Reflections on My 20 Years of Building Oil Companies
The military juntas who ruled Nigeria between 1966 and 1999, combined the worst of the world’s two main ideological persuasions; communism and capitalism, which sharply opposed each other until the collapse of the Berlin Wall in 1989.
Nigeria’s dictators ruled by enforcing state control of the levers of economic activities; they encouraged poor taxation practices and neglected “the big four”. Their dysfunctional reign led, inexorably, to a predictable collapse of the economy.
Western economies, where free enterprise have taken root, have enjoyed the benefit of building a culture of tested governance and regulatory structures over a long period of time; a culture that has supported entrepreneurship and wealth creation in those countries. So, a twenty-year-old Mark Zuckerberg could create Facebook and build it along “traditional” governance structures that supported its growth into the behemoth it is today. Conversely most businesses in Nigeria struggle to survive their founders.
Using Seplat Energy as an example, in the Nigerian oil and gas industry, we shall examine a few case reviews:
- Regulation and the Reward System
Regulatory effectiveness is very critical in a free-market economy as it supports fair competition, rewards efficiency, punishes bad and illegal practices and generally promotes value creation. In Nigeria, and in our industry, sometimes you get punished for doing the right thing and too often your competitors smile home with higher rewards because they are allowed to cut corners.
The assets that Nigerian independents bought from Shell between 2010 and 2013 (about thirteen leases in total) were all due for license renewal in 2019. Historically, the fee is a discretionary nominal sum imposed by the Minister of Petroleum Resources. This time, the regulator decided to calculate the fee based on reserves.
When Seplat Energy bought our asset in 2010, the working interest 2P reserves was 71MMBO. By 2018, after spending some $3Billion, we had increased operated production from 14,000BOPD to 65,000BOPD and quadrupled reserves to 283MMBO. Our competitors who acquired assets with three times our reserves size, but who had done nothing to increase production or add to their reserves ended up paying the same renewal fee as us! We were punished for our exemplary investment drive and efficient operation of our asset, leading to substantial value addition. You would have thought that as reward for our efforts, and as incentive to motivate others, our renewal would have been practically free.
Under our strict governance rules at Seplat Energy, we pay all our statutory dues promptly (royalty, taxes, lease rentals, flare penalty and even debt service obligations). Sometimes you wonder what benefit you derive from being this prudent when your competitors get away with failure to make these payments, sometimes for years. While you are struggling to balance your books, your less efficient competitors are awash with cash.
We have very stringent governance rules about related party transactions (RPT’s). They must be fully disclosed and contracting with related parties must be at arm’s length. In fact, effective the end of this year, RPT’s have been banned entirely. However, the reverse is the case with most of our peers. Subsidiary companies of the operator, or companies owned by the Operator’s principals execute all the contracts, ostensibly at outrageous costs. Of course, due to extremely high operating and capital costs, the operating company is perpetually in the red and liable to only minimum taxes. All the financial rewards are taken up-front at the level of rendering services and executing contracts. The efficient company like us becomes the ultimate loser.
When an institution is faced with a major crisis or where its survival is at risk, the INEDs are the first to jump ship, or blow the whistle on the company. The company collapses, they save their “reputation” and move on to take even bigger board seats on account of the reputation reinforced by their role in pushing the company over the cliff.
All of these anomalies happen, are in fact prevalent, because of a business and regulatory environment that is steeped in corruption, nepotism and sometimes just sheer incompetence. In almost all cases, those who cut corners find it easier to obtain regulatory approvals.
Even in cases of asset divestments by IOCs, they are acutely aware that a critical element of the sale process is obtaining government approval. A lot of times they are forced to bend their own rules to accommodate a bidder that is perceived to have the backing of those who will give the approvals. We have been involved in transactions where we ticked all the boxes (particularly in demonstrating ability and readiness to pay) and another party is chosen who is unable to pay.
Between 2014 and 2016, we had over $750Million tied down on two assets that we paid for but could not secure regulatory approval for. Eventually we had portions of these monies refunded to us, but over $200Million remains unrecovered till date.
But, perhaps the most injurious government segment to productive entrepreneurship and the entrenchment of good corporate governance in Nigeria is the judiciary. Too often, the judiciary has become a valuable tool in the hands of those who cut corners to hunt, harass, or simply torpedo the activities of genuine entrepreneurs working to create lasting value.
After we won Oil Mining Leases (OMLs) 53 in a bid conducted by Chevron in 2013, a bidder who did not win sued the sellers and held all of us to ransom for two years through an injunction they obtained. We fought all the way to the Supreme Court just to vacate the injunction! It took another three years to finally extinguish the case. Usually, the suing party has very little to lose, other than legal costs, while you have hundreds of millions of dollars tied down in an asset you cannot take possession of because of the court’s injunctive orders. Even a simple trade dispute could result in a court shutting down your offices or blocking all your bank accounts. The sheer knowledge that your investments can be totally destroyed by some treacherous judicial pronouncements, corruptly procured, can make even some brave investors avoid environments like ours.
So, if it is much more rewarding to do the wrong thing, why have some of us continued to insist that there is no alternative to sound corporate governance in any entrepreneurial journey? This is because of my firm belief in “the thirty-year rule”. Any business enterprise that is not built on firm and tested governance structures will ultimately fail within thirty years. In geographies where regulations are firm and effective, it would take no more than five years for such businesses to unravel. In Nigeria, it takes as long as thirty years because of the weaknesses I highlighted earlier, but happen it must eventually.
The banking sector is the most glaring example. We went from 126 banks to 24 in twenty-five years. When the smoke cleared only those that had adopted some measure of good corporate governance survived. The top five are now major African Banks. In the upstream oil and gas sector, the dominance of seven international oil companies is being replaced by a motley crowd of over twenty Nigerian independents. This transition kicked off about eleven years ago. My observations over this period of time only reinforce my thirty-year rule. I can confidently predict that, in the next ten to fifteen years, the ones that fail to build a culture of proper corporate governance will drop off the race. Their promoters might amass a lot of wealth, but the businesses themselves will collapse.
Let me now, in my final reflections, discuss two key elements of a proper governance structure which, in some cases, present some contradictions.
The first is the CEO/Chairman conundrum, which I believe is not unrelated to our culture of “the king and his subjects”. The UK Code of Corporate Governance as well as the Nigerian, revised Governance Code, require a clear separation of roles and powers between the board and management as between the Chairman and CEO for all public companies. However, very often, the Chairman turns out to be the “big man” with a large ego who perceives himself as the big boss to whom the management team, led by the CEO, reports.
The board is responsible for the strategic direction of the Company and supervises management performance using the appropriate governance structures in place. But very often the chairman assumes the clothing of the board, with the CEO reporting to him, as he takes on several executive decision-making roles. This has often led to unproductive tensions and power plays between the CEO and Chairman. And because of the level of control the Chairman usually has on the board, he is able to rally the board behind him in such power plays. Not surprisingly, where there is a loser, it is often the CEO.
In my ten years at Seplat Energy, I probably spent up to 20% of my productive time managing my relationship with the Chairman, and in some cases by extension, my relationship with the board.
The second is the role and powers of the independent non-executive directors, (INEDs). There are three broad classes of directors: Executive Directors are the most senior management staff who sit on the board. These are usually the CEO, and a couple of other top management staff like the CFO, COO, Commercial director, etc. Then there are the Non-Executive Directors who, very often, are representatives of key shareholder groups on the board. The third class are the INEDs who have no equity stake in the company, are not related to any key shareholder and have no business relationship with the Company.
For a premium listed company in the UK, only an INED is recommended by the governance code to be Chairman of the board. Even for a standard listed company, where a non-executive director may be chairman, the key board committees of Nomination, Remuneration and Finance must be chaired by INEDs. The senior INED (SINED) is generally seen as the conscience of the board and protects the interests of minority shareholders. Where the Chairman is not an INED, the regulators and minority shareholders hold the SINED in higher trust than the chairman. This is all because the whole governance code is designed to save the company from insider abuse by the key owners and the management. But herein lies the contradiction. Who is more likely to “shed his blood” to save an institution… the one with significant vested interest or the one whose only interest is to save his reputation?
Why have some of us continued to insist that there is no alternative to sound corporate governance in any entrepreneurial journey? This is because of my firm belief in “the thirty-year rule”. Any business enterprise that is not built on firm and tested governance structures will ultimately fail within thirty years.
In particular, when an institution is faced with a major crisis or where its survival is at risk, the INEDs are the first to jump ship, or blow the whistle on the company. The company collapses, they save their “reputation” and move on to take even bigger board seats on account of the reputation reinforced by their role in pushing the company over the cliff. True, their judgments at major decision-making gates are generally more balanced and unbiased, but I have never seen them to be as deeply committed to the survival and prosperity of the company as the NEDs who have a stake to worry about.