Falling oil prices threaten three deep-water projects in Nigeria

THE Nigerian National Petroleum Corporation (NNPC) yesterday expressed fear that the declining crude oil prices may lead to delay or cancellation of three major deep-water projects in the country.

  According to the Group Managing Director of NNPC, Joseph Dawha, who expressed the worry yesterday at the Offshore West Africa Conference in Lagos, the major challenge for the oil and gas industry in Nigeria remained how to manage major projects through both price and fiscal uncertainty.

  He stated:  “Many companies have stretched cash flow statements and will have to reduce capital expenditures to maintain healthy balance sheets. This will result in delays in the development of projects. Many analysts are of the view that at the resource type level, 80 per cent of North American light tight oil wells will still be in the money at $80 per barrel but that cash flow concerns might reduce spending in the medium term. Some projects may still be viable at $50 per barrel.  However, delays in major projects will now be a feature in many companies’ plans and programmes, especially for larger offshore and oil sands projects as companies try to balance cash flow statement”.

  He added that a number of deep water projects may suffer delay or cancellation including one project in Angola, three in Nigeria and one in Ghana, while in shallow water, two projects in Angola, one in Nigerias and two in Ghana may also suffer delay.

  Dawha hinted that Nigeria has always responded with innovation and the right balance of incentives, as the industry is important in the overall economic outlook of the country. He attributed the fall in the prices of crude oil to lower than expected demand growth, mostly due to lower growth in China and a net decrease in product demand in Europe, continued strong supply growth, particularly in onshore North America and Iraq and an unexpected loss of Organisation of Petroleum Exporting (OPEC) discipline.

  According to the NNPC boss, “Politics, economics, technology and the environment have always been critical factors in the oil and gas business. Often referred to as the four forces, political instability engendered by natural resources, economic growth, technology as evidenced by shale fracking and new supplies from sub-salt and the environment evidenced by the BP Macondo oil spill in the United States have helped shape the capability of oil and gas companies to manage project.” 

  Speaking also at the event, the Managing Director/Chief Executive Officer of the Upstream Companies of Total in Nigeria, Mrs. Elisabeth Proust, said that with rapidly falling oil prices, the decision to invest in large projects after discovery and appraisal would be more scrutinized by the shareholders.

  She added that it will also be highly dependent on the investor’s confidence in the stability of the contractual and fiscal terms and the perception that the country will respect the terms all along the duration of the contract, with any disagreements being settled through normal dispute resolution avenues.

  To survive these challenges, Proust said that the country needs petroleum law that would seek to encourage investment and to grow production and needs to be a robust investment vehicle that works during both good and not-so-good times.

  She stated: “The industry as a whole, and I refer here to the government, regulators, contractors, exploration and production companies and other stakeholders, need to do more to keep building the future of the industry on the continent.

  “Another strong element that assumes even more importance is management of cost. Cost drivers are relatively inelastic in the short term of one to two years. There is a time lag between movements in oil prices and cost due to existing contract commitments. This means that despite the best efforts of operators and partners, contractor prices do not fall as quickly as the oil price.

  “If we take the example of Nigeria, contractors integrate the cost of uncertainties and the time lag of contract approval cycles, in their bid offers. If those approval cycles could be reduced, it could have a positive impact in reducing projects costs. Other high expenditure uncertainties relate to the security cost of protecting people and installations as well as the time value of possible disruption of the works.”

  According to Proust, there is stiff competition in Africa between West African producers and Mozambique, Tanzania and Kenya with large volumes of oil and gas discovered. She expects exploration to continue in countries offering attractive terms, incentives and facilitating the circulation of means and goods.  

  Speaking on the theme: “Managing West Africa Major Projects”, Proust stated: “With lowered demand and plummeting oil prices, it is not only major projects but all projects and the way we work that must be managed in the new reality of the drastic fall of oil prices. We must not only fine-tune our technologies competences, we must also examine cost optimization initiatives.

  “The first requirement for managing major projects is the reduction of variables in the investment environment. To effectively compete for global investments needed to grow production and revenue, oil and gas industry requires an enabling environment with adequate funding, efficient institutions and processes and contract stability. Where these conditions are present, cyclical events such as rising and falling oil prices can be better managed”.