‘We have to focus on greater collaboration to cope with slide in oil prices’
Emeka Ene is the chairman of Society For Enginners (SPE), Nigeria Council. In an exclusive interview on the sideline of 2015 Oloibiri Lecture Series and Energy Forum (OLEF) in Abuja recently with Frank Uzuegbunam, editor, West Africa Energy, he spoke on how Nigeria can cope with the slide in global crude oil prices, OPEC strategy of defending its market share amongst other policy issues. Excerpts:
What informed the SPE to focus on the dynamics of global oil prices?
We have to understand that the oil industry is facing a crisis. By this time last year the oil price was over $100 and in less than six months, it was half that price. Bear in mind that Investment in oil and gas are done on a 10 years cycle. People have taken loans on the basis of $100 per oil barrel and overnight they have to deal with $50 oil. This challenge led to the fact as an industry, we all have to come together and re-strategize on how to solve the problem. And that is how we came up with this theme.
What are your suggestions on how Nigerian can cope with dwindling oil prices?
I think one of the solutions that came out of the event is that we have to focus on greater collaboration where we have shared experiences, shared resources; we have to align the industry with global politics and also policies across the oil and gas industry. We have to create long term mechanism through legislation like PIB, so that we can keep attracting new investment into the country and of course we need to create a policy so that we do not kill the goose that brings the golden egg. We have to cut cost in an intelligent manner so that the industry can be there when the activities rebound.
OPEC came up with a policy of no-cut in output to safeguard their market share. What will be your suggestion for OPEC bearing in mind that they may review the strategy in their next meeting?
Well OPEC strategy is not hidden. It is a strategy to manage the market, from the point of view of managing the supply and demand. Shale oil gas does not have any limit; they have not imposed any limit on what they intend to do. They are producing as much as they can. So OPEC want to allow the market to eliminate players who are trying to take advantage of the market. Now this is a strategic move, I do not know if it is a sustainable move because OPEC members need to improve production to balance their own budget.
So the upcoming OPEC meeting is a very interesting because it is going to be a meeting of who blinks first. Is OPEC going to blink and allow the market to cut back production which will allow the price to increase? Or is OPEC going to keep pumping oil into the markets and maintain the prices low enough so that shale oil does not find its feet.
What will happen when Iran crude oil comes into the markets?
Iranian crude coming into the market is going to depend on what OPEC does. If OPEC gives room for Iran to come into the market, then market stability will be ensured if on the other hand OPEC does not take into cognisance the Iranian oil, and everybody continues to pump oil, then we will expect some kind of price impact
What are your views on the Petroleum Industry Bill (PIB)?
The PIB is needed, I think every stakeholder in the industry realises that PIB is essential for long term investment in Nigeria’s oil industry. Remember the PIB process started close to 15 years ago and the fact that it is not passed today is a disappointment. However passing a good PIB or Passing the Right PIB is more important than passing any PIB and I think that if the discussion have not come close to passing the right PIB, the discussion should continue. Ultimately when the right PIB is passed; the PIB that balances the investors’ interest, investors’ incentives with national interest, then it is safe to say that it is the PIB is the industry is looking for.
What will be your recommendation for the in-coming administration on oil and gas policy?
I think the industry should be driven by technocrats; ultimately technocrats are able to look at the investment fields, match them up with the technology fields, the local contents requirement as well as the inherent demands that are not just demands for the rights of the stakeholders, communities and the country. Technocrats have the history of the industry and can look at things less emotionally than people who are not fully conversant with the industry. Nigerian oil and gas industry is a complex industry and therefore requires more experienced hands and technocrats to handle it.
There has been some controversy on the right pricing for domestic gas. What is your take on that?
I do not think it is a price point problem. I think it is more of creating the value preposition. We have to recognise that gas projects are long term, high cost and gestations period for recovering of cost is usually 10, 15, 25 years. If that is the case, for you to undertake a 10 – 15 years project, you have to secure the fixed cost, you have to secure the profits, then the project becomes bankable and then you secure the final off-takers. The problem has been in trying to solve one problem and not all the problems that is why gas price is looked primarily as a fixed cost price. But what about the uptake price, what about other price indices in terms of creating a new gas market. For us, these things are less of price and more of creating an opportunity for private sector to engage in the gas sector. I think not enough has been done. If you look at the gas projects today in the last ten years, all the new gas has been driven by private individuals, private sectors and the only refinery that has been done in the last 10 and 30 years is by private sector company. The only way forward is for the private sector to have access directly to the gas; they have the access to the market, finance and the drive.
How does the CBN policy of getting Nigerian companies to pay for service in naira affect the oil and gas sector?
I can understand very well the CBN’s position as an organization that has knowledge of inflow and outflow of foreign exchange on the economy. However, this should not been done against the background of panic, because it sends the wrong signal. The directive seems to be focussed on private schools, real estates and rental prices that collect their fees in foreign currency. However, the policy may not have taken into consideration the unique and the complex state of oil and gas industry.
There is an inherent challenge with this policy for oil and gas industry which has been running for 20, 30, 40 and 50 years on the basis of dollar flow and signed contracts; they have secured loans from multilateral agencies on the basis of dollar flow. Now you wake up in January 2015 and suddenly there is a directive that Nigerian companies should pay for services in naira; that will bring the industry to a halt, because the whole industry is dependent on foreign currency. Now most contracts have a certain naira component; money generated in Nigeria will be spent in Nigeria, but you are going to service a dollar loan, for example given by US-EXIM bank and all of a sudden, you wake up and find such policy, you going have a big challenge.
Another thing is that again companies in the oil industry pays royalty, taxes and some other charges to the federal government in dollars. Will that be paid in naira too? The implication is that all the foreign exchange accruable in taxes and royalty to the Nigerian government will now be paid in naira. Nigerian oil service industry is standing on the brink of disaster if such policies are implemented by executives here without taking into considerations unique contractor and complex contracture relationship required to keep the oil and gas industry attractive.