The dwindling crude price at the international market is certainly taking its toll on the operations of local oil companies in the country. Most local players in the oil and gas industry are lamenting that the reduction in the price of crude has adversely affected both the federal Government and the majority of the International Oil Companies (IOC), which are in joint venture agreement with the federal government.
They noted that the full force of adversities in the domestic petroleum sector has started to destroy the business fortunes of operating companies across the industry; compounding the gloom in the oil market to weaken the capacity of investors to generate commercial values from capital. The performance indicators emerging from the results of publicly quoted indigenous companies show that players in the domestic environment are getting increasingly overwhelmed by challenges peculiar to the local industry.
Across the globe, oil and gas producers are generally losing money on account of the steep fall in crude prices in the export market which has shaken the credit lines that fund operations and sank the profitability profile of high cost investments made before the price crash. Thus, the biggest commercial blow on the industry came from the deep cut in petroleum commodity prices, which has led to companies taking drastic cost cutting measures including offloading the highest number of oil and gas sector workers in recent history; a measure that appears to save costs in the short term but analysts warn that such measures weaken the collective industry capacity to meet long term demands.
A survey of industry response to the oil glut and consequent price crash showed that multinational oil corporations and service providers including Shell, Chevron, BP, Halliburton, Baker Hughes and Schlumberger have collectively cut their budgets by nearly $200 billion and sacked over 120,000 workers. Some of the operating companies have also sold off assets to absorb the shock. Weaker companies that rode on the strong price wave to muster funding for exploration and asset acquisition have also crashed with the prices.
A tragic example is the London listed Afren, which is not only broke but also deep in debt, worsening its option of offering itself up for acquisition. But the situation has been much worse in the local terrain where players already faced a number of domestic challenges that have also impacted negatively on the bottom line. A critical analysis of the crisis in the domestic upstream sector shows that cutbacks in government’s budget for the industry, piling government joint venture cash call arrears, high rate of industry facility vandalism by thieves, associated production losses and maintenance cost escalation as well as fiscal uncertainty associated with protracted delays in the passage of the controversial Petroleum Industry Bill (PIB) have all combined to form the great incubus on companies’ balance sheets.
The greatest shock came with government’s disappointing response to the sharp fall in the prices of crude oil, which worsened the existing budget crisis in the industry and affected the capacity of companies to balance falling prices with production boost. Oil industry captain and analyst, Mr. Austin Avuru, listed government’s penchant for budget cuts as a major problem in the industry, explaining that late budget response and slow approval processes have left the industry running without plans and targets.
According to him, government’s current debt profile in the industry hovers in the range of $7 billion. The situation, he said, has triggered a debt relay across the industry as the government’s inability to meet its funding obligations has compelled operating companies to delay payments to service providers and also contributed to cost escalation in the industry.
In explaining the major setbacks that affected his company’s financial performance in the first half of the year, Mr. Avuru, who is the Managing Director of Seplat Petroleum Development Company said: “The second big headwind is Nigerian Petroleum Development Company (NPDC) receivables. They are not abating. It is an industry wide problem. NNPC and its subsidiaries owe the industry some seven billion dollars. That is largely the reason you see that overall work programme across the industry is very low.” Mr. Avuru explains: “And that is why there are companies, including Nigerian companies, small indigenous companies that are not growing, that are owed for services rendered for two years. When a company has made commitments and even gotten contractors to do the work and suddenly the government walks up to you and says, ‘sorry, your budget to us was $700 million but we can only pay $450 million.’ “They (operators of joint ventures) are not going to their home office to get money to pay the contractors. They will owe the contractors until they sort it (government’s debt) out. So it is destroying a number of indigenous small sized contractors who are owed for so long and who in turn also owe the banks.
“There are no targets because targets can only be driven by budgets that are sacrosanct; and because there are no longer budgets whenever government walks up to you and says, ‘this is what we have for you,’ you then restructure your entire budget three quarters to fit into the money available. And this is what has been happening. “Again, these are part of the things that drive up costs because when vendors and service providers are not paid, in the next tender they build in the cost of money, cost of delay and other incidental costs into their costs meaning cost of operations will go up.”
Also, Managing Director of an oilfield service firm, Weafri Well Services, Mr. Chris Onyekwere, lamented that the protracted debts by the operators has become a huge problem that has refused to abate. He said such debts wipe off profits from jobs delivered at a time cost templates for award of the contracts were far lower than the templates at the time of payments.
Whereas government’s late response to its cash call on joint venture operations has become a traditional hiccup on operators’ budgets and work programmes, the total incapacity of the state to play its stabilizing role at a time of abysmal returns on investments has left the industry without a cushion. Industry players noted that worse is the government’s inability to meet its equity funding obligation to the joint ventures and its barefaced slash of joint venture budgets at a time production boost is needed to mitigate impact of low prices. Thus, the failure of government through the NNPC to live up to its funding commitments to the industry has left a huge debt burden that currently deters investments, hampers work programmes and weaken the capacity of players generate commercial margins.
Daily Independent
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