Consolidation looms for Nigerian companies to survive oil price drop

Small oil-producing companies in Nigeria, facing slumping prices and rising debt, may need to combine to survive, the chief executive officer of one of the companies said.

Oil price crash

Oil price crash

“We don’t have that much leverage, the rapid drop is unprecedented for the country’s small producers,” Kola Karim, the Chief Executive of Officer of Shoreline Natural Resources Limited, said in a phone interview with Bloomberg yesterday from London.

“The reality is there have to be mergers in the industry because it is difficult in a down market when you’re 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 independent oil firms owned by Nigerians, pumping between 5,000 and 100,000 barrels daily and accounting for about 20 per cent of Nigeria’s production.

Others include Seplat Petroleum Development Co., Neconde Energy Limited, Conoil Producing Limited and First Hydrocarbon Limited, among many others.
Nigeria produced an average of 2.04 million barrels per day in January, according to data compiled by Bloomberg.
Royal Dutch Shell Plc, ExxonMobil Corp., Chevron Corp., Total SA and Eni SpA run joint ventures with state-owned Nigerian National Petroleum Corporation (NNPC) 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.

“Already at $50 a barrel, we are 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 (MEND) are fighting for control control of the region’s oil resources.
Attacks cut Nigeria’s oil output by 28 per cent, mainly from the delta’s swamps and shallow waters, from 2006 to 2009, according to figures compiled by Bloomberg.

Though the violence subsided after thousands of 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 independents 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 Limited.
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.

Brent crude, which compares with West African crude grades, rose 2.3 per cent to $55.95 per barrel as of 8.43 am yesterday in London, down 53 per cent from last year’s highest point on June 19.

As Shell, Chevron, Total and Eni sold some of their onshore assets in Nigeria over the last four years, they were acquired by smaller Nigerian-owned companies that funded their acquisitions with debt, banking on high crude prices to repay the loans, Yinkere said in a phone interview from Lagos.

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 of Nigeria Limited. loans to these firms account for about 40 per cent of its loan porfolio and at Access Bank Plc the figure is 35 per cent, according to data compiled by Bloomberg. 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 90 per cent of the country’s export income.

Adding to Nigeria’s currency woes is uncertainty about the general election initially scheduled to hold this month and now postponed by six weeks.

Some of the banks have started negotiations on how to reorganise the debts, Dolapo Oni, energy analyst at Lagos-based Ecobank Research, said in a phone interview.

“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 a subsidiary of NNPC, Nigerian Gas Company (NGC), 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 makes it more attractive, he said.

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