An analysis of oil and gas industry in Africa released by Pricewater Coopers,PwC recently has warned that oil and gas explorers must review their capital expenditure on exploration activity across the continent in the wake of the significant drop in the global oil price.
It advised that oil and gas explorers should take fresh reflection on their budgets and decide where to allocate their limited capital spending given the substantial decline in oil price. Overall, low oil prices could have an impact on production undermining certain players in the market,” warns Chris Bredenhann, PwC Africa Oil and Gas advisory leader.
Nigeria’s economy, Africa’s biggest, expanded at its slowest pace in more than a year in the fourth quarter in 2014 as oil prices fell.
Growth in Gross Domestic Product slowed to an annual 5.9 per cent in the three months to December 31 compared with 6.2 per cent in the third quarter of last year, according to the National Bureau of Statistics (NBS).
While the oil industry “experienced production and price challenges in the last quarter,” average daily crude output rose to 2.18 million barrels from 2.15 million barrels a quarter earlier, the statistics office said.
Nigeria, Africa’s biggest oil producer, relies on crude for 70 per cent of its export income and the industry accounts for about 12.5 per cent of gross domestic product (GDP).
The plunge in the price has helped push down the value of the naira, Nigeria’s currency, by 19 per cent against the dollar over the past six months for the biggest decline of 24 African currencies monitored.
Oil production remains below the government’s current “optimistic” benchmark of 2.28 million barrels a day and down from a peak of as much as 2.3 million barrels, Gareth Brickman and Catherine Bennett, analysts with Johannesburg-based ETM Analytics, said.
“The naira’s sharp depreciation, topside risks to inflation as a result, uncertainty over the political landscape and tightening monetary and credit conditions looks set to keep the stagflationary pressure on for at least the first half of this year,” Brickman and Bennett said.
The impact of elections and scaling back of public spending because of the decline in oil prices may slow growth further to 5 per cent in the first quarter and 4.5 per cent the next, Bismarck Rewane, chief executive officer of Financial Derivatives Co. in Lagos, said.
“We’re just beginning to see the impact the reduction in government spending is having on all of the economic activities of the country and it’s going to go lower than this,” he said.
Price of crude oil significantly plunged below US$49 per barrel in the beginning of the year, following wide-scale reports of oversupply in the US.
According to PwC’s ‘Fit for $50 oil in Africa’ analysis, Africa has seen substantial successes in the exploration for hydrocarbons over the last decade including the entry of new country players with East Africa, joining the ranks of their West African neighbours.
In 2013 alone, six of the top 10 global discoveries by size were made in Africa including some of the largest discoveries in the last decade in East Africa. The key to surviving the ups and downs of the cyclical oil and gas market is to learn how to adapt quickly to be more agile and oil and gas companies now need to plan for the upturn that is sure to follow to ensure that the potential boom does not go bust,” adds Bredenhann.
The drop in oil prices is expected to have a significant impact on Nigeria, which has been grappling with the effects of long-term poverty, food shortages, HIV/AIDS, and more recently the outbreak of the Ebola virus in West Africa.
The challenges facing oil and gas companies in Nigeria continue to be diverse and numerous fuelled by regulatory uncertainty, fraud and corruption, poor infrastructure, and a lack of skilled human resources, among others.
Furthermore, Nigeria has one of the highest average finding costs in the world at a massive $35.01 per barrel in 2009 surpassed only by the US offshore fields which came in at $41.51 per barrel, according to the US Energy Information Administration.
Africa and Nigeria also hold a number of technically challenging hydrocarbon prospects.
Bredenhann says: “While oilfield service companies will venture to cut back on spending, they will also be under extreme pressure by the oil companies to drop their prices.”
According to the analysis, the following oil and gas players in the market are expected to be most likely at risk from the drop in the oil price: frontier areas, host governments, major gas projects and oilfield service companies.
Frontier areas around the world are expected to suffer from delayed development in the near-term. These include technically difficult projects that require more spending than conventional production such as deepwater, sub-salt, shale gas and enhanced oil recovery ventures.
Major gas projects are also expected to be under increased scrutiny, as oil-linked LNG prices have dropped significantly.
At this time, governments would do well to place regulatory, legislative and fiscal policies in order, so that they are seen as attractive regimes when the price recovers.
Also, analysts say that oilfield service companies will be hit hard globally, but Africa and indeed Nigeria may be an especially vulnerable portion of their portfolios.
There are also further challenges like difficult logistics and the lack of infrastructure and overall exploration costs that have already decreased significantly due to cost pressures, in particular seismic surveying and drilling. This is expected to lead to idle rigs as well as delayed and potentially cancelled projects.
Analysts suggest that a number of issues must, therefore, be addressed and this can be done by starting with an organisational stress test including strategic, financial, operational and commercial elements.
They contend that in situations of low commodity prices, many companies respond with knee-jerk cost reduction programmes which could be more effective if they took the time to understand what specific costs are, how they compare to peers and what reductions are truly possible. Cost reduction programmes need to be targeted and realistic,” concludes Bredenhann.
Specifically, Small oil-producing companies in Nigeria are facing slumping prices and rising debt and are likely going to combine to survive. In the capitulation of Kola Karim, chief executive officer of Shoreline Natural Resources Ltd, “We don’t have that much leverage, the rapid drop is unprecedented” for the country’s small producers.
According to him, the reality is there have to be mergers in the industry because it’s difficult in a down market when you are a small producer trying to weather the storm alone.
Karim’s Shoreline Natural Resources, with output of about 60,000 barrels per day, is one of more than a dozen small producers owned by Nigerians, pumping between 5,000 and 100,000 barrels daily and accounting for about 20 per cent of Nigeria’s production.
There are other indigenous players like, Seplat Petroleum Development Co., Neconde Energy Ltd., Conoil Producing Ltd., and First Hydrocarbon Ltd, Oando, and Aiteo.
Nigeria produced an average of 2.04 million barrels per day in January, according to available data.
Royal Dutch Shell Plc, ExxonMobil Corp., Chevron Corp., Total SA and Eni SpA run joint ventures with state-owned Nigerian National Petroleum Corp. that pump the rest of the country’s crude.
Most of the smaller companies obtained financing based on a price of $70 a barrel, compounding difficulties from the fall in the price of crude while they struggle to keep production steady in the face of pipeline attacks and oil theft, according to Karim.
Oil Theft
“Already at $50 a barrel, we’re under water,” Karim said. The financial pressure is compounded by the security threat, he said. “You face the devil on all sides.”
Armed groups led by the Movement for the Emancipation of the Niger Delta are fighting for control of the region’s oil resources with the attacks cutting Nigeria’s oil output by 28 per cent, mainly from the delta’s swamps and shallow waters, from 2006 to 2009, according to figures.
Though the violence subsided after many of the fighters accepted a government amnesty offer in 2009 to disarm, a surge in oil theft in recent years by gangs tapping crude from pipelines has left output hovering close to four-year lows.
Oil prices of less than $50 per barrel makes production unprofitable for smaller companies that pump at a cost of $30 per barrel. Taxes and extra security costs to protect installations cut into profits, according to analysts including Pabina Yinkere of Vetiva Capital Management Ltd.
Oil majors, such as Shell and Exxon Mobil, with larger economies of scale, pump at lower costs of about $15 for a barrel, Yinkere said.
As Shell, Chevron, Total and Eni sold some of their onshore assets in Nigeria over the last two years, they were acquired by smaller Nigerian-owned companies that funded their acquisitions with debt, banking on high crude prices to repay the loans.
Sufficient Margins
Falling oil prices have also had an impact on the country’s banking sector, where about 25 per cent of loans are made to oil companies. At First Bank Plc loans to these firms account for about 40 per cent of its loans and at Access Bank Plc the figure is 35 per cent. The two banks are the most reliant on lending to the oil industry, the data show.
The lenders are also hurting from the 27 per cent plunge of the naira this year under pressure from declining crude prices, the source of more than 95 per cent of the country’s export income. Adding to Nigeria’s currency woes is uncertainty about general elections initially scheduled to be held last month and now postponed by six weeks to March, 28.
However, some of the banks have started negotiations on how to reschedule the debts, Dolapo Oni, energy analyst at Lagos-based Ecobank Research, said. “The banks are already starting to see that their revenues are now so low that they can no longer meet their payments,” he said.
Seplat, the leading Nigerian producer, pumping about 70,000 barrels daily, is in talks to take over London-based Afren Plc, which operates fields in Nigeria.
“I foresee a huge combination of mergers in the local market, we’re also looking for opportunities,” said Karim. “You’re better being part of a bigger player, so you can save on your cost and make good margins.”
Companies including Shoreline are now looking to boost gas output after the government raised prices to $2.50 per thousand cubic meters, with demand to Nigerian power plants set to more than double to 5 billion cubic feet a day from the current 2 billion cubic feet, according to NNPC estimates. Nigeria holds Africa’s largest gas reserves of more than 180 trillion cubic feet.
Shoreline is in talks with companies including the Nigerian Gas Co. and Ughelli Power Plc ahead of plans to increase production from its 3.5 trillion cubic feet reserves, Karim said. His company’s focus would be on the domestic gas market as the higher prices make it more attractive, he said.
Meka Olowola, a managing partner with Zenera and an energy analyst also observed that the recent fall in oil prices from a high of $120 to below $50 has had ripple effects on different players in the industry, and not just oil-revenue dependent countries like Nigeria.
Olowola said while international oil companies (OICs) and indigenous oil majors may be able to stay above the waters until prizes and profits begin to surge again, the smaller oil firms may grapple in these precarious times and will be looking at remapping their business operation strategies. Mergers are one of the business leeways to stay relevant and profitable in the industry, just as the companies also attempt to retain their identity and vision.
According to him, soon after the sudden crash of oil prices, some experts saw it as de javu and predicted prices would recover. The government has proposed a N4.357tn budget for 2015 at an initial benchmark of $78 at .2 million barrels per day before reviewing it to $65 after another price slump. The national assembly is being cautious and rather proposing an oil price benchmark of $40-$45.
Yes the prices are beginning to slowly show signs of recovery, climbing to about $60 per barrel. That will impact positively on the economy, as coupled with the fiscal discipline that had been built into the federal government’s budget, it will spur increased economic activities in both the public and private sectors.
He said however that the government is beginning to see the huge potentials other sectors outside of crude oil holds.
‘To grow the industry, government must show greater political will and vigorously pursue its local content initiatives by encouraging increased local participation across all levels of operation. One cannot place emphasis enough on the need to block the drainpipe that the importation of petroleum products is on our resources.
Also he said, that the current scenario definitely will have the most stringent effects on the marginal oil filed operators, as outputs and profits are minimal. However, government must continue to work to maximise these fields, in allocating them to small but qualified indigenous operators and providing all the necessary technical assistance to help make the fields more profitable and contribute more to the national economy.
How falling crude price’s hurts NNPC Operations
The Nigerian National Petroleum Corporation (NNPC) is also groaning under the drop in crude oil price which has taken a negative toll on its operations, thus leading to a sharp decline in its production activities.
Group Executive Director, Engineering and Technical Division, NNPC, Mr. Bayo Ibirogba, said during a visit to the fabrication yard of Kaztec Engineering Limited (KEL) on Snake Island, Lagos that the corporation, faced with the double challenge of declining oil price and drop in production had to seek for value addition in its entire production chain, adding that KEL has proved to be a worthy partner in that regard.
‘‘Kaztec is an existing client of NNPC. They are already doing some works for us and are also prospecting for more. And as you know, we have some great challenges. We have the double challenge of declining crude oil prices and that of production. So for us, we are looking for value addition at every step of our operational chain.
“So when we have indigenous fabricators like this, it is very important that we come around to see what they are doing and actually access the extent to which they can improve our own business. Just like they are integrated, we are also integrated. We want to produce more oil and convert them to petroleum products to serve the Nigerian populace. And this is our own contribution to the transformation agenda of President Goodluck Jonathan’s administration,’’ he said.
The GED maintained that for local fabrication yards to continue to be engaged, operators in the oil and gas industry will have to increase their activities in the upstream sector and he said this can be realized if the Petroleum Industry Bill (PIB) is passed and subsequently becomes a law.
Ibirogba insisted that the passage of PIB into law would ensure a level playing field for all players, saying that remained what was needed to grow the sector because many don’t need any form of incentive but a level playing field where they can compete in an open and transparent market. ‘‘And I think with that, once the fiscals are clear to everybody that would attract the much needed investments into the sector.
