The country is undergoing political transition, and that will have implications on policy consistency as well as provide opportunity for correction. So, what are your expectations from incoming administration?
Thank you very much. There is what I will call cautious optimism across the industry. The reason is simple. We have to recognise that we are going through a lot of uncertainty within the industry globally. Oil prices are half of what they were one year ago. Invariably, people are asking how the industry is going to go.
Within the Nigerian context, the Nigerian economy depends a lot on oil. The oil industry is driven primarily by the price and the volume of oil being produced. With these challenges, the transition in Nigeria has been welcomed across the globe, simply because there is a lot of great expectations for change and opportunities to grow the industry within these uncertainties. I think, I will conclude by saying that we are optimistic that the growth will still be there. We are optimistic that the commitments to local content will continue even in the new administration. We are also optimistic that the engagements across all the different stakeholders will continue to emphasise the importance of growing capacity of Nigerian companies in the Nigerian oil industry.
You represent two important groups in the Nigerian oil industry. You represent an investors group in the Petroleum Technology Association of Nigeria (PETAN) and you represent a professional group in the Society of Petroleum Engineers (SPE), thus you are supposed to balance out some level of policy formulation and ideas in government. Other conflicting interests are rising. The Central Bank just said that they are going to ban dollar-denominated transactions in Nigeria. Given the global status of energy, oil and gas particularly, how will that affect the industry and how will the industry manage and respond to that?
The CBN has a unique role to manage the country’s resources, particularly, when it comes to microeconomic policy and stabilising the country’s economy. It is an objective stakeholders in the oil industry share. We will thrive in a stable economy. We will thrive in an economy where the cost of doing business is low. We will thrive where a long term exchange rate is stabilised.
While saying that, everybody recognises that the industry whether in Nigeria, Katzakstan, Moscow or in Houston, is denominated primarily in dollars. Nigerian firms are competing with companies across the globe, from China, U.S, UK; and are competing for advantage because we can leverage from the fact that we are Nigerians, the fact that we can bring expertise at a lower cost. But we have to source for equipment in the same market as other companies from across the globe.
Second, relationships have been built over the last 30 years, nurtured even against the negative perception that it difficult doing business in Nigeria. These relationships are built on contracts and these contracts are primarily denominated in dollars. We believe that a lot of information about how business is done in the industry may not have been available to the people who interpreted the CBN directive. We don’t believe that the CBN directive was targeted at Nigerian companies and limiting their competitive advantage. We believe that some misinterpreted the CBN directive to their own advantage.
We believe that the CBN wants a strong oil industry. You do not kill the goose that lays the golden egg. We believe that the objective of the directive is to strengthen Nigerian companies and not to diminish them. We believe that in global market, a Nigerian company can do business for example by buying steel in China. That steel is fabricated into parts in Houston and then is imported into Nigeria.
It is such a global economy that I do not believe you can say this is a Nigerian company and you do your work in Nigeria. I believe that PETAN will continue to work closely with the other stakeholders in the industry to see that the directive is properly interpreted to support and strengthen the industry which is what we believe was the original objective.
How will you see the participation of Nigerian companies in this year’s OTC, given the fall in oil prices. Also, some of the oil majors have been calling for a review of contracts. With the rise in price of oil above $60 per barrel, what has been the experience of PETAN members?
On the issue of participation, I will just echo the words of the US Commercial Counsellor to Nigeria. When he came to the Nigerian stand, he was excited. He said people were concerned that the oil industry in Nigeria was devastated by the oil price drop, but to his greatest surprise, he found that Nigerian oil companies still engaged the global oil industry by showing their presence, by demonstrating what they have done and what they can do, by discussing with their partners not just about the challenges of today, but how to grow the business tomorrow even within a tight regime. That for me sent a very positive signal to the industry that we have matured, we have come of age; that we can see the oil business as a long term business not a short term quick return. I think that was very important.
Concerning the issue of price review, we have to understand that profit margins of companies even during the best times are not more than 20 to 30 percent. Now, there was a panic when the oil price dropped and the immediately the reaction was to tell the service companies to reduce their prices by 30 percent. Unfortunately, that sent a very wrong signal to the industry.
For an industry, whose profit margin is about 20 to 30 percent, if you are being asked to drop your prices by 30 percent then something is wrong. Let me explain the implications. If your profit margin is 30 percent, and you have to drop your 100 percent of 30 percent, essentially you are asking the company to go out of business. The only way that company can survive is to slash their work force by 60 percent, because probably the average impact of pay roll would be about 20 to 30 percent range. I don’t think that was the objective. I think the better approach is the approach that some of the operators have adopted, which is a collaborative approach. How can we improve efficiencies? How can reduce the cost of doing business?
For a service company in Nigeria to mobilise for a project, it is going to carry police, it is going to arrange local security, it is going to pay communities, it is going to pay different toll gates along the way, it has to carry its own diesel, and its own power.
The cost of doing business has not reduced, whether you are doing a small job or a big project. Really, at the end of the day, the only way to solve the problem of low oil prices is a holistic approach, where every part of the value chain discusses and collaborates on how to improve the economics and reduce wastes right across board.
Service companies in Nigeria have been through hard times. We have through a $9 a barrel price regime. Today it is $50 or $60 a barrel. We don’t see it is reason to panic and heap the problem on service companies. The companies are going to sack their staff and sack has a consequence. At the end of the day, the price went to $47 and they said reduce price by 30 percent. Now the price has gone up above $60 a barrel have they said we should increase the price again? I think it is very important that the industry should not panic. Rather, the industry should engage to reduce cost.
The organisers of OTC just released the number of this year’s participants, 93,700, as against last year’s own of 108,000. Can we have the figure of Nigerian participants this year?
Statistics indicate that though there is a drop, there is not much significant drop. There was the same experience. Nigerian companies still came out.
You have to recognise today that Nigerian companies offer their services beyond Nigeria. People have to realise that if there is an export industry Nigeria has today, it the oil and gas industry. We did have a 10 to 20 percent drop in attendance, but the quality of attendance was not reduced. In fact, the quality of attendance this year is higher.
During the OTC, PETAN received congressional recognition from the US congress, for participation at the OTC, for supporting the adoption and application of technology found in the Nigerian oil and gas industry. This is the first time and this is a milestone recognition that the Nigerian oil industry has a global foot print.
If you go round the booths in the exhibition area, you see one form of tools or equipment or innovations from other countries. But at the Nigerian pavilion, you don’t see such. After almost 10 years of participation, what can we boast of?
We should have a very positive approach to issues. Let me start. A Nigerian company at this year’s OTC manufactured sub-sea control panel being used at Egina, Bonga and Agbami. A Nigerian company at this year’s OTC is displaying intelligence pigs that are used in up to 48 inch pipeline. These pigs are manufactured in Owerri and exported to places like Iran, Aberdeen and North America. A Nigerian company manufactured downhole fishing tools being sold in Columbia and Venezuela. A Nigerian company offers services in Kuwait, India, for Oil India. A Nigerian company provides logging services to Occidental of California, in Yemen and Abu Dhabi. A Nigerian company provides telecomm services offshore Mauritania on an FPSO. A Nigerian company is drilling in Congo and Venezuela. A Nigerian company is providing IMR services to companies in Angola deepwater. These are just few.
Many times, very little of these are known and understood. The challenge has always been that for them to physically bring things to OTC there are challenges related to port capacity, challenges related to the cost of logistics to bring them in. It is not easy exporting things from Nigeria. It is much easier importing things to Nigeria. If somebody exports a piece of equipment out of Nigeria, to bring it back to Nigeria after the OTC he is going to have a hard time convincing folks that his stuff was taken out of Nigeria in the first place. These are some of the constraints, but it is not as if we are not doing anything.
There has not been any exploration in Nigeria in the last five or more years, according to operators. Has this development affected the volume of jobs indigenous servicing get? Also, will the sack of the Executive Secretary of NCDMB affect the local content policy?
The oil business is a continuum. Unfortunately, we tend to focus on the oil and forget the process of getting the oil. It is unfortunate, but that is the reality. From the day you discover oil to the day you commission it is roughly 10 years. Therefore, if you cut off the head of the chicken, the chicken is still running around headless. The chicken does not know it is dying, until it is dead. The oil industry exploration has to be continuous because you are taking something out of the ground without replacing it. Therefore the day we start to cut down exploration is the day our reserves will be limited and at some time we will start to have a decline in our production. If that is not today, it will come in future.
The beautiful thing is that it is not too late to start. This is the best time to do exploration, when the oil price is low. Prices of services are low. Therefore this is the time encourage exploration. However, exploration has to be actively encouraged. That is the key. Exploration will then create jobs. Apart from that, it will create multiplier effect, the possibility of jobs to emanate from the process of finding and producing oil.
PETAN advocates for a firm and direct government policy towards encouraging the exploration activities required to grow the industry. That is the only way. One thing I will say is that the Shell divestment process is also going to be the trigger that will help to grow our reserves because people have invested in acquiring assets. One of the best ways and in fact the only way to make money is to grow their assets. Our expectation is that the Seplat model will be replicated across the industry and help to stimulate exploration activities once again.
Regarding the second part of the question, we believe the NCDMB is an institution and I think we need to focus on institutions. It was Benjamin Desrali, who said that institutions make a nation. Therefore, irrespective of individuals, institutions will live on. Our expectation is that the immediate past Executive Secretary has done a lot of work building up the institution of NCDMB. Our expectation is that moving from now to the future, the efforts made will not be lost.
Nigerian companies have grown their capacity because of the institution of NCDMB and we expect that the NCDMB will continue to be a strategic tool in the hands of the new government, to continue to strengthen the capacity of Nigerian companies, and by extension, creating more jobs that are needed at this time of our economic development.
The NCDMB is five years this year. As a stakeholder in the industry, can you give an assessment of the Board?
The NCDMB has created an enabling environment for Nigerian companies to grow capacity. When it was formed, the policy makers did the right thing by not emphasising the monitoring part, but by emphasising the development part. Although the people in the industry were a bit concerned about the negative potential impact of the local content on the growth of business, the NCDMB went to a large extent to assure companies and emphasise the development of Nigerian capacity. That has expanded the scope of many companies.
Of course, for any good thing there must be abuse. There has been a fair amount of abuse because one of the dangers of local content is the potential creation of toll gates, where no value is added. PETAN as an organisation frowns at such. We think that local content should be value-added. It should be competitive. People should make investments and not to seat back and collect tolls. That does not help to grow the industry. That is not local content.
Nigerian have borrowed money and made investments. We expect that the NCDMB should support such companies so that they make their money back. What happens is that when they invest in equipment and capacity, people learn real things that they can apply. Nigerians are working across the globe now based on the skills they learnt from Nigerian service companies.
The NCDMB has evolved. In the later part of the 5 years, the NCDMB started emphasising on monitoring. Monitoring aspect is very important. It allowed us to sieve the chaff from the real thing. It also helped to strengthen the institutional and regulatory role of the NCDMB. Above all, one area we think more should be done and more could have been done is in the area of capacity building through fund access for local companies. That was the purpose of the Nigerian Content Fund. Nigerian Content Fund was supposed to strengthen Nigerian companies. Not necessarily contract financing, but to strengthen capacity growth.
If a company invests $100 million buying an ocean going vessel and all he has to finance it is a 2 plus one year contract whereas it takes 10 years to recover the cost of that investment, if you take away that contract, what happens to him? How does he make up? How do you then encourage local content? It is then easier to lease a vessel from overseas and at the end of the contract, you leave that place.
For us to develop local content, we must put money where our mouth is. We must support Nigerian companies with real capital, access to long term low cost capital, so as to deepen and grow their capacity in the real, not in the figurative and inconsequential way.