Anxiety in Oil Sector Tue, 11/12/2013 - 10:40 Written by  Uncertainty hovers around Nigeria’s oil industry as unfavourable business climate forces multi-national oil companies operating in the country to scale down their operations By Tony Manuaka As a major player in the Nigerian oil and gas industry for well over a decade, Austin Avuru, managing director, MD, and chief executive officer, CEO, Seplat Petroleum Development Company, an indigenous oil firm, is knowledgeable enough to make game changing decisions in oil business. That is why his company took a bold step in buying over oil blocks, offered for sale by international oil companies, IOCs, operating in Nigeria. By his estimation, the indigenous oil companies have, in the last five years, purchased assets valued at about $5 billion from the IOCs. With Chevron and Shell poised to sell more assets, the figure is projected to increase significantly in the next few months. This optimism is based on the fact that Seplat, which was incorporated in 2009 by two Nigerian independents – Shebah Exploration and Production Company, SEPCOL, and Platform Petroleum Limited, became a special purpose vehicle for the acquisition of 45 per cent interest in oil mining leases, OMLs, 4, 38 and 41; three blocks in the onshore Niger Delta, which were divested by Shell Petroleum Development Company, SPDC; Total and Nigerian Agip Oil Company, NAOC, which operates as a subsidiary of Eni SPA, an Italian multinational oil company. The $340 million transaction closed in July 2010 following government’s approval and transfer of operatorship to Seplat. Shell and its partners, Total and Agip also sold 45 per cent interest in the onshore block OML 40 to Elcrest Nigeria Limited. The company also sold its 30 per cent interest in OML 30 with share production of 11,000 barrels per day, bpd, to Shoreline Natural Resources Limited. Not long ago, Brazilian oil giant, Petrobras notified Nigeria of its intention to auction eight per cent stake of its Agbami oil block as well as 20 per cent of the offshore Akpo project for N795 billion. In the same vein, ConocoPhillips, a United States oil major, which has operated in Nigeria for 46 years, has offered its entire business interest in Nigeria to Oando, an indigenous oil-producing company for a cash consideration of $1.79 billion just as French oil group Total in November, 2012 completed the divestment of its 20 per cent offshore stake in the Usan field to Sinopec, a Chinese petroleum and chemical company, for $2.5 billion. Despite concerns over the spate of divestments however, Shell says Nigeria remains an important part of its portfolio, where it will continue to have a significant onshore presence in oil and gas, and which has clear growth potential, particularly in deepwater and onshore gas. Shell says it has a history of over 50 years in Nigeria and remains committed to the country and to supporting the government of Nigeria in their plans for the oil and gas sector. “In June 2013 we announced a strategic review of our operations in the Eastern Niger Delta, which we said could result in the divestment of some of our interests there. The review is ongoing and therefore we are not in a position to confirm which, if any, blocks may be put up for sale”, an official of the company told the magazine. That may just be a modest way of describing the issue at hand. In its third quarter results released recently, Shell recorded a fall in its earnings from $6.2 billion in 2012 to $4.25 billion in the current financial year. It blamed weak refining margins and the security situation in the country for the 31 per cent drop in its earnings. That was not all. The company said it also took a $300 million hit from the impact of the widespread theft and disruption of its activities in the Niger Delta region. All these culminated in reducing Shell’s oil production capacity by 65,000 bpd in the current financial year. Last October, Shell declared a force majeure on Bonny Light export, releasing itself from a contractual obligation due to what it described as circumstances beyond its control. The declaration was made following oil spills on the Trans Niger Pipeline, which affected Bunu-Tai and Nonwa-Tai, two communities in the Ogoni area of Rivers State. Even though the force majeure was lifted within a short time after repairs were carried out on ruptured pipelines, IOCs believe that oil spills in the region are caused largely by sabotage and unending oil theft. The delay in the passage of the Petroleum Industry Bill, PIB, is another factor that has created an air of uncertainty in the oil industry. The long-awaited passage of the bill has been characterised by high-level politicking, thereby causing investors in the oil sector to be cautious. Oil industry experts estimate that investors in the sector are holding on to investments worth about $40 billion due to uncertainties. For instance, Shell had planned investment of $30 billion in two offshore deepwater projects. But with the current investment climate, “SPDC would rather wait for stable and right conditions before committing finances”, said Mutiu Sunmonu, managing director, Shell as he expressed regret over huge loss of revenue and investments to Nigeria due to oil theft and illegal bunkering. For this same reasons, the Senate Committee on Upstream Oil Industry estimates that the country may have lost investments worth about $28 billion since 2010. It is believed that such investments may have been diverted to Ghana and Angola that investors now consider as new grounds with more favourable investment climates. The PIB promises to ensure reform in the oil sector especially in the areas of taxes, royalties, transparency and local participation as well as massive overhaul of the Nigerian National Petroleum Corporation, NNPC, which many stakeholders in the oil and gas industry believe is less than transparent in its management of the country’s oil resources. Andrew Yakubu, GMD, NNPC, believes that the divestments are healthy for the oil and gas industry in Nigeria and would go a long way in promoting effective indigenous participation in core upstream activities. “These are not withdrawals in the real sense of withdrawals. The fact is that a number of these IOCs are moving into more challenging frontiers in the deep offshore and are leaving the onshore blocks which they consider less challenging,” he explained to the international community at the World Energy Congress held in South Korea in October. Having held on to the acreages for a long time, Yakubu believes that it is only fair for the IOCs to release these blocks so that others, especially the indigenous operators can have them and grow in the upstream business. The divestment, according to him offers immense opportunities for the nation’s indigenous flagship upstream operator, the Nigerian Petroleum Development Company, NPDC, to grow its capacity and capability especially as it strives to meet the aggressive target of crude oil production of 250, 000 bpd by 2020. Like Yakubu, Avuru believes that this development will strengthen local participation in the oil and gas sector. “Asset rationalisation by major operators is a normal and even common phenomenon around the world. If Shell, for strategic commercial and operational reasons, decides to reduce their footprint in Nigeria, it makes sense that their mature onshore fields would be the first set to go. Acquiring these assets helps to leapfrog the growth and capacity development of a few indigenous companies that are able to close transactions of these magnitudes. So, it ends up being a win-win situation for both sides,” he told an international news magazine. According to him, the present development would make the sector more vibrant as the oil majors’ new focus is the high risk; high rewarding segments would complement the Nigerian independents onshore oil activities, resulting in increased production of oil and gas. Avuru noted recently that increased investment by the indigenous oil companies could add 300,000 bpd of crude oil to the nation’s production output. For Henry Ojogho, executive vice chairman, Broron Oil and Gas Limited, another indigenous oil services company, the IOCs are on the right track. He told the magazine that with the divestment they have done in the last three years, worth several billions of dollars; their underlying business will be stronger and better focused. With plans by Shell and Chevron to start new projects, which are Mars B and Cardamon in Mexico in the next two years, he projects that their new business decisions will boost their cash flow and sustain massive capital spending initiative. But what will be the implications for Nigeria and the economy? “It will alert a host of domestic Nigerian companies and few of us that have spent more than $5 billion in the past few years to acquire onshore fields from some of them. Already, some of the companies that purchased oil blocks from Shell, have increased their production by investing heavily in the blocks”. In the case of Seplat, for instance, the company is said to have doubled oil production from the acquired assets within a short time. Seplat is said to have recorded over 45,000 bpd from its acquired assets in the first six months of this year, a significant leap from the over 29,000 bpd recorded in the corresponding period of 2012. Apart from increasing oil production significantly, it is believed that indigenous oil companies would be in better position to deal with operational and host community issues associated with onshore oil production. But beside the rosy picture of the future of the industry, painted by these stakeholders, there are still concerns. Muda Yusuf, director-general, Lagos Chamber of Commerce and Industry, LCCI, in an interview, told the magazine that the ongoing divestments by IOCs is not healthy for the nation’s economy because the international companies have high financial capacity, the manpower, the expertise and the global network to be able to invest optimally in the oil sector. “If we have any lapses in that sector, it is probably regulatory lapses but in terms of quality of investment and capacity of investors, the international companies are still our best bet because the financial resources we need is huge. And for most of these things we need foreign capital to meet up, because not many local banks can finance upstream operations of oil companies”. Whereas there are established cases where local operators have increased production since they took over from the OICs, Yusuf told the magazine that he has a report that since the IOCs sold some of the oil blocks to indigenous operators not much activities have been going on in terms of oil production. For this reason, he thinks it is in the interest of Nigeria to encourage the investors, because the sector is becoming increasingly competitive at the global level. The discovery of oil in commercial quantity in Ghana and Angola as well as decreasing energy needs of some other countries around the world are said to be enough reasons for Nigeria to create more business friendly environment for the IOCs. “America is one of our biggest buyers. Now the demand is reducing very drastically. With the change of leadership in Iran, it is possible that there is going to be increased supply from that side. All these things have implications for future prices of oil and ultimately on our revenue. So we will need to do something quickly”, said Yusuf. One of such measures is that government needs to address the issue of security in the Niger Delta region. The reason is that even if there is fairly good prices at the international oil market, and output is declining, the economy will be at risk. A case in point is the current situation where statutory allocations accruable to state governments have been dwindling for some time now. States are now agonising that they are being owed. Yusuf predicts therefore, that “unless we create the right investment climate in the oil sector and even the rest of the economy we will face a very tough time in the near future”. But security situation in the oil region is not entirely a hopeless one. Only last September, the federal government announced that it would spend N15 billion annually to secure oil facilities in the region. That is in addition to ongoing efforts of the joint military task force to keep criminal activities in check in the area. The decision was reached at the 52nd National Economic Council, NEC, meeting presided over by Namadi Sambo, vice president. Through a tripartite funding arrangement, the money is to be provided by the federal and state governments as well as multinational oil companies operating in the country. That decision followed recommendations made by a committee led by Governor Emmanuel Uduaghan of Delta State, on criminal incidence of crude oil theft in the Niger Delta region. Just as Yusuf, Seyi Gambo, spokesman, Petroleum and Natural Gas Senior Staff Association of Nigeria, PENGASSAN, does not see the scaling down of operations by the IOCs as a good omen. His main concern is the ripple effect of possible job losses in the oil and gas sector. “Let me correct an impression, which is that the first casualties are the workers. The national purse in form of revenue from the sector which is more than 85 per cent of the total revenue the nation generates is the first casualty. Signs of a weakening economy and inability to finance budget is already showing as the states cannot get their normal allocations from the federal account. So it is the masses, the general populace, before workers in the oil sector”. By the estimation of Gambo, there will be more than 20,000 job losses in the first instance, then, another 10,000 from allied services vendors in the industry. “We are looking at a generation of young and well-trained men and women being thrown into the labour market, but as a union we will fight that they are adequately compensated. Another issue we can say will arise is the fact that Nigeria today is far from being an investment haven, irrespective of how much our members will be paid when they are laid off”. To strengthen his position, Gambo takes a look at the oil industry in retrospect, with a focus on the downstream sector, which has been divested before now. “When these companies were being run by the multinationals”, he recalls, “the staff had a good salary structure and welfare package. Since our brothers took over these companies, staff strength has dwindled to about a quarter of what it was when the multinationals were running them. Now, we are coming upstream, do we have the corporate discipline in the country to manage these facilities,” he asked rhetorically. That is not all for the oil workers. There is also the fear that Chinese investors may show interest in the oil blocks being divested by the IOCs. In this case, their obnoxious labour practices could make working in the oil sector unattractive. Gambo told the magazine that from his experience as a labour leader, a Chinese investor could force five workers to undertake jobs meant for no fewer than 30 workers. The summation of his argument is that both the Chinese and local Nigerian firms lack the capacity to run the oil wells. He recalls with a sense of humor and a show of lack of confidence in local operators that during the construction of Bonga, the first deepwater project for Nigeria, “we had to import thousands of foreigners from Philippines to erect scaffolding. It spells doom and they know it. I was really ashamed when the Senate president said the IOCs should not intimidate Nigeria. What kind of a leader will say that when oil is now being found everywhere in the Gulf of Guinea, in Niger Republic, Ghana, you name it,” he pondered. The competition for investors, he further observed, “is getting tighter and we are talking tough”. But many economy analysts believe that oil workers are like capital. They could be deployed wherever they are needed provided the conditions are right. Can oil workers decide what happens to other peoples’ investments and the business decisions they make? “As a union we are canvassing that the buyers of the facilities will inherit the workers in those facilities since they already have the experience and this will guarantee continuation of production and the contribution to our economic bottom line as a country,” that coming from a labour leader could very well be considered as a threat to the new investors and a sign of impending unrest in the oil and gas sector. Additional reports by Helen Eni, Muyiwa Lucas and Abiola Odutola . Section: Business
Posted on: Tue, 12 Nov 2013 14:47:03 +0000
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