Historical overview of the impact of global oil politics on prices, investments and employment relations in the industry in Nigeria (2)
CONTINUED FROM FRIDAY 14/11/2015
Globa politics and current fall in crude oil prices
“Why is the price of oil falling?…Four things are now affecting the picture. Demand is low because of weak economic activity, increased efficiency, and a growing switch away from oil to other fuels. Second, turmoil in Iraq and Libya—two big oil producers with nearly 4m barrels a day combined—has not affected their output. The market is more sanguine about geopolitical risk. Thirdly, America has become the world’s largest oil producer. Though it does not export crude oil, it now imports much less, creating a lot of spare supply.
Finally, the Saudis and their Gulf allies have decided not to sacrifice their own market share to restore the price. They could curb production sharply, but the main benefits would go to countries they detest such as Iran and Russia. Saudi Arabia can tolerate lower oil prices quite easily. It has $900 billion in reserves. Its own oil costs very little (around $5-6 per barrel) to get out of the ground.” (The Economist, 2014).
Crude Oil price has fallen more than 60 per cent since June 2014. This has become a major challenge to the crude oil exporting countries such as OPEC. As the quotation from the Economist Magazine explained, there are four main causes for this dramatic fall in crude oil price which has been sustained for over a year now. The demand for crude oil has fallen seriously due to weak economic activities in China, Europe and most parts of the world, and there is increasing move to other fuel sources.
However the major reason for the current fall in price and its sustained fall is the struggle for market share between OPEC (mainly Saudi Arabia) and US Producers especially the US Shale Oil Producers. As crude oil prices soared to some $110 over the past four years, the oilmen of North Dakota and Texas set about extracting oil from shale formations previously thought unviable boosting United States of America (US) crude oil production by more than a third, to nearly 9m barrels a day (b/d), which is just 1m b/d short of Saudi Arabia’s output . Please see the table below for the estimates of the US Shale Oil Production, which in 2014 was some 4mln barrels per day.
EIA estimates of U.S. Shale oil production
This has worsened the oversupply in the international crude oil market. Unfortunately:
“The Saudis and their Gulf allies have decided not to sacrifice their own market share to restore the price. They could curb production sharply, but the main benefits would go to countries they detest such as Iran and Russia. Saudi Arabia can tolerate lower oil prices quite easily. It has $900 billion in reserves. Its own oil costs very little (around $5-6 per barrel) to get out of the ground.”
The result of this decision and the battle for market share between the Sheikhs in the Gulf and the US Shale Producers is the sustained fall in the international price of crude oil. Crude oil is currently under $50 per barrel from around $115 per barrel in June 2014. The Sheikhs project that at current crude oil price a lot of the Shale Oil Producers in the United States will be out of business. The table below from Merrill Lynch shows the breakeven prices of the US Shale Oil Producers. Reports indicate that some of the current Shale producers whose breakeven prices are higher than the crude oil price are having financial difficulties at the moment.
Unfortunately for OPEC producers, the Shale production may not be abating soon as recent reports reveal that “Exxon and Chevron both announced plans to substantially increase U.S. crude production, largely as a result of their shale operations.”
As if the above is not enough, there are fears of sustained further fall in crude oil price due to the nuclear agreement between Iran, the five permanent members of the United Nations Security Council, Germany and Iran in July 2014. The agreement will put additional Iranian oil supplies on an over supplied global market. This will definitely put more pressure on crude oil price and lead to further fall in price for a sustained period of time. As the table below from EIA shows the more drastic impact of the Iranian agreement will be felt in 2016.
According to the EIA: “Iran has the technical capability to increase crude oil production by about 600,000 b/d by the end of 2016. The pace and magnitude at which additional production volumes reach the market depend on how quickly Iran meets conditions triggering sanction relief and how successful Iran is in production and marketing operations. EIA expects most of this increase would occur in the second half of 2016. These additional Iranian volumes are expected to put downward pressure on global oil prices in 2016, as Saudi Arabia and the rest of producers in the Organisation of the Petroleum Exporting Countries (OPEC) are not expected to make production cuts to accommodate additional Iranian volumes in a well-supplied global oil market.”
The main implication of the above analysis is that the crude low regime of crude oil price is not expected to give way till 2019. This has great consequences for investments and operations in the oil and gas sector, and economies of countries that depend heavily on crude oil exports like Venezuela and Nigeria. Already analysts at Goldman Sachs project that crude oil price will remain around $50 per barrel by 2020.
It is, therefore, doubtful if President Mohammadu Buhari will be able to deliver his campaign promises to Nigerians if the price of crude oil which accounts for some 90 per cent of Nigeria’s total export revenue and 75 per cent of total consolidated revenue continue to hover around $50 per barrel between now and 2019.
Crude oil price, investment and employment relation in the Nigeria oil and gas industry
The current regime of low oil price which began since the second half of 2014 and has been sustained for over a year now as explained the the last section is not expected to improve till 2019. Already the fall in crude oil price has began to take its toll on the oil and gas industry cutting deep into revenue projections and big losses at the end of quarter 3 2015. This has also led to significant contraction in exploration and production activities globally as the oil and gas companies embark on massive cost cutting measures to weather the storm.
This no doubt has grave consequences for jobs and employment relations in the global oil and gas industry, Nigeria inclusive. For instance, the BBC reported on 9 September 2015 that “the contraction of Britain’s offshore oil sector has already stripped out 65,000 jobs” and that “the cuts came as operating expenditure on existing assets was slashed”. The USA Today of March 31, 2015 reported that “Planned oil industry layoffs in the U.S. are approaching 100,000 in the past four months(i.e. December 2014 to March 2015) with more likely to come.” Also, Forbes of October 22 2015 report that :
“The collapse in oil prices has so far claimed more than 200,000 jobs worldwide. Leading the bloodbath are the oilfield service giants; Schlumberger SLB has axed more than 20,000 oilfield service workers, about 15% of its staff. Rival Halliburton is cutting 18,000, Weatherford International 14,000, and Baker Hughes BHI 13,000. Among the big integrated oil companies Royal Dutch Shell appears to have the highest total with 7,000 laid off.’’
Expectedly, the fall in crude oil price has begun to negatively impact very heavily on the Nigeria oil and gas industry, and indeed the Nigerian economy. Already there strong fears that some 120,000 direct and indirect jobs may have been lost in the Nigerian oil and gas sector.
Unfortunately, the situation in Nigeria is made worse by the fact that there were existing serious challenges in the industry which were yet to be addressed by the government and other stakeholders. Key amongst these challenges are: Some 400,000 barrels of Crude Oil is stolen daily through Pipeline vandalism, Well Head vandalism and Illegal Crude Oil Diversion; Escalating insecurity and kidnapping in the Niger Delta leading to significantly increase in the cost of doing business ; Government’s inability or refusal to fund JV budgets and expenditures thereby stalling on-going oil and gas projects and operations; Huge cash call arrears; and the Non Passage of PIB which has reportedly stalled some $80bln in investments in the sector as international investors adopt a wait and see attitude refraining from making any new investment pending the passage of the bill.
There are also very serious challenges in the Nigerian downstream sector as the Nation’s four refineries produce at far less than their installed capacity forcing the country to import much of its needed refined products, and embracing a subsidy regime to reduce the cost per litre to the public.
Unfortunately, the Subsidy programme has become unsustainable under the current regime of low crude oil price, opaque and riddled with corruption.
As if the above challenges are not bad enough, in 2014 half way into the year, the NNPC announced a 40% cut in the JV Programme budget after the JV partners had gone ahead to spend on the basis on the DEVCOM approved figures and the 2013 levels. The effect of this is a significant cut in exploration and production activities from the second half of 2014.
In addition, the NNPC and the government owe the JV partners some $6bln in arrears of cash call. This $6bln arrears of JV cashcalls and the 40 per cent unilateral cut in JV programme budget forced the JV partners who are major oil companies to significantly scale down their operations in Nigeria and also owing their contractors thereby exercabating the problem in the Nigerian oil and gas sector.
The net result of all these is a very big decline in investment in the Nigeria oil and gas sector; steep fall in Nigerian oil and gas operations; unprecedented increase in redundancies, asset divestments, restructuring and right sizing in the Nigerian oil and gas industry.
Indeed this is a very difficult time for the Nigerian oil and gas sector and indeed Nigeria. The sector and the economy has seen unprecedented number of job losses ( some 120,000 direct and indirect jobs have been lost in the Nigerian oil and gas sector) as companies and organisations struggle to keep afloat in the midst of pressures from international crude oil price and Nigeria’s inability to make needed reforms especially passage of the Petroleum Industry Bill (PIB), diversification of the economy and stoppage of crude oil theft.
At present, the Nigerian economy is in a very bad shape and is obviously not prepared for any sustained fall in crude oil price as global analysts forecast.
Permit me to show you a view of the economic indicators of Nigeria to enable us appreciate the precarious situation of the Nigerian economy.
As the table above shows, Nigeria’s external debt has been growing since 2012 and has reached US$10.316bln. A more comprehensive view of the debt profile is presented in the table below , and shows that Nigeria’s total debt as at June 2015 is about $63.8bln. Even at that State Governments are still borrowing while the Federal Debt stock is growing.
Nigeria’s public debt stock as at June 30, 2015
Debt category Amount Outstanding in USD Amount Outstanding in NGN
A. External Debt Stock (FGN + States) 10.317.Bln 2.032 Trln
Domestic Debt Stock (FGN Only) 42. 633bln 8,397 Trln
Sub-Total 52.950 Bln 10.429 Trillion
B. Domestic Debt of States* 10. 857 Bln 1.690 trln
C. Grand-Total (A+B) 63.807 Billion 12.119Trillion
•Source: Debt Management Office, Federal Republic of Nigeria.
Unfortunately, Nigeria is clearly not prepared for any sustained low crude oil price as the Excess crude account is now just above $2bln from $8.7bln in 2012 and external reserves are down to $31.6bln. You can contrast this with Saudi Arabia with an external reserves of $900bln.
Also the Naira was devalued from rom N155 to nearly N200 to a US$ ;while there are still further pressures on the country for further devaluation. Although President Mohammadu Buhari and the Godwin Emefiele the Governor of Central Bank has ruled out further devaluation of the Nigerian Naira, it remains to be seen how they can hang on to that policy with the expected sustained low oil price regime.
Let me state again, that if the current regime of low oil prices continue till 2019 as forecasted by analysts at Goldman Sachs, President Mohammadu Buhari may not be able to deliver on his campaign promises, and if the government does not initiate well thought out plans to engage the people with the true position of things, this may lead to serious uprising giving the great hopes the campaign gave to ordinary Nigerians!
At present many State Governments are unable to pay the salaries of their workers as the federal allocation has dwindled seriously. Already many of the state governments including States in the Oil rich Niger Delta are resorting to borrowings and the federal government bailout funds to pay workers salaries.
The fact remains that in the coming months, analysts expect the country to rise above politics by making the needed bitter reforms such as removal of fuel subsidy and cuts in the public sector expenditure, if it must remain afloat. Analysts foresee a situation where many State Governments will in 2016 and 2017 or thereabout begin massive lay-off of public sector employees as many states governments in Nigeria may not be able to cope with the current wage bill of the workers if the current economic crises occasioned by the fall in global crude oil price and industry scale oil theft continues.
Consequently it is my considered view that the current economic crises in Nigeria occasioned by the misfortunes in the Nation’s oil and gas sector as hereinabove explained, calls for a proactive review of the approach to industrial and employment relations by the government, unions , and employers in the Nigerian oil and gas sector. The truth is that industrial harmony is needed more during periods of economic crises such as we presently have. Moreover “industrial harmony is inextricably linked with economic progress of the country” (Agarwal,1982).
This is definitely not the time for adversarial industrial relations by the Unions, Management, or Government. There must be a deliberate and proactive transformation from an adversarial to a partnership relationship as a basis for labour/management co-operation and as a strategy for addressing the challenges currently faced by the oil and gas sector and the Nigerian economy (Ferguson, 1980, p72 and Tichy and Devanna, 1986:p77). The unions and the employers must as a necessity work together to co-create win-win solutions. Labour unions, management and government must work together as partners to co-create win-win solutions to the current challenges facing the Nigerian oil and gas sector and the Nigerian economy.
Moreover partnership can provide a framework within which a more positive working relationship can develop. It will also improve communication and co-operative relationship between the government, employers and trade unions thereby enhancing mutual trust and perceptions of fairness. Partnership is viewed as representing a ‘positive-sum game’ where both parties ‘win’.
The Nigerian labour movement especially NUPENG and PENGASSAN, together with their labour centres NLC and TUC, must collaborate with the Nigerian Government, employers and other stakeholders to evolve appropriate strategies to protect its people from the vagaries of global politics, ups and downs in the international crude oil price as well as effectively resolve other outstanding challenges in the Nigeria Oil and gas industry.
Without these strategies and their effective implementation, the current administration of President Mohammadu Buhari, and any other administration for that matter, will be incapable of delivering on its campaign promises to the Nigerian people. Similarly, without these strategies and their effective implementation, the Nigerian labour movement especially the two Unions in the oil and gas sector-NUPENG and PENGASSAN would be unable to deliver on their objectives to their members and the general public and would therefore be in danger of becoming irrelevant leading to their eventual extinction.
Some of these strategies that must of necessity be pursued and advocated by the Unions include:
Adoption of Partnership Approach to Industrial Relations:
As I have mentioned before, this very difficult times in our industry calls for a strategic shift in our approach to industrial relations. Indeed, the Unions must partner with the management and the government to co-create win-win solutions to the current challenges facing the industry and the organisations their members work for.
Although conflict is not totally eliminated by engaging in partnership relations (Woodworth and Meek, 1995; Cohen-Rosenthal and Burton, 1993), the partnership approach however provides an agreeable platform for the swift and sustainable resolution of industrial conflicts.
This is an important advantage of the partnership approach and greatly underscores its adoption as a framework for sustainable labour and employment relations. The truth is that the management and the unions must necessarily work together to ensure the survival of the organization because without the organisation, there would be no management, no workers and therefore no labour union.
However effective partnership can only take place in an environment of mutual trust and respect. Empirical evidence reveal that in a climate of mutual trust between labour and management, trade unions help rally workers to co-operate with management’s efforts to improve the performance of the organisation (Beisheim, von Eckardstein and Müller, 1993 quoted in Gyes, 2003:p74 ). Moreover a climate of mutual trust has considerable impact on how communication is received, and is unfortunately hardest to establish during times of change and crises (Quirke ,1995). This therefore underscores the need for both management and the Unions to develop and maintain an atmosphere of mutual trust and mutual respect as a cardinal principle of labour-management relations.
The unions must also partner with the government to ensure the survival of the nation’s oil and gas industry because without the sector, NUPENG and PENGASSAN will become shadows of itself like the Unions in the Nigerian Railway. Therefore, this is not the time for adversarial labour relations by the Unions, management or government!
Diversification of the Nigerian economy and r view of our system fiscal federalism
Every government agrees that diversification of the Nigerian Economy is key and strategic to the development of the country. Unfortunately successive governments have not done anything significant to actualise it. It is therefore crucial that the administration of President Mohammadu Buhari which is premised on change, takes practical steps to ensure that the Nigerian economy is diversified by truly growing other sectors such as agriculture, solid minerals, manufacturing and services.
There is an urgent need therefore for the Labour movement to put pressure on government at all levels by engaging them at all levels of policy and programmes to design frameworks for moving Nigeria out of the the grips of the Oil and Gas industry.
We must increase our advocacy outreach in this direction so that Governments will understand the urgency to move away from this present comfort zone and spread the nation’s root into various sectors such as agriculture, solid minerals mining, manufacturing and services etc. We cannot afford to continue putting all our eggs in one basket as they say.
Furthermore, the country must be courageous enough to review her system of fiscal federalism such that states and local governments would be effectively motivated to grow their economies in their areas of comparative advantages, rather than continue to depend on federal allocation.
Passage of the Petroleum Industry Bill and conclusion of the reforms in the Nigerian oil and gas sector
The passage of the Petroleum Industry Bill (PIB) into law will signal the commencement of the conclusion of some 15 years of reforms in the Nigerian Oil and gas industry. Indeed its non-passage by the 6th and the 7th National Assemblies despite all appeals by various stakeholders presented the country as very unserious. Also, the fact that the PIB has been the subject of discourse in the National assembly for eight years without any progress created significant uncertainty in the Nigerian Oil and gas industry and made investors to adopt a wait and see attitude.
This uncertainty therefore led to the loss of $80bln in investments and arrested development of the industry. Therefore NUPENG and PENGASSAN must ensure that the PIB that addresses the main challenges of the Nigerian oil and gas sector is passed into law before the end of 2016. Some of these challenges which have been aforementioned in this paper are: issues of endemic corruption in the industry; under funding of the Joint Venture operations, Oil theft and Pipeline vandalism, importation of refined petroleum products, fuel subsidy and the institutional bottlenecks in the industry.
It is not enough for the government to present the PIB or any of its parts as is being currently suggested to the National Assembly. We have seen that since 2008. Government must , more importantly show the necessary political will to ensure that it is passed into law and implemented to the letter.
The NLC, TUC, NUPENG and PENGASSAN must therefore as a matter of utmost urgency ensure through its various platforms that enormous pressure is brought on the government and the National Assembly to pass this Bill into Law before the end of 2016.
Good governance and anti-corruption
Government at all levels must identify leakages in the system and block them effectively. Duplicated services must be stopped, while agencies that carryout similar activities must be merged for effectiveness and efficiency. The fight against corruption must be pursued tenaciously; while the cost of governance pruned down significantly. Let me commend the leadership of NLC and TUC for the September 10th 2015 National Day of Action against Corruption and for Good governance. It is a step in the right direction. However the scale of corruption in Nigeria and the desire for good governance by the ordinary Nigerians dictate that the labour movement goes beyond that, at least to proof critics. The labour movement must match words with action!
The labour movement must also ensure that government at all levels does not take the easy part of business as usual and borrowing to maintain current levels of expenditure. The labour unions at units, branches, local governments, states, industrial and national levels should identify possible leakages in the system and compile them for review and implementation by the various governments and organisations in Nigeria.
Review of the Nigerian Labour Laws.
The Nigerian labour laws are out-dated and out of tune with current reality. They have therefore become sources of industrial conflicts. As the international prices of Oil plummet further, employers in the Industry will begin to experience severe pressures as profits decline and operational capacity dwindle. These pressures will lead to to cuts on cost which will impact negatively on Job security and general workers welfare. This will increase Industrial Relations stress and make workplace relations become more explosive and less manageable.
• Onuegbu is the state Chairman, Trade Union Congress of Nigeria (TUC), Rivers State Council
TO BE CONTINUED