It may be virtually impossible for the Nigerian National Petroleum Corporation, NNPC, to operate its refineries, crude oil and products pipelines nationwide profitably unless the government takes drastic measures to eliminate all acts of pipeline vandalism, according to an investigation by The Guardian.

This is coming in the light of a report titled “Report on Improving Local Refining Capacity in Nigeria”, prepared by the Managing Director, Matwims Consult Limited, Mark Tubotein, which reveals that the repeated repairs by Petroleum Pipelines and Marketing Company (PPMC) after each act of vandalism for several years calls to question the integrity of existing pipelines that are over 35 years in operation without adequate maintenance on them.

Before this report, there were revelations by the NNPC that the huge spending by government for the purpose of protecting Nigeria’s vital petroleum products’ pipelines seemed not to be having any positive effects on the security of the country’s oil and gas resources after all.

This is because despite spending N103.4 billion for pipeline repairs and management between January and December 2015, data from the NNPC shows that the Federal Government actually recorded crude oil and product losses of N57.71 billion to pipeline vandalism.

According to Tubotein, the repeated repairs by the Petroleum Pipelines and Marketing Company (PPMC) after each act of vandalism for several years call to question the integrity of existing pipelines that are over 35 years of operation without adequate maintenance on them.

He noted that reports from the NNPC reveal that as from January to August 2015 alone, there have been over 1,824 cases of line breaks on PPMC pipelines. “The corporation, at least, spends billions of naira each year to maintain and secure pipelines with the assistance of security personnel and community personnel in the Niger Delta. With this level of financial expenditure on dilapidated pipelines coupled with low capacity utilisation of local refineries, there is no way the corporation can remain profitable.”

He said since the transportation of products through pipelines cost less than the alternative modes, viz, rail, road and sea,” providing marketing companies with the access to pipelines for a reasonable fee is essential to protect the consumer interests. All product pipelines need to be treated as utilities and ‘common carrier principle’ made applicable to all of them. The tariff for the usage of pipelines may be fixed by the regulatory body such as Department of Petroleum Resources (DPR).”

Due to the series of pipeline vandalism, Nigeria has suffered setbacks in meeting its gas obligation to Ghana and other West African countries through the West Africa Gas Pipeline Company. It was learnt that Ghana has already started making alternative arrangements to get gas in order to provide regular electricity, which has been epileptic for several months due to the deficit in Nigeria’s supply.

Specifically, NNPC disclosed that a total of 2,832 vandalised points were recorded between February 2015 and January 2016. According to data from the corporation, the Mosimi pipeline recorded 103 breaks in February last year; 60 breaks in March; 101 breaks in April; 146 breaks in June; 78 in July; 79 in August; 44 in September; 66 in October; 57 in November; 93 in December; and in January this year, it recorded 59 breaks. In January alone, Kaduna and Port Harcourt recorded 59 and 247 breaks respectively, while Warri recorded 32 incidents.

The government initially hired community members as guards, but then brought in the security personnel when there was no improvement with the local guards. Not even the intervention of the security personnel could stop the unrepentant vandals.

It was learnt that NNPC then adopted a new strategy in 2011, reportedly signing pipeline protection contracts worth at least $39.5 million a year. The government had touted the deals as effective tools in the fight against oil theft, yet NNPC’s own data show pipeline losses actually went up after the new contracts started.

In the last five years, things only appeared to get worse. In the Niger Delta, as many as 5,280 oil wells are linked by 7,000 kilometres of pipelines and are vulnerable to attacks by organised gangs.

The NNPC said in its report that pipeline vandalism, refinery capacity utilisation which is below commercial threshold due to prolonged Turn Around Maintenance (TAM) issues, and products losses, had continued to cost the corporation huge amounts of money.

Although the NNPC has not released the January 2016 claimable Pipeline Repairs/Management Cost and Crude and Product Losses due to vandalised pipelines, The Guardian learnt that the country has already recorded over 400 breaches on pipelines between January and March.

The corporation said that a comprehensive reform of the pipeline security situation would unlock several industry upsides which include improved upstream oil production due to reduced pipeline disruptions, improved refinery utilisation due to increased crude oil feed from restored pipelines, and reduction of crude oil and product losses.

The Minister of State for Petroleum, Dr Emmanuel Kachikwu, had expressed the determination of the corporation to eradicate oil theft and pipeline vandalism in the next eight months.

” I want to assure you that the new leadership of NNPC, with the support and cooperation of all stakeholders, is working very hard to eradicate oil theft and pipeline vandalism in the next eight months,” he said.

The NNPC boss said the measure was part of efforts to enhance transparency and accountability in the oil and gas industry, to boost production capacity of the corporation.

According to him, oil theft and pipeline vandalism have greatly affected the revenue generation and image of Nigeria in the international arena.

“Oil theft has reduced our revenue generation and indeed affected the image of our country at the international community,” he said. He disclosed that as part of ways to find a lasting solution to the lingering oil theft, NNPC would establish a company that would be saddled with the responsibility of securing pipelines in the country.
*Roseline Okere – The Guardian

By Margaret Nongo-okojokwu

Africa’s richest man and President, Dangote Industries, Alhaji Aliko Dangote, yesterday, dismissed fears about the impact of the fall in crude oil prices on the Nigerian economy, saying the decline would not translate to doom for the economy.

Aliko Dangote

Speaking in Lagos at The Nigerian Economic Summit, Dangote said despite the fall in oil price, a lot of sectors were doing well in Nigeria, adding that the problem was that people were under estimating the resilience of the Nigerian economy. Entitled: ‘Nigeria: The Dawn of a New Era?’ the summit was organised by The Economist Events, a subsidiary of The Economist International magazine.

Those in attendance were economic experts and top government officials, including Managing Director/Chief Executive, Access Bank Plc, Mr. Herbert Wigwe; Managing Director/Chief Executive, Oando Plc, Mr. Adewale Tinubu; Managing Director/Chief Executive, Financial Derivatives Company, Mr. Bismarck Rewane; Managing Director/Chief Executive, Verod Capital Management Company, Danladi Verheijen and Minister of Industry, Trade and Investment, Mr. Okechukwu Enelamah, H. E Kashim Shettima, Governor of Borno State, and a host of others.

According to him, while the fall in oil prices portends dangers to some businesses, it, however, presents a good opportunity to diversify the Nigerian economy. He said “If we don’t diversify the economy now, then we would never do it.” He said Nigerian companies should learn to export, advising that they should leverage on the 320 million population of the West African sub region to grow their businesses through export.

People are under estimating the economy He said: “I think people are under estimating the economy of Nigeria. They just go and look at foreign exchange, because price of oil has gone down, it means that everything has gone out of the window. That is not correct, in some areas, yes, depending on your business.” Citing the example of growth recorded by Dangote in cement and sugar sales, he said:

“If you look at it, right from October to November, our sales of cement have actually been going down, even though at a cost because we took the price down by 35 per cent, but this has given us over 50 per cent market growth up to January, February. “January, you know is a very slow month, but in February, we had 47 per cent growth in terms of volume. And our own estimate is that in the next three months we would have over 60 percent growth. We could not go beyond this 50 percent because we have been having serious issues in terms of gas. “

“On our sugar too, we have seen growth of about 80 per cent.  When you take a company like Coca-Cola, it has actually exhausted its capacity. They delisted about three years ago, and they doubled their capacity within these three years, and now their major problem is that they cannot meet up with their capacity, and now they have a plan to double their capacity in the next two and half years”.

“So it is not that there is dullness all over the economy, no. In some areas things are even moving up. But it does not mean that people should sit back and say there is crisis. Sometimes, crisis is also an opportunity, so you use it very well so that the crisis should not happen to you. “You just had to have faith, and keep pushing to make sure you are where you are and that is what we are doing. That is why we are not stopping in all our projects, we know the market, and we know the dynamics of the markets.”

Time to diversify economy

“I think the one quick policy, which is what we have been talking about is diversification of the economy. This is the right moment. I know in Nigeria, once the oil price goes up to $80, nobody will diversify, we would go back to our misbehaviour. “Government should be very specific and come out with clear policy that we would support. And the implementation has to be monitored. If we don’t do it now, we would never do it.

Nigerian firms should learn to export

“Nigerian goods can be very competitive. We don’t have to export goods from here to East Africa. We have 15 countries in the ECOWAS region, which are duty free. At the moment, most of the companies are not geared up for export which I think is a big mistake because when you have more volume, you can make more money and become more competitive. “The scenario of export is that if I meet up with my domestic market, I can actually take the excess and dump it in another country. It will give me much more profit. The issue is about capacity. If you have it fine.

“But for countries in Nigeria, they don’t have to export to East Africa. First of all, there is population of about 320 million people to feed. So the market is big, great and profitable.

“Also, from Lagos to Accra is 450 kilometres, but to Abuja is about 650 kilometres. That means your real market is this West African market. So your real market is Nigeria, Benin, Togo, Ghana and even up to Ivory Coast. “So we have a big market and the export will not be difficult.  I think what we need now, especially with this foreign exchange freeze, is that our people should learn to export.

“And government too should find out how to correct this export credit scheme if it is going to continue. Because it is good to export and also to have support for export but what the government should say is ‘if I give you export credit support, you don’t go and use it to pay duties and co. If you are in business, you use the export credit against your taxes.’

On Forex Subsidy

“There is nothing like subsidy. It is about giving incentives to people to set up industries. And that is happening almost everywhere and Nigeria is not even the highest. “If somebody has a business, he is more interested in running his business than in round tripping. Those people doing round tripping, no matter what you do, they would still do round tripping, they would not stop doing round tripping.

“Give them what you want to give them; their own business is how to make money from the differential in foreign exchange rate. But there are ways government can block them, by making sure that the goods to be imported are here. They would not be able to take dollars without you bringing in the goods.

Petroceltic International and its partners on the Isarene Permit in Algeria, Enel and Sonatrach, have started development drilling on the Ain Tsila gas and condensate field. The Sinopec Rig 50117 arrived on the Isarene Permit in November and was successfully assembled and tested.

The first well in the development program, the AT-10, was spud on February 21. The well is located approximately 3.4 km from the field discovery well AT-1, and 2.0 km from the appraisal well AT-8. Each of these wells delivered gas flow rates in excess of 30 Mmscf/d on test.

The AT-10 is the first of up to 24 new development wells on Ain Tsila expected to be required to establish and maintain the currently approved annual average wet gas plateau rate of 355 Mmscf/d.

In addition to the commencement of development drilling, the tender of the major field EPC contract covering main field facilities and pipelines is progressing.

SacOil has announced proposed reorganisation changes to its indirect participating interest in Block III, Albertine Graben, in the Democratic Republic of Congo, currently held by its indirect subsidiary Semliki Energy.

The reasons for the reorganisation of the ownership structure are to enable SacOil to represent its interest in Block III directly and to have direct line of sight to the activities of Block III. The impact of the reorganisation is that the assets and liabilities related to fellow Semliki shareholder,Divine Inspiration Group (‘DIG’), will be retained in Semliki.

Background

Semliki has a direct 18.3% participating interest in Block III alongside partners Total E&P RDC(66.7%) and the DRC government (15%).  Semliki is currently 68% directly owned by RDK Mining with the remaining 32% held by DIG. RDK is a wholly owned subsidiary of SacOil whose effective interest in the asset is therefore 12.5%.  The operator of Block III is Total.

Proposed Reorganisation

The proposed reorganisation will separate the respective interests of SacOil and DIG in Block III via a change in ownership of Semliki. SacOil has formed a new wholly owned subsidiary, SacOil DRC, being a company incorporated in the DRC, which will be directly owned by RDK.  Semliki will dispose of a 12.5% participating interest in the PSC and a proportionate interest in the Block III Joint Operating Agreement and Exploration Permit to SacOil DRC for nominal cash consideration.  Concurrently Semliki will repurchase the entire shareholding of RDK in Semliki for nominal cash consideration, thus resulting in Semliki becoming a wholly owned subsidiary of DIG.

Semliki shall assign a portion of its future rights and obligations under the Farm-Out Agreements (‘FAs’) to SacOil DRC with the consent of Total.  This assignment represents a transfer of SacOil’s rights and obligations attached to the 12.5% effective participating interest in the PSC now held through SacOil DRC pursuant to the disposal highlighted above.  The rights and obligations to be assigned include:

• The right to receive bonuses totalling US$54 million pursuant to the provisions of the FAs upon the attainment of First Investment Decision Date and First Oil Date;
• The right to require Total to pay SacOil DRC’s share of carried costs;
• The right for Total to recover the carried costs and interest thereon from SacOil DRC’s share of cost oil;
• The right to receive payment from Total of an amount equivalent to SacOil DRC’s share of the Sell On Premium as defined under the FAs; and
• The obligation to pay SacOil DRC’s share of costs to Total under the provisions of the FAs. Carried and other costs associated with future operational activities cannot be quantified at this stage.

Semliki shall delegate to SacOil DRC its payment obligations in respect of loans owed to SacOil and South Africa Congo Oil amounting to $2.5 million and R41.3 million respectively, which arose from historical transactions relating to the acquisition of SacOil’s effective 12.5% interest in the PSC.

As part of the reorganisation SacOil has agreed to reimburse DIG operational costs of $150,000, which are primarily representation fees as SacOil does not have an office or presence in the DRC. This reimbursement will be paid on the closing date of the reorganisation.  Payment of the reimbursement amount will constitute full and final settlement of all and any claims by DIG, Semliki and their affiliates against SacOil and its affiliates.

SacOil and DIG will retain their respective participating interests of 12.5% and 5.87% in Block III post the reorganisation. SacOil’s entire interest in Block III will be held via SacOil DRC.

Rationale

The reasons for the reorganisation of the ownership structure are to enable SacOil to represent its interest in Block III directly and to have direct line of sight to the activities of Block III.

Timeline

On 29 February 2016, SacOil and DIG concluded the transaction agreements implementing the reorganisation.  Closing is subject to all necessary approvals being procured and necessary amendments to the relevant Block III agreements being effected.

Wednesday the 24th of February, 2016 marked the official launch of the BV Marine and CSIA Certified Panel Shop, the only shop certified in Nigeria for marine rated Industrial panels. The shop is a further show of our demonstrated local competence in Automation and Electrical equipment manufacturing in Nigeria.

The event was well attended by numerous customers from 19 companies across Oil, Gas, Power, Food & Beverage, Breweries and the cement industry. We also had the pleasure of having representatives from PETAN, DPR, NAPIMS, NNPC, MAN and NCDMB.

At the launch, the MD/CEO-Lawal Gbolahan welcomed all who had made time to come for the event. A delved a little into the company’s history and every effort made to be a certified panel shop. He also encouraged patronage from all stakeholders. He described the facility to be a hub were Nigerian young Engineers would be able to grow into specialist in areas such as welding, design and fabrication of Electrical and control panels etc.

Closely following the CEO was a representative of the Nigerian Content Development and monitoring board – NCDMB Mr. Frank Ibi – Manager Capacity Building gave a goodwill message on the need for supporting companies who work hard in ensuring the Nigeria content act is followed. He commended GIL Automation for achieving this prowess and encouraged others to do same.

A representative of Total Nigeria provided customer testimonial on how GIL Project team have delivered panel projects to specification, timely and safely.

The AGM, Project & Services Olawale Akande talked extensively on the various processes of the panel shop including the software and hardware involved and the relevant IEC compliance of our cabinets.

The GM –Sankalp Singh was delighted to facilitate the tour of the facility which saw the staging area where panels are staged after fabrication for FAT and preparation for packaging and shipping. Then they went to the fabrication area and then to the workshop were metal sheets are fabricated and bended, the bus bar machine and loading area.

The event continued after lunch with a question and answer section which was co-anchored by the GM and MD.

‘Following the launch, GIL Automations opened its doors to their clients to make out time and come for a tour anytime. Be rest assured we are glad to take you round because we are proud of it. We look forward to working with you on your next enclosure project’, Singh said.

The fabrication of the Floating Production Storage Off-loading, FPSO, for Total E&P Egina oilfield project is estimated to boost local content development up from current levels of 10 percent to about 15 percent.

The Managing Director, Lagos Deep Offshore Logistics, LADOL Base, Dr. Amy Jadesimi, who disclosed this in Lagos, said upon the completion of the facility, other FPSO’s can berth there.

According to her, “this is a huge milestone; what it means is that every FPSO from now on can come to Nigeria and local content can finally reach beyond the 10 to 15 percent level.

“We have been stuck at that 10 percent level, why? Because of capacity, if you do not even have a place where the FPSO can berth, then what are you talking about? So we have to first build the capacity and this FPSO is very critical because this is the most complicated, most expensive facility you have to build.

“Once you build the facility, other people can now come in to invest millions and they can contribute and benefit from this whole exercise we are engaged in to make Nigeria a hub.”

The Egina FPSO is expected to be one of the largest in the world with the capacity to store about two million barrels, and the first FPSO to be integrated onshore in Nigeria.

She said: “The value of the whole Egina project is about $14 billion – $15 billion, but Samsung’s part of it is about $3.8 billion.

“What we are saying is now that we have this facility at LADOL, we will be able to achieve up to 50 percent local content. So not only are we creating jobs, we are domesticating activities and therefore conserving foreign currencies because we are now charging in naira.

“This facility is a game changer; once you change the game, it is just a question of making sure that we have enough additional investment, more participants, particularly from the indigenous side so that we can increase our capacity enough to meet the demand.

“The other thing that we are looking at which is very important is the human capacity development. This is very important; the work we are doing in LADOL has never been done in Nigeria before.

“In a low oil price environment they are looking for cost savings and Nigerians are cheaper than South Koreans. Also, these projects are necessary to support the diversification away from oil and gas. The facility in LADOL can be used to do any kind of steel fabrication – we can do railways, we can do pre-fabrication steel for hospitals, we can build bridges and we can also do for factories.

“The cranes we have inside the facility are the heaviest in the whole of Africa, even if you go to South Africa; they do not have what we have in Nigeria now. So when we say this is a game charger, this is a real game charger”.

… Reiterates its Commitment to Nigerian Content

Clay Neff (in the middle), Chairman & Managing Director of Chevron Nigeria Limited (CNL) exchanges the agreement of the sale of  CNL’s interest in OMLs 52, 53 and 55 with Austin Avuru (third right), Chief Executive Officer, Seplat Petroleum and representative of the Seplat Consortium comprising of Seplat, Amni and Belemaoil -yesterday in Lagos. Others are:  (left to right) – Mirian Kachikwu, General Counsel, Seplat Petroleum ; Stuart Connal, Chief Operating Officer, Seplat Petroleum; Nedo Osayande, Managing Director, Belemaoil;  Roger Brown, Chief Financial Officer, Seplat Petroleum and Chioma Nwachukwu, General Manager, External Affairs and Communications, Seplat Petroleum.

Chevron Nigeria Limited (CNL),operator of the joint venture (JV) between the Nigerian National Petroleum Corporation (NNPC) and CNL (the “NNPC/CNL JV) has formally handed over the producing assets in OMLs 53 and 55 to Seplat Petroleum Development Company Plc. (Seplat) and Belemaoil Producing Limited (Belemaoil) respectively, at a brief but impressive ceremony in CNL’s Lekki Headquarters. A similar handover and induction exercise was conducted at the Jisike Flow Station, near Owerri, Imo State.

These events conclude the asset sale transaction between CNL and Seplat for OML 53, and between CNL and Belema oil for OML 55.

Clay Neff, Chairman and Managing Director, CNL, who received Austin Avuru and Nedo Osayande the CEOs of Seplat and Belema oil respectively at CNL’s Lekki headquarters said: “We are pleased to conclude the handover of the producing assets in OMLs 53 and 55 to Seplat and Belema oil respectively. This affords these companies an opportunity to grow their production, while also confirming our commitment to developing Nigerian content.”

In response, Mr. Avuru acknowledged that “The acquisition of these assets is in realization of our carefully designed strategy to create long-term value and shared prosperity for our shareholders and other stakeholders.” He confirmed that “Seplat will leverage its core strengths and expertise to capitalize on growth opportunities available to them across the upstream value cycle.”

In his own response, the founder of Belema oil, Mr. Jack-Rich Tein said “we are pleased that the acquisition of OML 55 by Belema oil is now concluded and we will now proceed with our long-term strategy to maximize value for all stakeholders.”

CNL signed a Sales and Purchase Agreement in November 2013 for the sale of its interests in OMLs 52, 53 and 55 to The Seplat Consortium comprising Seplat, Belema oil and Amni International Petroleum Development OML 52 Company Limited.

By Pita Ochai

‘You never want a serious crisis to go to waste.” Barack Obama’s former chief of staff Rahm Emanuel used this familiar aphorism when discussing the 1973 oil shock, and it applies again now. But today’s crisis is the reverse – plunging rather than soaring prices. And of course what is a crisis for some is a mild inconvenience to others and an opportunity for still others.

The fall in the price of crude oil in the international market is sending economic and political shocks around the world. The hardest hits are countries whose economies depend largely on oil for appreciable percentage of their foreign exchange earnings. According to statistics, crude oil accounts for about 95 percent of Nigeria’s foreign exchange receipts.

The reality of possible crippling budget shortfalls also stares many oil exporting countries in the face as the priced commodity has hit its lowest price level in four years. The prices of crude oil have now fallen by more than seventy per cent since June 2015, when the commodity was being sold for $110 per barrel to less than $30 per barrel. Analysts have blamed weak global demand and booming U.S shale production as reason behind the price plunge and with the Organisation of Petroleum Exporting Countries (OPEC) reluctant about cutting output. Having carefully studied the market situation, the World Bank has predicted that the international crude prices may go as low as $20 per barrel.

The impact of the falling oil price has been seen in the dwindling oil bench mark for the national budget of Nigeria. In 2014, the budget was based on 78 dollars per barrel, in 2015 it was lowered by about 17 percent 65 dollars per barrel, but the 2016 budget seems to be the worst hit with a drop of 41.5 percent which is 38 dollars per barrel. While the sustained low oil price is having its toll on government revenue, oil companies are not also spared. Most companies have reacted by reducing cost through sack of workers, and reduced investment as there are less fund do that.

According to Raoul Restucci, Managing Director of majority state-owned Petroleum Development Oman (PDO), governments that are dependent on high oil prices to balance budgets will generally be concerned over the source and distribution of funds and emerging fiscal deficits, while executives of exploration and production companies will increase their efforts to enhance and drive business efficiency.

However to Restucci, there is a silver lining in falling prices. “Operators tend to revert to more rigorous activity-based pricing and escalate efforts towards contract optimisation and efficiency. The decline compels the industry to reassess the incremental value generated across every facet of expenditures, and often to reinvent itself where returns are inadequate. This helps the company become more robust, sustainable and efficient,” he said.

According to Restucci, many opportunities can emerge from the current oil prices that simply reaffirm the need to get the basics right. Leveraging operator and contractor resources, rebalancing the apportionment of risks and aligning procurement efforts are some of the practices that will, no doubt, be implemented more effectively across the industry to generate savings and sustain profitability and investment return goals at lower price levels.

Osaze Benson, an energy expert, told Orient Energy Review that the global drop in oil prices has analysts mulling over the shrinking profitability of the oil industry. But it is not all doom and gloom. On the contrary, companies may be in a stronger position today to negotiate better deals with host governments, compared with when prices were high. “Oil prices are the most obvious drivers of change in the relationship between the two key players: host governments—the owners of resources; and companies—the holders of capital and technology. The price level significantly determines the degree of bargaining power each party has at the negotiating table.

Typically, when the oil price is high, the government has the upper hand; when the price moves in the opposite direction, the pendulum swings in favour of the companies,” he said. Adding that even before the oil price started to weaken, some governments introduced drastic changes to improve their investment outlook, such moves further toughen competition between countries for international capital. It is, however, a question of time before the pendulum swings again.

Experience shows that periods of high oil prices are not always good news for the industry. On the contrary; they typically attract higher taxes, contract renegotiations, tougher regulations and, in extreme cases, expropriation and nationalization as host governments demand a bigger share of the additional returns.

These changes are seldom implemented easily or peacefully, and often result in lengthy litigation. As shown by London-based think tank Chatham House, the higher incidence of arbitrations in the oil sector correlates strongly with the commodity price boom. A contract signed when oil prices were $30/bl may well be viewed as simply too generous to the industry at $100/bl.

The period between 2002 and 2008 is a good illustration. Over that period, oil prices were rising steadily and more than 30 countries revised their petroleum taxation systems to increase their share of profits. From Angola to Argentina, China, Ecuador, India, Kazakhstasn, Libya, Nigeria, and the United States (Alaska), governments increased the tax rates oil companies pay.

Today’s low oil prices have pushed some governments to go in the opposite direction. This is most notable in countries which have been struggling to increase production and attract investment. Low oil prices will only exacerbate an already dire situation and therefore prompt anxious governments to implement drastic measures to stop conditions from worsening further.

For instance, energy giant BP and its oil and gas partner, RWE Dea, recently made headlines after signing a historic deal with the Egyptian government. The contract has been described by some critics as the “great Egyptian gas giveaway.” While such a statement is surely an exaggeration, it indicates the Egyptian authorities’ willingness to try different means, even completely new schemes, to improve the country’s challenging investment outlook. The agreement shifts away from a production-sharing model—long used by Egypt whereby companies are paid a share of production as compensation for their efforts—to a concessionary system where the companies own all the production and pay taxes in return.

The Managing Director, Total Exploration and Production Nigeria Limited, Mr. Nicholas Terraz  has said the oil price fall is responsible for the challenging economic environment in Nigeria, and noted that the harsh environment required oil companies to adapt and quickly take actions, while identifying three critical factors for sustainability of the petroleum industry.

Terraz, who spoke at the recently-concluded 20th Offshore West Africa Conference (OWA), in Lagos, elaborated on the three critical factors that will be key for future development in the industry. He noted that safety, irrespective of all issues, cost efficiency in company operations and adequate petroleum laws and regulations which provide a robust framework that is conducive to investment and flexible enough for the varied economic climates linked to the price of oil, were all absolutely essential.

Terrez, further hinted that, “If we are able to achieve these conditions and put in place laws that create a win-win situation for all stakeholders, our countries would have laid a solid foundation for a sustainable future.” “This will also stabilise investors’ confidence, ensures attractiveness and respect of the contractual and fiscal terms, cost efficiency is critical in the current context. Irrespective of all these issues, high safety standards must not be compromised” he added.

In response to the decision by the Organisation of Petroleum Exporting Countries, (OPEC) not to cut production, oil prices plummeted. Prices may fall further, or may stage a modest rebound, but it seems clear that expectations of a new floor of $100 per barrel were misplaced. So what should producers, governments and consumers do in preparation for an extended period of weak prices?

Olisemeka Obeche, an energy economist said: Firstly, they should not think of current prices as “low”. Since the birth of the modern petroleum industry, the inflation-adjusted oil price has averaged above $70 for just 16 of 153 years. Prices in a range of $60 to $80 would be enough to keep oil competitive as energy source and industry profitability still strong. So if you are a government official, this fall should not come as a surprise. The wiser states have already been trimming their budgets; for others, the time of consequences is approaching. Cutting wasteful subsidies now makes even more sense – the required hike to reach market prices is less.

“If you are an executive in an oil company, remember that the industry has overreacted to such boom-and-bust cycles so often before – overspending during the early 1980s in expectation of relentlessly rising prices, gutting research and the workforce in the 1990s, then suffering for it from rising costs and skills shortages in the 2000s, before repeating the mistake during the financial crisis. Is it too much to hope for that this time may be different? Of course oil companies will seek to halt unprofitable projects and squeeze suppliers,” he said.

Obeche said this should also be an opportunity to invest in technology and in building a younger and better-skilled workforce. For the bolder chief executives, this is a chance to make acquisitions. The supermajor oil companies may seek to fix their problems by delivering growth; the smaller independents may consolidate to build the scale to compete.

The low oil price also creates opportunity in the downstream sector in some countries like Nigeria. For decades, the downstream sector has always sat in stark contrast to what had always been a thriving upstream oil and gas industry in the country. The downstream sector was very much the sick child of the Nigerian oil and gas industry, defined and plagued by chronic fuel scarcity. During such times of scarcity, the petrol stations across the country would be littered with never ending queues of cars while jerry-can carrying touts held court in the thriving black market, the price of petrol often selling at five times the going rate.

A large chunk of energy policy in Nigeria has always focused on the upstream sector, that may be with good reason – the breadwinner of the family with energy sales accounting for up to 80 percent of the Nigerian government’s revenue and 90 percent of the country’s export. In the first quarter of 2014 alone (obviously before the oil price plummetted), Nigeria realized N2.432 trillion in oil revenue compared to N299.2 billion realized from revenues from non-oil sector sources. This has meant that the current low oil prices has hit Nigeria hard because the government’s income is not diversified.

Between June 2014 and January 2015, oil prices fell by nearly 50 percent, and the oil price has remained low since then despite one or two upticks. Oil exporters are said to be receiving about 54 percent less than what they received in 2013.

The Managing Director, Chevron Nigeria Limited, Clay Neff said Nigeria had the opportunity to improve its competitive position in the global oil and gas industry.

He noted that in this current situation, the country should restore investors confidence by providing competition in the oil market, adding that the security of lives and properties, and control stability and speedy approval processes should also be institutionalised.

The Chevron chief said the country should address its Joint Venture (JV) funding challenges and pay the arrears, adding that Nigeria had an attractive resource base.

While the upstream has been hit very hard by the current oil price, the downstream in a lot of countries, has enjoyed a boost in revenue. The low oil price environment has meant that the cost of feedstock has also fallen materially. Could this be the blessing in disguise?

According to Idahosa Andrew, an independent fuel marketer, the root cause of the Nigerian downstream sector’s travails can be traced back to high crude oil prices (and the weak Naira). This made it more attractive to export crude for foreign exchange rather than supply the domestic market.

Further, high crude prices meant a higher cost of feedstock (which wasn’t even readily available because most, if not all of the crude was exported). This invariably meant that it was easier to import refined petroleum product than to refine the crude in Nigeria. Let’s not forget the eye watering amount of government subsidies made available to petroleum marketers for the import of refined product. With such a huge pay day available to importers of refined product, why go through the hassle of refining? As a result, Nigeria’s refineries were brought to a grinding halt, operating far below capacity if not dormant for extended periods of time due to prolonged states of disrepair.

Now with the decline in government revenue as a result of the plunge in oil prices, it was difficult for the government to pay subsidies due to oil marketers. The month long fuel scarcity in May 2015 was as a result of non-payment of subsidies by the government. The new government finally announced the removal of the fuel subsidy and fixed the pump price at N86.5. The truth is that the new government can do without paying out huge fuel subsidies which is rumoured to be in the region of N2 billion per day.

Another point is that the outlook for Nigeria’s downstream sector has been bleak for quite some time, prompting major players such as Oando to exit the downstream business all together. Oando in July 2015 announced to its investors and journalists that it would be divesting its downstream business to focus on its upstream and midstream business. Without a doubt the uncertainty in the sector has led to this point.

At a time when there is so much gloom about the sustainability of economic recovery and about the putative limits to monetary policy, the fall in the price has come as manna from Heaven for all those Western economies, and Japan, that were hit badly by the successive oil shocks of the 1970s.

The logical effect of the fall in oil prices means that the cost of feedstock for refining has also fallen. The decline in feedstock should hopefully signal to the downstream market to invest more in refining, whether or not the subsidy regime will continue. Nigeria cannot afford to pay these subsidies if the price of oil persists at this level). Therefore, making imports less attractive to oil marketers. The market should realize that it is just as lucrative (perhaps even more so) to supply crude to the domestic market for refining instead of exporting.

Nigeria, with over 180 million people, cannot not be said to be lacking in demand for refined products. Nigeria consumed 305 000 bpd of petroleum in 2014. The fact that there is a problem of illegal refining is testament to the fact that there is a market there (albeit a black market. low oil prices should signal investors to invest in the infrastructure required to provide the much needed supply to meet the demand for refined product.

By Godspower Ike,

Margaret Nongo-Okojokwu

The low oil price has brought in its wake a number of challenges for oil and gas producing countries in Africa. These countries are faced with declining foreign exchange reserves, dwindling revenue, rising expenditure, declining growth and risk of a number of oil companies defaulting on their loans with some in danger of going bankrupt. This article seeks to analyse the many challenges confronting these countries and oil companies that operate within these countries, while also exploring the solutions proffered by experts on how these countries and companies can escape from this quagmire.

The declining crude oil price has plunged oil producing countries in Africa into serious economic dilemma and it is also threatening the social and political fabric of these countries and the continent in general. These countries are faced with declining foreign exchange reserves, dwindling revenue, rising expenditure and declining growth.

Analysts are also unanimous in their views that the decline in oil price has thrown Africa’s oil and gas industry into dire straits, a situation exacerbated by factors such as uncertain regulation, corruption and the prospect of political and social instability.

According to analysts, it is a particular burden on those economies most reliant on the industry for revenue, and could have far-reaching socioeconomic results.

It is estimated that with almost 90 percent of African countries now exploring hydrocarbons, the global decline in oil prices would throw up extra hardship for those countries, especially as investors are averse to taking risks in the midst of the global turmoil.

Nevertheless, report stated that despite the fact that a number of African countries are already diversifying their economies, it is impossible for them to escape the global turmoil in markets and growing insecurity brought about by low oil prices.

Already, it is common knowledge that many currencies have performed badly against international currencies. Particularly, the South African rand plunged to its lowest level in the last 13 years, while the Zambian kwacha also fell to a record low price against the euro and the dollar.

Duncan Clarke, Chief Executive Officer of Global Pacific and Partners warned that with oil prices dropping by more than 50 percent, many African economies are in deep trouble.

He declared that the industry is under a global shock and all oil producing countries, as well as non-producing countries are going to witness less capital coming in for exploration into their countries. Clarke stated that projections in Africa that were done in the past were oversold.

According to him, there is still growth and opportunity in the continent, but only countries that adjust quickly will do best.

However, he said, “The market has adjusted to the crude oil prices overnight. The companies have taken a little bit longer but they have all adjusted on portfolios, on layoffs. Now it’s up to the governments.”

In the same vein, the International Energy Agency had said that African crude oil exports will fall by 600,000 b/d over the next six years as production from its biggest producers’ slips and rising regional refinery activity absorbs more domestic output, Africa will observe the steepest absolute decline by a major crude exporting region, with regional crude production set to decline by 400,000 b/d mainly due to fall in output in Nigeria, Algeria and Angola, according to the IEA’s Medium-Term Oil Market Report, as published by PLATTS Africa Energy Outlook, February 24^th 2016.

In this report, the IEA said that West African oil producers are likely to have problems marketing their crudes over the next couple of years due to the existing global glut of sweet crude, which has made this region a new “swing producer.”

According to the report, the Dangote refinery project in Nigeria which is expected to start-up by 2021, will process Nigerian crudes and thus reduce the volumes for export. Crude runs are expected to reach 300,000 b/d in 2021 with the full 500,000 b/d nameplate capacity reached in subsequent years.

Algeria is expected to post the biggest loss in crude production in Africa and in OPEC over the six year forecast period because exploration and development of new Algerian oil fields has ground to a halt.

IEA said that Algeria’s oil production will fall by 170,000 b/d to 990,000 b/d in 2021 as a lack of investment pushes aging oil fields into decline.

Declining Nigerian, Angolan oil

The IEA said the oil price collapse was causing “particular pain” for Africa’s two largest oil producers Nigeria and Angola, as oil output is expected to slow down along with declining state revenues.

Nigeria’s oil production is expected to decline by 70,000 b/d by 2021 to 1.85 million b/d as investment slows in the country’s high-cost deepwater projects and “large-scale oil theft and pipeline sabotage in the Niger Delta continues unabated.”

Africa’s second largest producer Angola will see its crude production fall to 1.8 million b/d in 2021, a fall of 20,000 b/d over the six-year forecast period, according to the IEA.

The IEA said that Angola’s official 2 million b/d target looked unachievable even before the fall in oil prices due to technical problems besetting its deep water projects.

“The country’s aging offshore oil fields need continuous support from new and costly projects to offset steep declines and since output peaked in 2008, Luanda has struggled to stem the drop,” the report added.

West African Crudes under pressure

The report said that WAF oil producers like Nigeria and Angola may be forced to cut prices to sell barrels, with low prices, oversupply and high stocks projected to prevail until at least early-2017. There is currently a glut of WAF crude in the global market and a lot of these cargoes have been unsold leading to excess barrels being stored on tankers.

But the IEA said WAF producers have the geographical flexibility to sell oil east or west as demand requires. It also said that customers for African crude will remain relatively similar over the forecast period.

Europe is expected to remain the main demand outlet for WAF crude, but imports of African crude to OECD Europe are set to decline by 500,000 b/d accounting for 2.2 million b/d in 2021.

The IEA added, however, that if Libyan production rose, “incremental volumes are expected to be shipped to traditional European markets likely backing out similar light, sweet crudes from West Africa.”

By 2021, Chinese imports of African crudes are set to inch up by 200,000 b/d to about 1.5 million b/d with the bulk of these coming from Angola.

While corroborating this stand point, another report by Gulf Intelligence declared that the collapse of oil prices at the start of 2016 had comprehensively dashed hopes that a brief bounce in prices in mid-2015 heralded the beginning of the first uptick since June 2014.

According to the GI report, oil prices sank below $30 per barrel in mid-January – hitting a 12-year low, ensuring that governments and companies with oil revenues at the heart of their economic security will spend the rest of 2016 grappling with budget-crippling prices.

The report further stated that the United States’ decision to lift a four-decade ban on crude exports, bar the 500,000 barrels per day that is largely already exported to Canada, will fuel a change in African exporters’ routes this year.

The report explained that over a third, about 38 per cent of respondents to its survey, expect Africa’s dominant producers – Nigeria, Angola, Algeria, Egypt – to focus on local markets across the continent, which are backed by a population boom and up to six per cent economic growth.

It also added that Africa’s shift away from US markets could create more competition between African and Gulf producers for market share along the new Silk Road and wider Asia.

It, however, stated that Africa’s annual appetite for gasoil and gasoline is expected to

Climb by as much as eight per cent over the coming year, while demand for liquefied petroleum gas (LPG) hit double digits.

The report noted that Africa’s expanding home-grown energy supply will help satisfy some of the swelling demand.

But East Africa, it said, is elbowing its way under the spotlight and will change Africa’s energy map in 2016 – a move easily justified by its wealth of oil and gas assets. For example, Tanzania hopes to use its 55 trillion cubic feet (tcf) of natural gas reserves to become a LNG exporter by 2025, while Tullow and Canada’s Africa Oil have identified 600m barrels of oil reserves in Kenya’s South Lokichar basin.

PriceWaterHouse Coopers (PWC) in its latest oil and gas review, stated that the countries that have been most affected by the dramatic decrease in crude oil price are those that are highly dependent on oil exports. The countries that would be hardest hit, according to the report include Nigeria, Cameroon, Chad, Angola, Republic of Congo, DRC, Gabon and Ghana.

The report stated that the situation may require governments to implement austerity measures and develop realistic budgets based on a significantly lower oil price.

Particularly, the report said Angola’s economy will suffer from significantly lower oil prices, adding that the risks to the Angolan economy are not just limited to the implementation of austerity measures.

“A reduced budget could mean the government is not able to pay civil servant salaries and a reduction in the provision of social services. This could increase the risk of social instability– which makes its appearance as the third most likely factor to affect business,” the report noted.

In the case of Nigeria, PWC explained that the non-passage of the Petroleum Industry Bill (PIB), has had less of an impact on funding than expected as many companies have factored in the country’s risk.

According to the report, it would also appear that the risk is relativity high, and IOCs are divesting, while international financiers may also look at funding other capital projects and shift more investment into the ‘new frontier’ countries that have fledgling oil and gas industries. It projected that an estimated $50 billion has been lost in oil and gas capital investment in Nigeria.

There is also the risk of increasing non-performing loans in Nigerian commercial banks, heavy indebtedness of indigenous and international oil companies and high risk of default by indigenous companies that acquired the assets of oil majors a couple of months ago.

In the area of South Africa, the report said, “Investment in South Africa has stalled for another year as lawmakers work to approve amendments to the Mineral and Petroleum Resources Development Act (MPRDA). “Companies have put spending on hold until there is clarity on the Act. A new clause entitles the state to a 20 per cent free carry in exploration and production rights and an ‘uncapped’ further participation clause enables the state to acquire up to a further 80 per cent at an agreed price or under a production sharing agreement. This bill is now up for re-evaluation and is expected for release later in 2015.”

As a growing oil-producing state the Republic of Sudan was pumping 500,000 barrels-per-day prior to 2011. Since the partition both Khartoum and the Republic of South Sudan have both suffered growing economic difficulties.

Reports alleged that South Sudan was receiving the lowest price internationally for its oil. This is in part the result of a negotiated deal with the Republic of Sudan where additional costs were placed on the export of each barrel of oil in order to compensate Khartoum for its ownership of the pipelines and the potential damage done to its economy resulting from the partition.

According to Financial Times, war-torn South Sudan is receiving what traders say is arguably the lowest oil price in the world, $20-$25 a barrel, because of falling prices and unfavorable pipeline contracts. It claimed that South Sudanese revenues have now fallen to about $100 million a month, equal to an oil price of about $20.5 per barrel based on output of 160,000 barrels a day.

The report further stated that oil executives believe South Sudan could become an example of how falling oil prices can exacerbate political risk as countries are forced to slash budgets.

In addition, the report stated that the discovery of large-scale oil deposits in East Africa fuelled speculation centred upon phenomenal economic growth dependent on increased exports where prices would remain above $100 per barrel.

Moreover, BP Plc, in its latest annual Statistical Review of World Energy, wondered how energy companies in West Africa are coping with the ever-declining oil price.

Specifically, Panoro Energy ASA’s second quarter results for 2015 revealed a $34.13 million operating loss at the Earnings Before Interest and Tax (EBIT) level, which was a significant drop from the EBIT level operating loss of $2.19 million posted during the second quarter of 2014 and $1.93 million in the first quarter of 2015.

In spite of the losses however, the company reported a cash balance of $33.3 million as at June 30, compared to $36.1 million at March 31. Around $26 million of this cash was earmarked for the development of the Aje Cenomanian oil field, located in Nigeria, which is on schedule for first oil at the end of this year, according to Panoro’s second quarter 2015 results statement.

Also, Mart Resources Incorporated, which focuses its activities in the Niger Delta region of Nigeria, posted net loss of $24.30 million for the six month period ended June 30, 2015 compared to a net income of $13.07 million registered in the first half of 2014.

Net loss rose to $6.8 million in second quarter 2015 from $1.4 million in second quarter 2014 and one of the main reasons for this increase in loss was the lower oil price experienced by the oil and gas industry at the time, according to Mart Resources.

Seven Energy, which has two core areas of operation in the northwest and southeast Niger Delta, posted an operating loss of $13.68 million in first half 2015, which was $67.85 million less than its first half 2014 operating profit of $54.17 million.

Côte d’Ivoire and Ghana-focused oil and gas company Azonto Petroleum Limited reported a similar waning trend in its second quarter 2015 results, reporting that its cash at the end of the quarter stood at $2.57 million, compared to $3.64 million at the end of first quarter 2015 and $5 million at the end of fourth quarter 2014.

Azonto also recently sold its entire 35 per cent stake in Vioco Petroleum Limited, the operator of the CI-202 block offshore Côte d’Ivoire, to Vitol E&P Limited for $4 million, effectively ending its activities in the West African country. Azonto claimed that the increased cost growth experienced by the CI-202 Block’s Gazelle project in recent months was one of the reasons for the planned sale of its asset, as was the ‘increasingly challenging’ oil and gas sector environment.

Oando Energy Resources, which largely concentrates its activities onshore and offshore Nigeria, posted a loss of $50.35 million in the first half of 2015, while first half 2014 financial statement shows a $177.54 million loss, which highlights a significant year on year improvement.

Oando’s revenues more than tripled during this timeframe too, going from $62.60 million in first half 2014 to $222.65 million in first half 2015.

African Petroleum, which holds ten licenses across Côte d’Ivoire, Liberia, Senegal, The Gambia and Sierra Leone, reduced its year-to-date second quarter loss from $8.93 million in 2014 to $8.08 million in 2015, despite the fact that its revenue decreased from $2.93 million to $350,000 during the same period.

According to its most recent comprehensive results statement, Nigeria-focused energy company Eland Oil & Gas Plc also improved its losses from $26.14 million, for the year ended Dec. 31, 2013, to $16.29 million for the same period in 2014. In a separate financial statement, Eland revealed a cash balance of $13.1 million as of June 30, which was $4.9 million higher than the cash balance of $8.2 million as of March 1.

Indigenous Nigerian upstream exploration and production company Seplat Petroleum Development Company Plc managed to buck the trend of recording losses and registered a $71 million operating profit for the first half of 2015, despite suffering a 59 per cent decrease in operating profit compared to the previous year.

The Managing Director of Seplat Petroleum Development Company Plc, Austin Avuru, at the 13th Aret Adams Annual Lecture Series in Lagos recently, said that Nigerian independent oil
companies were most affected by the drop in price of oil globally.

Speaking on the topic: “Low Oil Prices: Challenges and Opportunities,” Avuru said: “We all borrowed to fund acquisition and growth capex. Many are now cash negative and yet need more investments for production increase to survive,”

According to him, an average of $60 per barrel was required for most companies to survive in 2016, adding that the nation needs to embrace effective domestic utilisation of fossil fuels to survive.

The Seplat boss said that because Nigeria heavily depends on oil to balance its economy, the drop in oil prices was a huge blow to the country’s major revenue.

However, with the decline in prices, there may be some benefits for non-producing states but this fact poses serious problems for those who have planned to focus development plans on increased drilling and exports. Some analysts are of the view that the falling oil prices can turn to the good for some African countries.

According to Ese Avanoma, Managing Director of Brade Consulting said, “There is less corruption, because there is no money to support it. The little we have is just to take care of basic things. People will understand that we have to weather the storm. There is not much to waste. “The oil industry sees this downturn every six years. It is a time for recalibration. It is time to look at all the projects and to look at what is viable. It’s a time to strategize for the future. So it is a good time to meet.”

Despite the lull in crude oil price, PWC projected foreign direct investment into the continent to come from the three main regions with North America and Europe continuing to invest and China entering through the likes of Sinopec, CNOOC and CNPC aggressively targeting the African market.

It explained that the Chinese Government is reliant on oil produced in Africa, especially Angola, which is now the second-largest exporter after Saudi Arabia to China. There is concern that Chinese funding might be detrimental to other investors.

To succeed in these tough times, analysts are of the view that African oil producers should strengthen their local content laws and concentrate on empowering indigenous companies as this will help fast-track the growth of the economy.

The Gulf Intelligence report also stated that African producers can cope by creating greater opportunities for partnerships between Africa and the Middle East on the emerging South-South energy corridor and also create competition for market share in Asia between African and Gulf producers.

It added that African producers will increasingly find markets locally, with a population boom and six percent Gross Domestic Product (GDP) growth across the continent.

In conclusion, drawing from arguments posited by experts, it is obvious that the best safeguard for the shocks brought about by low oil price is for the affected countries to diversify their economy away from dependence on oil, deepen local content laws and place increased emphasis on investment in renewable energy.

There is also the need for continued investment in the oil and gas sector while attempt should be made to increase the competitiveness of the continent in global oil and gas market.

Like Nigeria’s Minister of State for Petroleum Resources and Group Managing Director of the Nigerian National Petroleum Corporation, NNPC, Mr. Ibe Kachikwu said, there is the need for oil producing countries to position themselves and ensure they play a strategic role in the Organisation of Petroleum Exporting Countries, OPEC and in the global petroleum industry in general.

Kachikwu, who stated this in Abuja when announcing the commencement of preparations for the African Petroleum Producers Association’s, APPA, 6th Africa Petroleum Congress and Exhibition (CAPE VI) to be hosted by Nigeria, had maintained that the volatility in the global oil industry has made it imperative that smaller producer countries in Africa huddle together to be able to find ways and means of encouraging and pushing forward their agenda.

This, it is believed, is going to be critical in the 2016 timeframe when obviously, the strategic movements and realignments over the issue of oil pricing would be happening.