Indigenous firms face gloomy future over plummeting oil prices

CRUDE oil prices have now fallen by more than fifty per cent since June last year, when the commodity was being sold for $110 per barrel. Brent crude, the global oil benchmark, fell 1.2 per cent to $48.61 a barrel on London’s ICE Futures exchange on Monday.

On the New York Mercantile Exchange, West Texas Intermediate futures were trading down 1.7 per cent at $41.75 a barrel.

Analysts have blamed weak global demand and booming U.S shale production as reason behind the price plunge and with the Organisation of Petroleum Exporting Countries (OPEC) reluctant about cutting output, saying it is likely that we will see further decline in the coming weeks towards the $40 mark.

While the drop is good news to consumers and businesses in countries that import the product, oil producing countries such as Nigeria, Russia and Venezuela where oil is the main stay of the economy have taken some hit.

Nigeria for example, needs oil at $123 to balance its budget and has since revised the benchmark for the 2015 budget and devalued the Nigeria Naira as part of fiscal measures to cushion the effects on the economy. 

Experts believed that indigenous oil and gas firms are the worst hit by the uncertainty in crude oil prices.

According to them, while the International Oil Companies (IOCs) have the capacity to surmount the challenges of crude oil prices, indigenous firms may not be able to weather the storm that may arise from falling crude oil prices.

An energy expert, Kazeem Bello said, the fluctuation in the oil market following the discovery of crude oil in many parts of the world and the new wave of alternative energy sources, particularly shale oil, have had adverse effects on Nigeria.

The Chair of the Nigeria Natural Resource Charter (NNRC) and former Minister of Petroleum Resources, OdeinAjumogobia, who noted that crude oil prices had fluctuated over the years, said the current decline highlighted the importance of planning.

Speaking at a policy dialogue entitled: “Implications of the Falling Oil Price for Policy in Nigeria”, organised by the Centre for Public Policy Alternatives, a Lagos-based think-tank, he commented on the need for a hedging mechanism, saying, “because we don’t have a hedging mechanism, we are completely left at the mercy of the oil price.”

Inevitably, Oil and gas companies globally have been adversely affected by the falling oil prices with their revenues and profits on the decline. 

Seplat Petroleum Development Company’s after tax profit amounted to N4.83 billion at the end of the first quarter of 2015, which represents a drop of 33.4 per cent year-on-year. Full year outlook indicates after tax profit in the region of N20.21 billion for the company in 2015.

The company may therefore lose as much as half of the profit figure of N40.48 billion it reported in the preceding year.

Companies have taken to proactive measures to cushion the effect of the downturn including cuts in capex, downsizing of operations and cancellation or suspension of contracts. 

At the end of 2014, Shell said it was deferring spending in many areas and this would result in a reduction in capital investment from 2015 to 2017 of over $15bn. Chevron Corporation announced a $35bn capital and exploratory investment programme for 2015; 13 per cent lower than the total investments for 2014.

ExxonMobil said it would slash its capital spending by 12 per cent to $34bn from about $38.5bn last year, while French oil major, Total, cut capital spending by $2 billion to $3 billion from last year’s total of $26.4 billion.

This singular move led to a significant drop in the Nigerian rig count from 51 in September 2013 to 27 in June 2015 to a 47 per cent reduction. The drop in rig count has had a negative effect on other manufacturing and services businesses such as drilling fluids and chemicals, drill bits, casing services, and marine vessels to name a few, leading to multimillion dollar losses to indigenous services companies who have made substantial investments towards acquiring assets, technologies and capacity to execute projects.