Cost: NAPIMS causes IOCs to slash contracts by 40%

*Foreign contractors leave Nigeria in droves

Hector Igbikiowubo 09 March 2016, Sweetcrude, Lagos – The National Petroleum Investment Management Services, NAPIMS, a subsidiary of the Nigerian National Petroleum Corporation, NNPC, has directed international oil companies operating in the country to slash cost on ongoing contracts with services providers by 40 percent, disrupting upstream operations in-country.

A section of the BP Eastern Trough Area Project (ETAP) oil platform is seen in the North Sea, around 100 miles east of Aberdeen in Scotland February 24, 2014.  REUTERS/Andy Buchanan/pool

An offshore oil platform

It was gathered that owing to the inability of some contractors to comply with the directive, their contracts have been cancelled resulting in staff lay-off and the exit of foreign entities in droves.

In letters written to their contractors, Addax Petroleum Development Company, Chevron Nigeria Limited, Nigerian Agip Oil Company Limited and ExxonMobil, all urged the contractors to slash prices by 40 percent, pleading perpetually low oil prices as the reason behind the request.
In a letter by Addax dated 2 February 2016 to one of its contractors, the company served notice that it was looking to secure a minimum of 30 percent cost reduction, adding that the contractor had till the close of business on Thursday, February 4, 2016, to accept the discount.
Another letter written by ExxonMobil dated 24 February 2016 sounded more urbane; giving the impression the contractor had a viable option. The letter actually invited the vendor to a meeting, while proving explanatory notes for requesting the cost reduction.
“Dear vendor, in line with the current economic market situation/market condition of the oil and gas industry/sector, our joint venture partner has directed a downward review of all existing contracts.
“Thus, you are hereby invited for a re-negotiation of the vessel daily rates plus other associated costs of your contracts,” the letter signed by B.F. Ben Nsien on behalf of Mobil Producing Nigeria Unlimited, read.
A staff of NAPIMS who spoke on condition of anonymity disclosed that all contracts awarded in Nigeria’s upstream oil and gas industry are largely inflated, adding that “this is occasioned by the inefficiencies in the management of the contracting processes between NAPIMS and the IOCs”.
“There are instances where an IOC charges as much as $40,000 per day for supervision of an ongoing project and we gloss over it,” the NAPIMS official noted.
A contractor whose operations is heavily impacted by the 40 percent cost reduction request, however, contends that “it is crazy to task running contracts to cut costs by 40 percent across board without any negotiation. This is high-handed and unheard of anywhere else”.
Another letter from Chevron dated 26 January 2016, demanding a similar 40 percent cost reduction in running contracts, stated: “Dear Supplier, as you are all well aware, there has been a continuous and substantial decline in the global crude oil price. This has necessitated the need for further reduction of our cost structure to mitigate the adverse effects on our operations.
“As a consequence, we are requesting a 40 percent price reduction from our marine suppliers,” the letter signed on behalf of Chevron by Adetoro Balogun of the company’s Logistics Category, stated.
In a similar vein, another letter dated 19 January 2016 was sent out to contractors by the Nigerian Agip Oil Company Limited, titled ‘Request for Revision of Rates’. The letter was signed by Paolo Carnevale, the company’s General Manager, District Management.
While the directive from NAPIMS calling for cost reduction on ongoing projects sounds plausible given current oil price realities, there are indications that the directive may be more effective if implemented from the perspective of an all-inclusive effort on the part of NAPIMS and the IOCs, rather than chase an effort targeting only the contractors.
Investigations also revealed that the culture of imposing less qualified contractors on ongoing projects as well as new ones, which began under the embattled Diezani Alison-Madueke era, may have gained traction under the new dispensation.
Further checks revealed that the contracts of several contracting companies have since been cancelled by some of these IOCs mentioned above owing to their inability to comply with the cost reduction request.
Foreign contracting firms whose contracts have been cancelled have been forced to withdraw personnel and close shop in Nigeria while local contracting firms have resorted to lay-off of staff as a means of rationalising to stay afloat.
A ranking personnel with one of the IOCs who did not want his name in print disclosed that 7 of his company’s contractors have been forced to close shop and leave Nigeria.
Another contractor who also spoke with us but did not want his name in print because he wasn’t cleared to speak disclosed that his company had withdrawn personnel, adding that he knows of two other companies that have shut down their operations owing to the 40 percent cost reduction request.
The contractor explained that despite the incidence of corruption and inflation of contracts is a problem between the IOCs and NAPIMS, adding that resorting to arm-twisting contractors will be counter-productive in the long run.
Repeated phone calls and a text message sent to the Group General Manager, NAPIMS/NNPC requesting a reaction to the development failed to elicit any response.
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