A Review of the Nigerian Energy Industry

Companies may downsize, cut investments over falling oil prices

16 December 2014, Lagos – The Director of Emerald Energy Institute for Petroleum and Energy Economics, Policies and Strategic Studies, University of Port Harcourt, Professor Wumi Iledare has stated that the falling prices of crude oil at the international market may force oil companies operating in Nigeria to cut investments and downsize operations.

Oil price fallSpeaking in Lagos, the petroleum economist, however, stated that the drop in the prices of crude oil is an opportunity to reduce wastages and take greater risks by embarking on aggressive implementation of projects.
According to him, since the costs of oil and gas projects are high during high price regime, this period of low price regime is a good opportunity for the companies to manage their operations at profitability.

“There are constraints in drilling rigs and they are expensive to hire. If there is a time for a risk seeker to act, it is now, when the price of oil is down,” he said.
“In fact, it is now that you can make a lot more money because you are going to cut all the wastes. When you look at profitability of assets, it is not only tied to the price of crude oil; it is also tied to the cost. So, you will begin to manage your cost very well and then cost of preparing wells – all of those excessive gold platting will be monitored very well,” he added.

Iledare pointed out that though the companies will put projects on hold, they will not stop projects they have started.
“Now, they are going to cut some of the proposals, if they are based on oil price that is higher than the current price. That is expected; there could even be downsizing but they have long strategic plans. I am sure majority of the oil and gas companies will not tell you that they did not anticipate this fall in price. They have scenarios that play out on a regular basis with different price ranges and there are projects that are lined up, depending on where the price range falls at a particular point in time. So, certainly, the rate of investment growth is expected to reduce as a result of the falling prices. This where the government comes in,” he explained.

According to him, the federal government should create an incentive to enable the operators cushion the effects of the falling prices.
“The government of Nigeria has done it in the past. They just create an incentive package like a tax holiday or credit allowance if they are able to know what the cost of capital and what the margin is. I mean these companies operated when the price of oil was only $12 per barrel and they were actually looking for reserves at that particular time,” he said.

Iledare noted that what is driving the companies is not crude oil price but the operating environment, which is currently charged in terms of political risks and uncertainty created by absence of enabling framework that would move the industry forward.

– This Day

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