Oil & Gas Afren –a unique African approach

Equities.com -- While the African oil and gas sector is still dominated by international majors, independents are now claiming bigger stakes both upsteam and downstream. Perhaps the best example of an independent making it big in Africa is Afren.

Afren can rightly lay claim to being the leading independent partnering with indigenous capacity in Africa. The company was launched in a small office with two employees in 2004. Today the company's portfolio has grown rapidly to 28 assets across 12 countries, producing over 50,000 barrels of oil equivalent per day and is on track for cash flows in 2012 of around $1bn. From its solid base in Nigeria, Afren moved into Iraq's Kurdistan region and East Africa ahead of the pack.

The secret of its success has been its partnership-based company business model. The company's founders encouraged by the government of Nigeria leaning towards the indigenisation of its oil resources, established partnerships with a host of local companies, including Amni International, Oriental Energy Resources and First Hydrocarbon Nigeria (FHN), bringing in capital, technical skills and other resources. This has not only been a huge boost to local companies but communities around the areas of operations have greatly benefited as well.

AfricanBusiness talks to Galib Virani, Associate Director of Afren Plc and Director of Afren East Africa Exploration (below). Virani, a Kenyan-born corporate financier, is an early member of the founder group. He played a key role in acquiring the portfolio, funding the company's activities and is taking increasing responsibility for its East African activities.

In what way is Afren different from other oil companies?

It is an Africa-centric story. We have a partnership-led approach that prioritises working with indigenous companies, with host governments, host communities and local suppliers and service providers.

I have established the company as a bridge to certain capacity gaps that in the past have impeded the rate at which domestic exploration and production (E&P) industries could grow. The capacity gaps we have focused on are technical and financial skills. In a period of just eight years, Afren is now a leading African upstream independent oil and gas company, and perhaps more importantly, is the partner of choice with the indigenous companies in the sector.

What have been your achievements so far?

We have built a strong technical team, with circa 265 employees, a diversified asset base with almost 2bn barrels of discovered reserves and resources and exploration upside of over 7bn barrels. This year we will generate over $1bn of cash flow which will be invested back into the portfolio to continue to grow value and expand the business.

What about the exploration aspect?

We did not want to roll the dice on exploration until we had our own cash flow and could self-sustain a comprehensive multi-well exploration drilling programme.

Two years ago, with visibility over the large-scale Ebok field being developed and coming onstream, it was the time to build our exploration portfolio. The region that we looked to was East Africa. We had always liked East Africa as an exploration play, but it was just a question of timing for us. In 2010 we acquired a specialist East African exploration company called Black Marlin, which gave us an extensive early position in key basins of interest and ownership of the largest seismic database in the region.

We moved ahead of many of the recent entrants, including BG, Total, Statoil, Eni, and before some large oil and gas discoveries were made in Kenya, Tanzania and Mozambique. We paid $105m in paper for Black Marlin and since then valuations in East Africa have progressively increased. Through our strategic foresight and willingness to move early, we have been able to access a truly world-class exploration portfolio that would today, most likely, be out of reach for a company of our size and scale.

Another strategic move was taking the development and technical capabilities we honed in Nigeria into the Kurdistan region of Iraq. Again we took an early position. Valuations have significantly increased since our entry and there is a scarcity premium attached to any remaining available acreage.

Where will you be in five years' time?

The company has an analyst consensus unrisked net asset value of over $16bn. In simple terms, we will be looking to bridge the gap between the current market value and our unrisked net asset value.

What would you say are Afren's strengths?

The management team is ambitious, has adopted a successful partnership-based model and is technically driven. We have taken early and successful positions in Nigeria, East Africa and the Kurdistan region of Iraq, well ahead of our peers and the wider industry. We have demonstrated an exceptional technical track record having delivered two of the quickest independent developments to date in Nigeria and we have got our exploration drilling campaign off to a great start, having made three large discoveries already in 2012. Above all, we benefit from exceptional leadership. Osman Shahenshah, our chief executive, who has worked in and around Africa for over 20 years, has led by example with incredible foresight, tenacity, ambition and with full confidence in his management team.

How have you built up your technical side and do the skills come from Africa?

Today we are about 265 people in the company; the majority of those are technical. In Nigeria we have about 80 people working for us, all of them are Nigerian except one. They have all come out of pedigree positions and careers in the majors and the independents and we have been fortunate to attract bestin-class talent.

Are you looking at further acquisitions?

We are certainly under no pressure, and our current focus is on consolidating our existing portfolio and realising the organic upside potential we already have in front of us. However, we remain opportunistic and will give full consideration to materially accretive acquisitions.

Why is there so much interest now in East Africa?

We had our eye on East Africa from day one, but our entry to the region was really a question of timing. For us the excitement started under the ground - we were and remain incredibly excited by the geology. We see all of the necessary components there for prolific hydrocarbon generation, and carry the view that the main difference between East Africa and the rest of the continent is simply the number of wells drilled.

There have been over 19,000 wells drilled in North Africa, over 15,000 in West Africa but quite remarkably less than 500 in East Africa. In the past, oil price crashes have curtailed exploration activity in the region. Now that we are seeing a real commitment by industry to explore the region, driven by an ever-increasing global demand for oil and natural gas resources, the success rates are indicative of the quality and potential we have always believed in.

How long will it take to develop East Africa as an oil-producing region?

There are significant discovered oil resources in Uganda and the discussion at the moment is around how to monetise the barrels, including a pipeline to the Kenyan coast, a local refinery or a combination of both. In northwest Kenya, following the significant discovery I would expect to see drilling intensify. Tanzania and Mozambique are already both gas producers today and sell into local markets, but recent exploration has yielded excellent results such that both countries are now looking towards future LNG developments that will open up global markets in years to come.

How do you view the evolving legislative environment and the Petroleum Bill?

It's still early days! However, if you look at the spirit of the Petroleum Bill, one of the factors that it's trying to achieve is greater indigenous participation in the sector and we should be well positioned with our partnership-based model.

Could the partnership model be replicated in other parts of Africa?

Absolutely. Our thesis is that the host nations should develop their own resources and operate their oil and gas fields themselves, because that's the way to maximise economic rent and create mutual prosperity for all stakeholders.

We have tried, particularly in Nigeria, to have this partnership approach, where we share technical capacity and provide funding. It's still early days in East Africa for this type of model, given the exploration/development phase but partnerships of this nature are always our preferred approach.

Does this African model attract investors?

We are a London-listed company, which gives us access to the international capital markets. So far we have invested over $1.6bn in African projects, and we will continue to invest significant amounts for a long time to come.

We have also used African sources of capital, and in Nigeria in particular we have raised over $30m for our Nigerian development projects in the form of corporate loans and the participation of Nigerian banks in our reserves based lending syndicates.

Does your success and growth attract potential buyers of Afren?

We are focused on delivering the organic growth opportunities we have within the business today and realising the full po-tential of our portfolio. However, it is the nature of the industry that successful companies such as Afren that have world-class assets and large-scale growth potential are increasingly attracting attention from the IOCs and NOCs.

What are your views on sustainability?

We've put a lot of emphasis on working with the communities around which we have our assets.

Encouraging sustainability and empowerment in the communities are real passions for us. We've run women and youth entrepreneurship programmes, we place great emphasis on education, both secondary and tertiary, we've put up health facilities, water purification and sanitation projects.

We also maximise recruitment from the local communities. For example, we have a floating production, storage and offloading vessel (FPSO) on the Okoro field and over 70% of the employees were recruited from the local community - they all attended extensive training and orientation courses with the facility whilst it was in dock in Singapore and they are now working on that facility and doing a great job.

After Okoro they will then have the skills and experience to work on other projects for us or even for other operators. We also look to bring the host communities alongside us. Yes, we are maximising shareholder value, but not at the expense of the governments and the partners and the communities with which we operate. This is of paramount importance to us. n

Through our strategic foresight and willingness to move early, we have been able to access a truly world-class exploration portfolio that would today, most likely, be out of reach for a company of our size and scale

$1.6bn

WeareaLondon-listedcompany, which gives us access to the international capital markets. So far we have invested over $1.6bn in African projects, and we will continue to invest significant amounts for a long time to come.

We are maximising shareholder value, but not at the expense of the governments, partners and communities we work with. This is of paramount importance to us