How to Stay Afloat in an Economic Storm

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In this article, the Chairman, Petroleum Technology Association of Nigeria, Bank Anthony Okoroafor proffers ways to overcome the recession

As we reach the end of 2016, we have some good news and some bad news in our local content advocacy to save our country and get more of our people employed and increase the GDP in Nigeria while creating more sustainable Nigerian entrepreneurs.

The good news includes

The Minister of Petroleum, Dr. Ibe Kachiukwu and the NNPC GMD, Dr. Maikantu Baru’s solid commitment to grow Nigerian local content to 70%; the GMD’s support of PETAN’s resolve to Leverage proven Nigerian companies, with a strong resolve that capacity building in country cannot be compromised; the Minister and GMD’s commitment not to sacrifice local content on the altar of loans from China and India. The GMD’s speech on PETAN annual dinner was a morale booster to the Oil & Gas service industry that issues holding the industry back are being worked on. The IJV structure to be in place to replace the issues from cash call debacle; activity level to improve considerably; the ministers 7 Big wins and the draft oil and gas Policy; at last, the signing of agreements on JV cash calls exit with international oil companies by minister; Good sign from NCDMB new ES that it will no longer be business as usual; Proper processes to be set up for NCF use to build capacities where gaps exist; Leverage the funds to drive the change needed in NORGIC ACT; Fight senseless monopoly, Ensure the process creates value, reduces cost and allow Nigerian companies to grow and unleash their full potentials. Aggressive frontier exploration. The successful amendment of the NORGIC Act by the House of Representatives under the leadership of Emma Ekon committee, now waiting for concurrence from the Senate and then signature of the president. The essence of the amendment was to address the inadequacies of the Norgic act. The strong move by the senate under the leadership of Bukola Saraki and Tayo Alasoadura, and their team to pass the PIBG – first phase of PIB that has eluded all the senate for the past 10 years. Shell launching of $1,765B, and N129B with 8 Nigerian banks to guarantee PO’s given by shell for Local contractors. GMD’s commitment to include Nigerian Companies in Crude Lifting contracts effective Jan 2017 by streamlining the process that makes it difficult for local Nigerian Companies to participate. GMD’s commitment to ring-fence exploration budgets. This is commendable and the only way we can grow our reserves that are falling at an alarming rate.

The bad news are

Activity level still very low, the lowest rig count ever. Companies are dying; no news on the new marginal fields rounds; exploration still very low. Also, EPCI contracts is still being controlled by international companies; insecurity of life and assets still taking place. Also companies are still owing service contractors; no sanctity of contracts; vandalism of pipelines still taking place, volatility and scarcity of foreign exchange still in place.

In present-day Nigeria, oil accounts for 95% of foreign exchange earnings and 75% of government revenue for Nigeria. The implication of extended low oil price for a Nigerian economy which runs mainly on a single commodity is dire and we foresee a lot of challenges in our local content compliance. This environment creates high risks. If $50/bbl. becomes the new normal, countries like Nigeria with large populations, low reserves and an over dependence on oil could become severely stressed. These are interesting times because the mono-product that Nigeria’s finances hang on is being threatened These have several consequences to local content compliance. Our industry was too cost – careless in years of boom 2010 – 2014, there were unnecessary acquisitions and wasteful lifestyles, aging facilities, matured fields, weakened governance, huge leakages, expertise and technology innovation relegated, unwholesome cost indiscipline and unintended consequences of +$100/bbl. oil. The huge revenue we have earned from oil and gas and a simultaneous lack of investment in infrastructure and sustainable projects remain a challenge for Nigeria.
The hallmarks of today’s business environment are Depleting Crude Reserves, Declining JV reserves. In 2013, JV reserves has declined by 15% whereas PSC reserves grew by 9%, High per bbl. production Cost, JV production (technical) cost has increased from sub $10/bbl. to $27/bbl. in 2014, JV production decline 62% within a ten year period, This does not encourage capital projects and erodes revenue from production. Security Challenges, North East, Niger Delta, Pipeline Vandalization, Militancy is development in reverse.

It damages the country, reduces growth, kills people, Conflict generates territory outside the control of a recognised government. Funding Challenges, Inability to meet cash call obligations, huge budget deficits, income – Currency anomaly. Low Industry Activity, No new capex projects in sight, Projects deferred or cancelled, Over 400,000 direct and indirect job cuts, Companies are unable to meet loan payments – Asset capacity acquired are endangered. Uncertainty of Fiscal Framework, Non passage of PIB, Exchange Rate Volatility, 95% of Foreign Exchange Earnings are tied to oil and with shortened revenues in dollars terms, the Naira will be under continuous pressure. Despite devaluation, Nigeria will earn less revenue from oil and gas exports and imports of household items will be more expensive, with the burden passed on to Nigerians. Savings Stagnation, Extended Low oil prices mean that Nigeria might not be able to add additional revenue due to pressure from States who also run high recurrent expenditure. It might also be difficult for the FG to save funds in the Sovereign Wealth Fund, considering the austerity measures of the times. Accretion to the External reserves is also expected to slow down with falling crude prices. Debt Spiking, Debt servicing will possibly rise, especially foreign debts and Nigeria will need more funds to cover the budget deficit (difference between accrued revenue and expenditure). With stagnated Excess Crude Account savings, raising debts is the glaring alternative. The haste to spend on recurrent items will remain, as they are fixed charges, unless drastic reforms such as downsizing personnel and sharp cut in overhead costs. Capital Expenditure under threat, Capital Expenditure performance might be threatened by lower oil prices as government strives to keep its deficit within the limits of the Fiscal Responsibility Act whilst ensuring it meets its day-to-day obligations. Employment, with cuts to government expenditure due to falling oil prices, the number of new jobs will actually continue on a decline. Depleting External Reserve.

Impact on Companies

The participation of local firms in the Nigerian oil and gas industry have fallen significantly as the slump in global crude oil prices left many of them without contracts.

The sharp drop in prices has forced oil companies, including the big ones, to cut capital expenditure budgets, lay off employees and suspend some projects. The Local Content Act, directly affects operating companies, contractors, sub-contractors and service providers, seeks to increase indigenous participation in the oil and gas industry by prescribing minimum thresholds for the use of local services and materials to promote the employment of Nigerian staff in the industry. But the current low oil price environment has made many International Oil Companies (IOCs) to suspend many projects, leading to low activities in the sector. Experts said that the price of oil is critically important as it generates the revenue that drives businesses and with the price falling, “we have to re-evaluate our priorities”.

We should as a matter of urgency review our fiscal terms to maintain attractiveness and investment. Investment goes to friendly environments.
We can loose all the local content progress made in creating more Nigerian service companies, vessel ownership, fabrications, rig ownership, pipe coating, logging companies, pipe laying companies, waste handling companies, well testing, well head, seismic companies, gyro companies, rov companies, training companies, E &P companies, but more needs to be done. Our desire to have strong Nigerian EPC leaders, Nigerian owned vessels transporting Nigerian crude would be a mirage if the low price environment continues.

High Funding Cost. High interest rate on facilities from the banks, Poor funding/financing of projects, Tightened access to Capital, Banks are no longer lending, there is tightened access to capital with decreasing cash flows, highly leveraged companies will struggle as lenders and investors tighten access to capital, limiting their ability to continue exploration and developmental activities. Low industry Activity, since there are no new projects or projects are deferred or canceled, Activity level is at the lowest. Projects have been deferred or cancelled. Service industries that have built capacities and capabilities are laying-off well trained personnel, Rig count is very low; well intervention and well completion activities are down to zero level. Unable to pay salaries – Lose Capacities already built, Irregular and delayed Payment systems. Unable to work because of security challenges.

How Can We Survive
To survive in this extended low price environment, we really need new ways of working – Values, Attitudes, Practice and Priorities. Strategic Alliances, Collaboration and Consortia, These adds value and creates opportunities. It expands the pie and creates sustainable long-term value (asset acquisition, capacity development, supply chains, resource optimisation). Exploiting synergies, sharing risks, leveraging togetherness, Operational Excellence, Capacity Utilization, Process Improvements, Standardized engineering. New profitability Philosophies, Cost discipline, Values rather than volumes, prudent lifestyles. Mergers and Acquisitions. Capital management, Improving structures, Spending cuts, Staff Cuts. New business models, Collaborate, Integrate, Consolidate, We cannot all have fabrication yards; we can collaborate with those that have fabrication yards and increase its utilization. More attractive fiscal terms needed now, With different places competing for low investments in a low oil price regime, it is imperative that we create a more competitive fiscal terms to make our country more attractive to investors, Pass the Right Petroleum Industry Bill which favours transparency in mining leases and licenses, taxes, royalties and respect for institutional procedures, Maximize returns from gas, with large scale investment In infrastructure and also end gas flaring, Build a multi-stakeholder security system to stop crude oil theft as this secures production volume and vandalization, Ensure that Marginal Oil Fields are given to credible people and institutions with goals to mine it for the broader benefit of the society, Take a bullish attempt to reform NNPC with more transparency in its presentation of oil revenues to the public, Resolve the challenge of opacity in beneficial ownership, with clear definition of patrons of Nigeria’s oil and gas industry

As we come to the end of 2016 with the attendant drop in oil price and activity in our industry, we ask all our service contractors and operators to hang-in there for there will be light from the other side of the tunnel. On this note, I wish you all in our industry a merry Christmas and a more prosperous 2017.