Insolvency looms in Nigeria’s oil, gas sector
Falling oil prices are affecting projects and companies in the oil and gas sector. There are a number of reasons for the drop in the oil price which includes over-supply as the high prices of the last four to five years and the boom in shale gas have caused production to increase significantly and oil and gas to flood the market, the return of major oil players such as Libya, with its close to one million barrels per day, and Iraq has caused supply to outstrip demand and has given consumers a number of alternative sources of supply.
The dip in the Asian economy and the fall in Asian demand has also had a drastic effect on prices and contributed in large part to the over-supply problem. This is coupled with the stuttering European economy.
The slide in oil prices will bring upstream projects closer to their break-even points, with costly deep-water projects in particular, being at significant risk. This means that projects may no longer be economic as revenue streams from sales are no longer enough to offset funding obligations.
Exploration drilling in Nigeria is close to the lowest in more than a decade because of shelved investment plans, according to the Petroleum Ministry.
“People are under-estimating the size of the hemorrhage going on” said Victor Eromosele, Board Secretary, Centre for Petroleum Information (CPI), The slide in crude oil prices since June 2014 means that Nigeria loses about N10 billion per day.
Mike Madoghwe, head, Legal, ConOil Producing Upstream In his presentation titled “Company bankruptcy risk in low price environment”, at the CPI oil and gas law forum with the theme, “Mitigating Nigeria oil and gas insolvency risk”, said that about 120,000 direct and indirect jobs are at risk in Nigeria due to the slide in crude oil prices.
Likely increase in bankruptcy filings
According to Madoghwe, the past 15 months has been very challenging for players in the upstream sector of the oil industry as a result of the low crude oil price in the international market adding that “the situation has led to widespread belief that there is the likelihood of an increase in bankruptcy filings in the energy sector by second half of 2015 into 2016”.
“Small oil companies, independents and indigenous, are gradually steering towards bankruptcy because of the spiral effects of low oil price, especially in meeting obligations for banking facilities accessed for funding exploration and production purposes”, Madoghwe said.
Madoghwe said that apart from the low crude oil prices, Nigeria’s oil and gas industry has to contend with several other challenges which include crude oil theft, well-head vandalism, illegal diversion of crude oil, escalating insecurity and kidnapping in the Niger Delta leading to significant increase in cost of operation, government’s inability to fund joint ventures, huge cash call arrears and the non-passage of the Petroleum Industry Bill (PIB).
In order to mitigate the current risk which the industry is facing at the moment, Madoghwe suggested a cut down on the lengthy time of contract cycle with possibility for negotiating, ensure that facilities collected from banks are utilized for the purpose it was meant for, streamline employment in line with current realities, consider the option of leasing certain assets rather than buying, renegotiate existing exploration contracts at lower prices, cut down on drilling operations, outsource some administrative activities and restructure existing loans to longer tenor with reduced rates.
Kenechi Ezezika of Ikeyi and Afriayan law firm said that the way for oil companies to mitigate insolvency is by instituting good corporate governance which will put in place structure and processes of operation that exhibits fundamentals of good corporate governance which includes accountability, transparency fairness and independent board.
In her remarks, Sena Anthony, former executive director, Legal, of the state-oil company, Nigerian National Petroleum Corporation (NNPC) said that Nigeria is in a perfect storm situation at the moment; a situation where the crude oil price is at about $44 per barrel, indigenous producers acquired assets at high prices, the cost of operating environment is very and supply glut in the international market adding that with Iran coming on stream in 2016, crude oil prices may be heading towards $36 per barrel.
“There is still so much optimism by Nigerians that crude oil prices will bounce back but the reality of today is that we are at the risk of insolvency”, said Anthony.
Nigeria’s oil output could fall by 2017
Nigeria’s oil output could drop by as much as 15 percent by 2017 unless the government attracts more investment and resolves cash shortages at state oil firms, a senior Moody’s analyst said.
Projects have been held up because the state-oil firm NNPC needs parliamentary and regulatory approval to spend anything. Officials and lawmakers are often six months late in giving their assent, making proposals irrelevant as costs exceed the original budgets. As a result, unpaid bills have been piling up.
“By 2017, if there’s no more investments oil production will drop by 15 percent affecting jointly the government revenues,” said Aurelien Mali, senior analytical adviser, Africa, at ratings agency Moody’s.
“So the cash call funding issues for the joint ventures and the long term funding to drive the deep offshore fields is something that will have to be addressed to maintain at least the production levels of 2.1 million,” he said.
FRANK UZUEGBUNAM