Oil price slump: Service companies groan under pressure
The global prices of oil have fallen sharply over the past one year, resulting to significant reduction in the revenue profile of both the government of many exporting nations and that of exploration and production (E&P) oil companies. Currently, crude oil importing countries are gaining from the declining oil price because they now pay less to either power their homes or drive their cars while exporting nations especially those that depend largely on oil revenue, are experiencing economic recession due to revenue drop.
Findings revealed that the down turn in oil prices is due to a surplus in supply occasioned by increased production in countries like Libya, Angola, and the United States of America, Russia etc. The resulting weaker demand and higher supply, which turned world crude, demand deficit of 100,000 barrels per day into a surplus of 1 million barrels per day, a significant percent increase in the global oil market.
According to the International Energy Agency (IEA) the surplus in oil supply experienced globally since late last year till date, will grow to 1.4 million barrels per day and, if Iran reaches a nuclear agreement with Russia, China, France, Germany, the United Kingdom, and the US, the Persian country could immediately add up to 500,000 barrels per day of oil to an already oversupplied oil market.
The effect on oil majors and service companies
Currently, oil companies especially the E&Ps are experiencing pressure on their revenues and profits due to the decline in oil prices to below $50 per barrel. This is based on the fact that investment has become less attractive given the price of oil in the international market. Owing to this, major multinational oil companies started reducing the volume of their capital expenditures; some divested their marginal fields while others canceled the development of new wells and also cut down staff strength.
According to Eric Richards, an American based investment analyst, investing in new wells is only profitable when oil is trading at a minimum price of $80 per barrel. “Cut in capital expenditure could be even higher among small cap stocks where some companies have already announced 50 percent reductions in spending.”
Many larger upstream and midstream companies are likely taking a look at their company’s vulnerabilities and considering options for cost reduction and capital raising. For many, the first option was to reduce staff strength so as to reduce money spent on salaries and allowances. This step has resulted to huge job loss in many oil exporting countries.
Oilfield service companies provide services to the petroleum exploration and production industry and are closely linked to trends in the industry. These companies take direct hit in a down turn because the declining oil price would have reduced the level of contracts executed for oil majors.
Richards, who doubles as the vice president of Alger, an investment company, emphasised that the decrease in capital expenditures globally will be particularly hard on oilfield service companies. This, he attributed to the fact that those companies are hired by exploration and production companies to provide services that are needed to identify oil resources and develop new wells.
It is very obvious that oil service companies are worst hit because when operators cut down activities, the first thing they do is to cancel contracts with their servicing companies. On the other hand, this results to lack of technological development and loss of jobs.
Diran Fawibe, an analyst, pointed out in a chat with BusinessDay that service companies are no longer getting jobs to do due to the slump in oil price. “This is a logical process because service companies work for oil majors on their specific projects, if the projects are not there, the service companies will not have anything to do. This is why many of them are laying off personnel because the companies no longer need their services.”
In order to reduce cost, he hinted, service companies could not keep large number of people on their wage bill and employment list, thus they lay-off their workers and engineers due to lack of income to sustain them.
“Also, by sending such manpower away, human capacity of those companies to deliver on their jobs would be lost and there is no continuity in technology transfer among the personnel. Because by the time, job comes back, the company must have lost skills and it will be difficult to start all over again, and it is not good for the development of the service companies,” he explained.
According to Rolake Akinkugbe, head, Energy and Natural Resources of FBN Capital, the demand for oilfield services is strongly tied to the level of investment in drilling which is largely driven by global oil prices.
In fact, she opined, we have already seen that daily rates for hiring state-of-the-art ultra-Deepwater rigs are falling. “In some cases we are seeing up to 20 percent cost deflation for services. However, many E&P oil companies will choose to continue production, particularly in order to service their debt obligations, so many oilfield services will still be in demand where CAPEX is already sunk.”
Akinkugbe believed that service companies such as rig contracts, well service providers and those who do operations and maintenance may fair relatively well despite the current price slump. “Some EPC and subsea services may be more at risk, but ultimately you have to look on a project by project basis. One thing to bear in mind that there are economies of scale involved in contracting services in the oilfield, particularly where several E&P companies are able to share or pool oilfield services within a particular geographical area or terrain.”
Port operators bearing the brunt on oil price slump.
Presently, Nigeria is largely an import dependent economy such that even raw materials for the nation’s upcoming manufacturing sector are mostly imported likewise oil and gas related equipment used in executing oil projects. Based on this, the federal government designated some specialized seaports for handling of oil and gas related cargoes, and an example of such port in Nigeria, is the Onne Oil and Gas Free Zone Port Complex where companies like Intels and other terminal operators are based.
To Fawibe, fallen oil prices have overall effect on the economy because reduced activities bring down volume of businesses especially the volume of imports that berths in the port. “Though, the Nigerian Content law stipulates that companies should look inwards and make use of locally produced goods and materials. However, there would be reduction in traffic of vessels brining in oil and gas related cargoes in the nation’s seaports due to combined government policies and the effect of global low crude oil prices.”
For Val Usifoh, chairman, Shipping Association of Nigeria (SAN), who noted that oil is a major cash cow of this economy and nearly every part of this economy depends on it, also said that as an import dependent economy, when price of oil is going down, it has serious effect on the economy including the port.
Usifoh, who stated that some port terminals are already operating below optimal capacity due to the slowdown in the economy, said that terminals have lost close to 50 percent of their cargoes, and every business is changing tactics for them to continue to stay afloat, even as some have laid-off staff. Some terminals, according to him, that used to receive two ships every day, now received one ship in four days due to slump in imports.
A recent publication of the Nigerian Ports Authority (NPA) Shipping Position, confirmed that the number of vessels brining imports into the port has reduced drastically such that Lagos Port Complex, which used to handle over 100 vessels in month, now struggle to handle less than 50 vessels.
Industry close watchers believe that the volume of business recorded in Nigerian seaport has also witnessed a sharp decline since the past one year, given the current economic situation in the world. This is also having great impact on the volume of businesses recorded in oil and gas ports in Nigeria as the reduced capital spending of oil majors, has also reduced the number of vessels brining oil and gas related cargoes into the port.
To them, operators of oil and gas terminals are not left out in the cutting down of staff as other oil service companies are doing to reduce cost. Therefore, many oil terminals may be considering relieving some of their staff especially dockworkers hired specifically for handling of these cargo as they berth at the port. This is owing to the fact that the reduction in the volume of imported oil and gas cargo has also reduced the revenue profile, therefore their inability to keep the same number of dockworkers formerly used during the oil boom period.
AMAKA ANAGOR-EWUZIE