Stakeholders share recession proof strategies for resurgence in oil drilling activities
There is no one in doubt that the present economic climate in Nigeria is a very challenging one for businesses in the country. It has impacted adversely the volume of business activities and investments. As a result, local businesses are nearing breaking point – they are starved of economic activity. Like every business owner in the various sectors, operators in the drilling services sectors are counting their losses.
Recently, members of the International Association of Drilling Contractors (IADC) held a session in Lagos to evaluate the impact of the country’s economic woes on members, share perspectives on responses and proffer strategies for members.
The IADC is a 70-year-old global association with the vision to be recognised for its vital role in enabling economy and its high standards of safety, environmental stewardship and operational efficiency. Its mission is to catalyse improved performance for the drilling industry.
The Nigeria chapter was inaugurated on October 12, 2012 with the objectives to support the achievement of IADC’s mission in Nigeria. The chapter currently boasts of 25 member companies that cuts across multinational and local drilling rig contractors, exploration and production companies and oil field service companies that perform services on an oil rig.
According to Sola Falodun, chairman of IADC Nigeria, members of the chapter have been severely affected by the recession that began “when the price of crude plummeted from over $100 per barrel in August 2014 to an average of $30 in January 2016.”
This, he said, did not remove from the fact that Nigeria had its own macro issues to deal with like funding the Joint Venture operations, pipeline vandalism, and non-passage of PIB into law and so on.
“At the peak of $100 per barrel, we had about 37 active rigs working in the Niger Delta. As at 30 September, 2016, the number of active rigs has fallen to about 11,” Falodun said.
The decline of active rigs meant that 24 rigs were decommissioned as a result of inactivity. Also in a bid to survive, some operators either took their rigs outside Nigeria to other countries or stacked them at various yards and ports such as Lagos, Onne, Calabar and Warri.
A typical rig potentially employs about a 100 people directly and about 200 people indirectly through companies that offer services on the rig’s platform and employees that support rig operations onshore (land based offices).
“Assuming a 90/10 mix of Nigerians and foreign nationals, it means we have wiped out about 6,000 jobs in the last 18 months. This number excludes oil industry employees that work in other value chain of the oil industry that were compulsorily laid off as a result of downturn in activity and this runs into tens of thousands,” Falodun said.
In view of the challenges, the session was mandated to provide suggestions to help member companies navigate the current downturn in the economy. Some of the suggestions put forward by various speakers at the session include the review of existing cost structure; renegotiation of contracts with clients; refinancing debt to reduce pressure on profitability; and possible implementing of pay cut for staff.
Nosa Omorodion, President of Nigeria Association of Petroleum Explorationists, represented by Abiodun Adesanya expressed concern that despite the clarity of the economic challenges, there appears to be no roadmap in sight to put them away for good.
“One of the ways to come out of this is to look government eye to eye and tell them what they need to be doing. We should look at issue of asset sale – we should look at the merit and the implementation rather than saying it is for a cabal,” Adesanya said.
Operators who fail to plan in this period, said Bandele Badejo, managing director of OES Energy Services, will have themselves to blame.
“The day of fancy rates is long gone. When you have instance like this, the first thing you need to do is reduce cost – look at what the cost structure is and reduce it.
“Second, you need to renegotiate your contract – particularly the interest rates. Visit your bank and ask for a lifeline. They have no other choice but to help your business to survive. We need to communicate. Also you need to preserve key resources particularly your personnel. Reduce salaries starting with yourself and the executives,” Badejo said.
Austin Avuru, managing director of Seplat believes it will take more than that to pull the members out of recession. According to him, the strategy that will work long term is a strategy that removes the operators from the mercy of the banking institutions.
“The problem is not about low oil price, it is about funding that has long inhibited the companies because we have to produce oil whether low oil price or high oil price. We have to look for solutions that are really sustainable,” Avuru said.
He noted that the one percent drilling operators contribute from their profit to the Nigerian Content Development and Monitoring Board (NCDMB) could be used to bail out operators who are heavily indebted to the banks.
“It is time to develop an intervention fund so that drilling contractors do not die. If 60 percent of the debt owed by Nigerian drilling operators is not wiped, they will not survive. Drilling companies need to be saved from the banks,” Avuru said.
Falodun concluded by saying that as a country, the major focus should be to shore up our foreign reserves by at least meeting our production quota.