Yemisi Izuora
The global oil glut has continued to send economic shocks around the world. The hardest hit have been countries whose economies depend heavily on oil for a significant percentage of their foreign exchange earnings such as Venezuela, Angola, Azerbaijan and Nigeria amongst others.
Mr. Kazeem Bello, an energy expert said, the fluctuation in the oil market following the discovery of crude oil in many parts of the world and the new wave of alternative energy sources, particularly shale oil, have had adverse effects on Nigeria. The country’s failure to take cushioning measures against volatility risks by implementing fiscal buffers and hedging mechanisms, has left her at the mercy of the crisis.
The trio of Saudi Arabia, Kuwait and the United Arab Emirates have over $2 trillion dollars in their Sovereign Wealth Fund (SWF) accounts; one of their numerous fiscal buffers, hence the oil crisis has so far had very little impact on their respective economies. Also laudable is Mexico’s adoption of a hedging mechanism before the oil downturn at $76.40 per barrel, saving the country an inevitable exponential loss in the wake of the free fall in price.
The Chair of the Nigeria Natural Resource Charter (NNRC) and former Minister of Petroleum Resources, Mr. OdeinAjumogobia, who noted that crude oil prices had fluctuated over the years, said the current decline highlighted the importance of planning. Speaking at a policy dialogue entitled ‘Implications of the Falling Oil Price for Policy in Nigeria’, organised by the Centre for Public Policy Alternatives, a Lagos-based think-tank, he commented on the need for a hedging mechanism, saying, “because we don’t have a hedging mechanism, we are completely left at the mercy of the oil price.”
Inevitably, Oil and gas companies globally have been adversely affected by the falling oil prices with their revenues and profits on the decline. Seplat Petroleum Development Company’s after tax profit amounted to N4.83 billion at the end of the first quarter of 2015, which represents a drop of 33.4% year-on-year. Full year outlook indicates after tax profit in the region of N20.21 billion for the company in 2015.
The company may therefore lose as much as half of the profit figure of N40.48 billion it reported in the preceding year. In April 2015 the Wall Street Journal reported that BP’s UK version of net income fell 40% from a year earlier and its cash flow plunged by more than 75%, while Total SA of France net profit fell by 20%.
Both companies reported lower revenue from oil sales as crude traded for about $54 a barrel in the first quarter of 2015, half its price a year earlier. The publication further stated that, to demonstrate how challenging the market has been for big oil companies, these numbers were considered better than expected by analysts. In January Total reported a $5.7 billion loss for the fourth quarter of 2014, while BP’s losses totalled almost $1 billion.
Companies have taken to proactive measures to cushion the effect of the downturn including cuts in capex, downsizing of operations and cancellation or suspension of contracts. At the end of 2014 Shell said it was deferring spending in many areas and this would result in a reduction in capital investment from 2015 to 2017 of over $15bn. Chevron Corporation announced a $35bn capital and exploratory investment programme for 2015; 13 per cent lower than the total investments for 2014. ExxonMobil said it would slash its capital spending by 12 per cent to $34bn from about $38.5bn last year, while French oil major, Total, cut capital spending by $2bn to $3bn from last year’s total of $26.4bn.
In Nigeria, there have been cuts in Joint Venture budgets; in Q3 2013, NAPIMS ordered a 30% – 40% cut in the JV budget followed by a similar directive in Q1, 2015. This has led to the stalling and suspension of several ongoing projects. New opportunities have been deferred or out rightly cancelled. This singular move led to a significant drop in the Nigerian rig count from 51 in September 2013 to 27 in June 2015 – a 47% reduction.
The drop in rig count has had a negative effect on other manufacturing and services businesses such as drilling fluids and chemicals, drill bits, casing services, and marine vessels to name a few, leading to multimillion dollar losses to indigenous services companies who have made substantial investments towards acquiring assets, technologies and capacity to execute projects.
The highest losses are being incurred by indigenous rig owners who are stipulated by the NOGICD Act of 2010 to acquire by direct purchase at least 50% of deep water assets which can be valued at as much as $650m and above. These local companies are expected to demonstrate this ownership at the tendering stage with no guarantee of contract commitment. Tendering is unusually lengthy because of bureaucracy and outdated manual processes with cases of tendering going on for over five (5) years with no conclusion in sight.
Acquisition of these assets usually requires these companies’ borrowing from local banks at interest rates averaging 20% or more. These rates make the indigenous companies uncompetitive especially when compared to foreign oilfield service companies who have access to finance at significantly reduced interest rates and grants from their governments.
A combination of falling demand for rigs and cheaper foreign options has led to local rigs being left idle – according to a February 2015 BBC report industry analysts have said this is the worst oil rigs market they have seen globally since 1985.
The Group Lead of the NNRC Expert Panel Core Sector group, Mr. Gbite Adeniji, said oil companies were beginning to renegotiate contracts, adding that some clients were delaying payments. According to him, “there is a general waiting game in the industry. In the service sector, several companies will go out of business. Borrowing from the banks in this kind of environment is almost suicidal… Contractors are beginning to lay off staff. The implications remain that projects will be cut, while the optimism that brought those indigenous companies into the industry is dampening.”
Vivid examples of indigenous companies that have caved in to the pressure are SeawolfLonestar and NRG Drilling to mention a few. Seawolf has since gone out of business with the Asset Management Corporation of Nigeria (AMCON) seizing its three rigs. The company terminated the contracts of its 450 employees who are presently being owed 22 months outstanding salaries and the company has been unable to service its loan agreement with First Bank Nigeria.