Ugo Amadi
Gloomy Outlook for
Indigenous Upstream Services Companies
The global oil glut has
continued to send economic shocks around the world. The hardest hit have been
countries whose economies depend heavily on oil for a significant percentage of
their foreign exchange earnings such as Venezuela, Angola, Azerbaijan and Nigeria
amongst others.
Mr. Kazeem Bello, an
energy expert said, the fluctuation in the oil market following the discovery
of crude oil in many parts of the world and the new wave of alternative energy
sources, particularly shale oil, have had adverse effects on Nigeria.
According to him ‘The
country’s failure to take cushioning measures against volatility risks by
implementing fiscal buffers and hedging mechanisms, has left her at the mercy
of the crisis.
Bello said
that the trio of Saudi Arabia, Kuwait and the United Arab Emirates have over $2
trillion dollars in their Sovereign Wealth Fund (SWF) accounts; one of their
numerous fiscal buffers, hence the oil crisis has so far had very little impact
on their respective economies.
‘’Also laudable is Mexico’s
adoption of a hedging mechanism before the oil downturn at $76.40 per barrel,
saving the country an inevitable exponential loss in the wake of the free fall
in price.
In his own views, the
Chair of the Nigeria Natural Resource Charter (NNRC) and former Minister of
Petroleum Resources, Mr. OdeinAjumogobia, who noted that crude oil prices had
fluctuated over the years, said the current decline highlighted the importance
of planning.
Speaking at a policy
dialogue entitled ‘Implications of the Falling Oil Price for Policy in
Nigeria’, organised by the Centre for Public Policy Alternatives, a Lagos-based
think-tank, he commented on the need for a hedging mechanism, saying, “because
we don’t have a hedging mechanism, we are completely left at the mercy of the
oil price.”
Ajumogobia, stated
that inevitably, Oil and gas companies globally have been adversely affected by
the falling oil prices with their revenues and profits on the decline.
Daily Champion gathered
that Seplat Petroleum Development Company’s after tax profit amounted to N4.83
billion at the end of the first quarter of 2015, which represents a drop of
33.4% year-on-year. Full year outlook indicates after tax profit in the region
of N20.21 billion for the company in 2015. The company may therefore lose as
much as half of the profit figure of N40.48 billion it reported in the
preceding year.
In April 2015 the Wall
Street Journal reported that BP’s UK version of net income fell 40% from a year
earlier and its cash flow plunged by more than 75%, while Total SA of France
net profit fell by 20%. Both companies reported lower revenue from oil sales as
crude traded for about $54 a barrel in the first quarter of 2015, half its
price a year earlier. The publication further stated that, to demonstrate
how challenging the market has been for big oil companies, these numbers were
considered better than expected by analysts. In January Total reported a $5.7
billion loss for the fourth quarter of 2014, while BP’s losses totalled almost
$1 billion.
Companies have taken to
proactive measures to cushion the effect of the downturn including cuts in
capex, downsizing of operations and cancellation or suspension of
contracts. At the end of 2014 Shell said it was deferring spending in
many areas and this would result in a reduction in capital investment from 2015
to 2017 of over $15bn.
It will be recalled that
Chevron Corporation announced a $35bn capital and exploratory investment
programme for 2015; 13 per cent lower than the total investments for 2014.
ExxonMobil said it would slash its capital spending by 12 per cent to $34bn
from about $38.5bn last year, while French oil major, Total, cut capital
spending by $2bn to $3bn from last year’s total of $26.4bn.
In Nigeria, there have
been cuts in Joint Venture budgets; in Q3 2013, NAPIMS ordered a 30% - 40% cut
in the JV budget followed by a similar directive in Q1, 2015. This has
led to the stalling and suspension of several ongoing projects. New
opportunities have been deferred or out rightly cancelled. This singular move
led to a significant drop in the Nigerian rig count from 51 in September 2013
to 27 in June 2015 - a 47% reduction. The drop in rig count has had a negative
effect on other manufacturing and services businesses such as drilling fluids
and chemicals, drill bits, casing services, and marine vessels to name a few,
leading to multimillion dollar losses to indigenous services companies who have
made substantial investments towards acquiring assets, technologies and
capacity to execute projects.
Daily Champion
learnt that the highest losses are being incurred by indigenous rig owners who
are stipulated by the NOGICD Act of 2010 to acquire by direct purchase at least
50% of deep water assets which can be valued at as much as $650m and
above. These local companies are expected to demonstrate this ownership
at the tendering stage with no guarantee of contract commitment.
Tendering is unusually lengthy because of bureaucracy and outdated manual
processes with cases of tendering going on for over five (5) years with no
conclusion in sight.
Acquisition of these
assets usually requires these companies’ borrowing from local banks at interest
rates averaging 20% or more. These rates make the indigenous companies
uncompetitive especially when compared to foreign oilfield service companies
who have access to finance at significantly reduced interest rates and grants
from their governments.
A combination of falling
demand for rigs and cheaper foreign options has led to local rigs being left
idle – according to a February 2015 BBC report industry analysts have said this
is the worst oil rigs market they have seen globally since 1985.
Idle rigs Daily
Champion learnt are in itself cost centers as there is a daily maintenance cost
to ensure they don’t deteriorate and are ready to use as and when
required. Consequently companies have to invest on manpower that supports
every oil rig idling by- from staff on board the rigs to office support and
supply related companies.
The Group Lead of the
NNRC Expert Panel Core Sector group, Mr. Gbite Adeniji, said oil companies were
beginning to renegotiate contracts, adding that some clients were delaying
payments.
According to him, “there
is a general waiting game in the industry. In the service sector, several
companies will go out of business. Borrowing from the banks in this kind of
environment is almost suicidal. Contractors are beginning to lay off staff. The
implications remain that projects will be cut, while the optimism that brought
those indigenous companies into the industry is dampening.”
Vivid examples of
indigenous companies that have caved in to the pressure are SeawolfLonestar and
NRG Drilling to mention a few. Seawolf has since gone out of business with the
Asset Management Corporation of Nigeria (AMCON) seizing its three rigs. The
company terminated the contracts of its 450 employees who are presently being
owed 22 months outstanding salaries and the company has been unable to service
its loan agreement worth millions with First Bank Nigeria.
