A Review of the Nigerian Energy Industry

Nigeria: Low oil prices, lack of direction hit industry

A drilling rig operating in Soku.
*A drilling rig operating in Soku.

*Experts finger Diezani, Jonathan

Chuks Isiwu, Yemie Adeoye
& Kunle Kalejaye

09 September 2015, Sweetcrude, Houston – The Nigeria oil and gas industry is beleaguered by sustained dwindling oil prices and the Federal government’s seeming inability to provide clear cut policy direction, eliciting heightened investors and stakeholders concern.

Over three months into his government, President Muhammadu Buhari has not said much about his government’s plans for the sector. He is also yet to name a cabinet and appoint a substantive oil and gas minister that would help define the policy thrust for the sector.

All that has come to be seen as the new government’s stance on the oil and gas industry have emerged largely from the president’s body language and his orientation from his previous administration as head of state between December 1983 and August 1985.

In the interim, the international oil and gas companies, IOC, operating joint ventures, production sharing contracts, and joint operating agreements with the government though the Nigeria National Petroleum Corporation, NNPC, are still at a loss how the government intends to meet its outstanding cash call obligations.

“Several oil and gas projects have stalled and there is no clarity going forward,” a manager with one of the IOC who did not want his name in print volunteered.

A managing director with a front end engineering design, FEED, company lamented the lull wrought by the seeming lack of policy direction, noting that: “if the Buhari administration fails to rise to the occasion by providing a clear cut direction, there would be no industry left to change by the time he gets around to it”.

Fight against corruption
Many see Buhari as representing anti-corruption and transparency, and so, it is given that he would not condone corruption in the oil and gas sector.

His position concerning the nation’s four refineries in Warri, Kaduna and Port Harcourt is well known. He wants them revamped and run along profit lines by the Nigerian National Petroleum Corporation, NNPC, though there are reports that the corporation would have preferred they were sold.

The President wants to bring an end to the importation of petroleum products, which had in the past few years seen the nation spend billions of Naira of its annual budget on subsidies to the benefit of a few sharks called fuel importers and petroleum marketing companies.

As for the NNPC, President Buhari has said the national oil company would be unbundled into two firms without mentioning details. He has also recently appointed Dr. Emmanuel Ibe Kachikwu, a former Vice President, Africa at the multinational ExxonMobil, as NNPC Group Managing Director. Kachikwu has gone ahead to commence reforms in the corporation, re-echoing President Buhari’s position on the local refineries.

These are a few of Buhari’s possible plans for the industry. But beyond them, there is hardly any other information that could provide a background for understanding his policy thrust in the industry.

According to Mr. Johnson Chukwu, a capital market and oil industry analyst, what the nation has seen from Buhari on his economic direction has only been snippets, rather than clear cut policies. “Some of the snippets include government’s unwillingness to sell the refineries and non-removal of petrol subsidy,” he said.

Mr. Chukwu explained to SweetcrudeReports that the new Group Managing Director of the NNPC has said government will focus on implementing existing policies rather than implement the content of the Petroleum Industry Bill, PIB, saying: “This means government is going to take more time to re-work the PIB and it also means that we will not see the PIB being passed in the next two to three years”.

Wait-and-see attitude
Some industry stakeholders are of the opinion that the Buhari-led government could not have achieved much in only three months, but that the regime is old enough to show the exact direction it is headed in the oil and gas industry.

They maintain that it is this absence of a sense of direction that is largely responsible for the current situation in the industry where the international oil companies, IOCs, appear to have practically laid down their tools, adopting a wait-and-see attitude while at the same time carrying out massive retrenchment of staff quietly.

“We need to know the direction the government is headed. We seem to know the President and what he stands for. But, it is a tricky situation when there are no pronouncements, no clear cut pronouncements. As far as exploration and production is concerned, the president has said nothing. Nobody is sure of anything yet,” an upstream player, who pleaded anonymity, said.

He added that activities still remained at a low-ebb where the Goodluck Jonathan government left off, but would likely pick up once the direction of the current government is made clearer.

Other analysts, who spoke with SweetcrudeReports, said ‎until a proper government structure is put in place to some extent, investor will continue to guess which direction the government wants to head to.

“Investor will still remain on the side line. I think it will be presumptuous to jump into a conclusive position to say this is the policy direction. What we’ve seen are snippets that indicate the orientation of the president. Those are not yet policies direction. But once we have a cabinet and the government comes and says this is what we want to try, it becomes a clear policy direction,” Mr. Chukwu noted.

“The good thing is that we are now in September and the government had promised to put in place a cabinet this month; so having waited for three months it will be worthwhile to see what will happen next.

“The orientation of the cabinet members will help investors second-guess ‎what the policy direction will be”.

Blame Diezani, Jonathan
Industry stakeholders and enthusiasts, however, believe Buhari is not to blame for the lull in activities in the upstream sector and the massive staff lay-off in the IOCs, noting that the bulk of the blame should go to the sharp decline in oil prices.

Others argue that the situation is a carryover from the Jonathan administration. Indeed, the retrenchment exercise in the IOCs dates back to the Goodluck Jonathan administration, and this has not abated with the coming of the new government.

They maintained that what is being interpreted as the impact of a lack of clear cut direction on the part of Buhari administration is a result of the impact of Diezani-Alison-Madueke’s poor leadership of the oil and gas industry in the Jonathan administration.

“It may not be fully correct to allude to the fact that lack of policy direction is caused by the current administration as there has been no policy direction in the oil sector over the past five years.

Under Diezani Alison-Madueke, the industry suffered a lot. The greatest problem the industry suffered in that period was the inability to access the Minister of Petroleum Resources,” a top official of Exxonmobil, who spoke on the condition of anonymity, told our correspondent in Lagos.

He added that the lull in exploration and production as seen in the industry was not a fault of the present government, but rather a carryover effect from the previous government. “The upstream oil sector has a long term planning structure as a project of another 10 years should commence today.

“The effect you are seeing on ground has absolutely nothing to do with this three month old government, as it is the repercussion for lack of investment over time. There was little or no investment planning at all under the previous government,” he asserted.

Low oil prices; Job cuts
A manager with the National Petroleum and Investment Management Services Company, NAPIMS, who confirmed that job cuts were still ongoing in the industry blamed it on low oil prices. SweetcrudeReports’ checks revealed that Shell, Mobil, Chevron, Total and Agip are all quietly laying off staff. Nigerdock, Nigeria’s premier engineering, fabrication, and construction yard, as well as ship repairs has also commenced staff retrenchment.

“Shell started laying off staff last year and the sack has continued,” the NAPIMS official disclosed. The Royal Dutch Shell reported last month that it was cutting 6,500 jobs in Nigeria and the rest of its global operations, while reducing capital spending by 20 per cent this year, in response to the plunge in oil prices.

“Today crude oil price is doing $50 per barrel. This low price is pushing companies into cost cutting, including, staff reduction. Low prices also mean that the incentive to go into massive exploration and production will not be there. We are also seeing the fiscal regime that govern exploration and production being uncertain because the PIB may not be passed in the near future and that we are going to rely on existing legislations to govern E&P,” the capital market and oil industry analyst, Mr. Chukwu, said.

“New projects are the only way to stem the tide of retrenchment in the upstream oil sector, this is so because with new projects the companies can easily forecast and make adequate plans on staff welfare, overheads and operating costs as well as profitability, this is what is lacking and it didn’t start with this regime,” a ranking Exxonmobil official disclosed.

The official however agreed that there was no policy on ground at the moment for the industry to chart a course in the upstream.

Country lacks fiscal buffer to cushion impact of oil price volatility
For Mr. Kazeem Bello, an energy consultant, low crude oil prices as seen currently in the international market is hitting Nigeria hard due to government’s failure to take cushioning measures against oil volatility risks by implementing fiscal buffers and hedging mechanisms immediately this administration took office.

He pointed out that Saudi Arabia, Kuwait and the United Arab Emirates hold over $2 trillion in Sovereign Wealth Fund, SWF, accounts which they now deploy to protect their economies against the prevailing oil crisis.

“But, the industry in Nigeria encountered the price headwind without any kind of ready countermeasure, and government’s response to the funding needs of the industry was limited to the worst option: slashing industry budget by 40 percent and rolling back work plans, he said.

The budget cut pushed projects off the table, with several work programmes suspended or out rightly cancelled,” he added.
Also, new projects that host job opportunities have been put off, leading to sharp drop in oilfield service activities.

The consequent drop in rig count, according to Bello, signifies another devastating blow on the local oil service firms most of whose jobs revolve around drilling, a key activity that is central to exploration and field development programmes.

“An idle rig means that its entire crew is idle while the rig company continues to run overhead costs on facilities and personnel.

“Ancillary service firms that specialise in well services, logging, air shuttle drilling fluids and chemicals, drill bits, casing services, marine vessels and others also suffer downtime and incur huge losses,” he said.

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