Cau­tious op­ti­mism marks 2018 oil and gas out­look

It is ob­vi­ous that im­prove­ment in the man­age­ment of the (Nige­rian) oil and gas in­dus­try is a na­tional emer­gency.

Financial Nigeria Magazine - - Contents - Men lock in hand­shake at an oil rig

In this in­ter­view, Dr. Ladi Bada, Man­ag­ing Di­rec­tor/CEO, Shore­line Nat­u­ral Re­sources Lim­ited (SNR), speaks on the re­cent up­heaval in the oil and gas in­dus­try and the out­look of the in­dus­try in 2018. He was in­ter­viewed by Jide Ak­in­tunde, Man­ag­ing Ed­i­tor, Fi­nan­cial Nige­ria mag­a­zine. Jide Ak­in­tunde (JA): Since late Oc­to­ber 2017, the Brent Crude has been trad­ing above $60 per bar­rel. Price sta­bil­ity at the lev­els of the last two months surely is an op­por­tu­nity to ex­hale, af­ter the tur­bu­lence of the pre­ced­ing 2 – 3 years. What have been your re­flec­tions on the trends in the last three years that stretch to when oil was trad­ing above $100 per bar­rel? Ladi Bada (LB): The roller­coaster ride in oil prices comes with the ter­ri­tory. There are com­plex tools to pre­dict oil price volatil­ity. But is­sues like in­ter­na­tional geopo­lit­i­cal in­sta­bil­ity, na­tional in­se­cu­rity – es­pe­cially mil­i­tancy in the oil-pro­duc­ing re­gions – and nat­u­ral dis­as­ters can be quite un­pre­dictable, al­though they tend to in­duce the great­est price volatil­ity.

Right now, for­ward curves by most an­a­lysts have oil prices gen­er­ally be­tween $55-$60 per bar­rel for 2018. The largest cul­prit that led to the sud­den price drop three years ago, Amer­i­can Shale oil, seems to have been “tamed,” and fac­tored into the as­sump­tions. How­ever, with the state of po­lit­i­cal af­fairs in Saudi Ara­bia and ten­sions in North Korea, all bets could be in ei­ther di­rec­tion of the cur­rent price level. Over all, a price range of $50-$55 for the Nige­rian econ­omy, and pro­duc­ers, would be viewed as pos­i­tive.

JA: In the pe­riod of this oil price tur­bu­lence, we started to hear some Nige­rian se­nior gov­ern­ment of­fi­cials talk­ing about the “post-oil” econ­omy. That is muted a bit now. Isn't the Nige­rian oil econ­omy back, af­ter help­ing to end the 15-month re­ces­sion in Q2 2017, and shouldn't the con­ver­sa­tion turn to sig­nif­i­cant im­prove­ment in the man­age­ment of the oil and gas in­dus­try?

LB: The “post-oil” econ­omy is amongst the many won­der­ful slo­gans pop­u­lar­ized by the gov­ern­ment that are so true and needed, in the­ory. But some­times, the over­all pol­icy thrust does not show we are head­ing in that di­rec­tion. An­other sim­i­larly won­der­ful slo­gan used by the gov­ern­ment is “us­ing oil to get out of oil.” These state­ments, as a pol­icy goal, are fan­tas­tic. How­ever, we need to bring life into them and that re­quires com­mit­ment, plan­ning, sin­cer­ity and many hard choices from the gov­ern­ment.

Oil might have helped Nige­ria end the 15month re­ces­sion, but oil, or more specif­i­cally, oil pro­duc­tion shut-ins and low

oil prices caused the eco­nomic re­ces­sion in the first in­stance. There­fore, it is ob­vi­ous that im­prove­ment in the man­age­ment of the oil and gas in­dus­try is a na­tional emer­gency. I give credit to the gov­ern­ment, though, for tak­ing a bold step in this di­rec­tion through two main ini­tia­tives that are foun­da­tional to any pos­i­tive change. The first is the grad­ual pas­sage of the Petroleum In­dus­try Bill into law, and sec­ond is the planned un­bundling and com­mer­cial­iza­tion of the na­tional oil com­pany, the Nige­rian Na­tional Petroleum Cor­po­ra­tion. Mak­ing NNPC nim­ble and, more im­por­tantly, more trans­par­ent in the way it con­ducts busi­ness is cru­cial.

The post-oil econ­omy, or us­ing oil to get out of oil rhetoric, re­quires us to man­age to­day's oil re­sources and in­come ef­fec­tively, rein­vest­ing the pro­ceeds into mas­sive so­cial and in­fras­truc­tural de­vel­op­ment projects that will cre­ate a con­ducive en­vi­ron­ment for non-oil & gas busi­nesses to flour­ish and con­trol the econ­omy. Let us be clear, de­spite the fo­cus on oil and gas, the in­dus­try is by no means the largest or sec­ond- or third-largest con­trib­u­tor to Nige­ria's GDP, which stands at around $400 bil­lion (2016). It may be sur­pris­ing to know that oil and gas con­trib­utes no more than 8% to the GDP. Yet when the oil in­dus­try sneezes, the whole na­tion catches a cold.

The power of oil and gas lies in the fact that it pro­vides 95% of na­tion­ally dis­trib­uted for­eign ex­change earn­ings and 80% of bud­getary rev­enues. This is where we need a re­ver­sal in ad­vanc­ing a post-oil econ­omy. JA: Ask­ing for as­tute and more strate­gic man­age­ment of the Nige­rian oil and gas in­dus­try is not tan­ta­mount to un­der­min­ing the agenda for the di­ver­si­fi­ca­tion of the econ­omy. On the pub­lic sec­tor side, what are the key ar­eas you would like to see im­prove­ment in the man­age­ment of the in­dus­try and what strate­gic out­comes would you like to see in the next three years?

LB: Con­tin­u­ing from my ear­lier theme of us­ing oil to get out of oil, it is im­por­tant to note that the suc­cess and good man­age­ment of oil and gas re­sources will lead to the di­ver­si­fi­ca­tion of the econ­omy as op­posed to un­der­min­ing it. The gov­ern­ment to­day holds huge con­trol over oil re­sources, as the largest owner of oil as­sets, reg­u­la­tor, re­ceiver of oil rev­enues and as­so­ci­ated taxes.

On the pub­lic sec­tor side, we need the Na­tional As­sem­bly to, as a mat­ter of ur­gency, pass the en­tirety of the PIB, al­beit in piece­meal. It will be im­per­a­tive to un­bun­dle and com­mer­cial­ize the na­tional oil com­pany. The in­di­vid­ual units need to be more ac­count­able and prof­itable; and they need to be able to at­tract best tal­ents and cap­i­tal to yield profit. The reg­u­la­tors need to be more ef­fec­tive, es­pe­cially in reg­u­lat­ing gov­ern­ment-owned as­sets and not just pri­vately-owned oil and gas com­pa­nies. It will also be good for the gov­ern­ment, through the Cen­tral Bank of Nige­ria and the Fi­nance Min­istry, to strengthen the laws that al­low banks to op­er­ate more ef­fec­tively in fund­ing the Nige­rian oil and gas in­dus­try, es­pe­cially the up­stream as­pect.

Se­cu­rity of oil and gas as­sets is also a pub­lic sec­tor re­spon­si­bil­ity. To­day, there is a fail­ure of se­cu­rity that leads to losses of close to 20% of pro­duc­tion, es­pe­cially in the pro­lific on­shore pro­duc­tion. The losses run into bil­lions of dol­lars on an an­nual ba­sis. The gov­ern­ment needs to strengthen, re­struc­ture, equip and mo­ti­vate the se­cu­rity forces and also hold them ac­count­able for fail­ures af­ter pro­vi­sion of re­quired re­sources.

JA: I am sure that the oil com­pa­nies would also be look­ing at re­struc­tur­ing their balance sheets. Within Nige­ria, what are the scope for this gen­er­ally-speak­ing?

LB: In a volatile Nige­rian oil and gas space, re­struc­tur­ing of balance sheets oc­curs far more than in most stable en­vi­ron­ments. This is ne­ces­si­tated by the oc­cur­rence of ma­te­ri­ally more ad­verse events in this re­gion. Glob­ally, the usual sus­pect that trig­gers fi­nan­cial re­struc­tur­ing in an oil and gas busi­ness will be a sig­nif­i­cant down­ward turn of oil price. How­ever, in Nige­ria, ma­jor se­cu­rity chal­lenges, which are of­ten near-im­pos­si­ble to pre­dict, cause schisms in balance sheets.

Since the last oil price crash, most en­ergy com­pa­nies have had to re­view their bor­row­ing base and liq­uid­ity; they have

The reg­u­la­tors need to be more ef­fec­tive, es­pe­cially in reg­u­lat­ing gov­ern­men­towned as­sets and not just pri­vate­ly­owned oil and gas com­pa­nies.

been re­struc­tur­ing ac­tively since 2015. Com­pa­nies in the For­ca­dos axis, where there were also mil­i­tant attacks on the ex­port ter­mi­nal's main pipe­line, were dou­bly af­fected. For the af­fected com­pa­nies, the at­tack on the ex­port trunk led to the shut­down of ex­port for al­most 16 months. This im­pacted mainly in­dige­nous com­pa­nies that owned largely sin­gle as­sets and had no choice but to sit around the ta­ble with lenders to forge a new fi­nan­cial re­al­ity.

I must com­mend the Nige­rian banks that are ex­posed to most of this lend­ing risk. De­spite the chal­lenges, most of them sup­ported their clients dur­ing this tough pe­riod and in­no­vated ways to help re­fi­nance and re­struc­ture many balance sheets. I be­lieve the whole process has deep­ened the re­la­tion­ship be­tween the in­dus­try and Nige­rian lenders. It has also showed the re­silience and adapt­abil­ity of most of the in­dige­nous pro­duc­ers. Re­struc­tur­ing for the most part is a con­tin­u­ous process and we should ex­pect to see more in the years to come.

JA: Let's be more spe­cific now about Shore­line. How are you lead­ing the busi­ness to nav­i­gate the is­sues of re­struc­tur­ing your balance sheet and en­gag­ing the prospects of the dis­rup­tion by re­new­able en­ergy over the medium- to long-term?

LB: Shore­line Nat­u­ral Re­sources was among the pro­duc­ers af­fected by the 16month shut­down of the For­ca­dos ex­port ter­mi­nal. This im­pacted our cash­flow, as ex­pected. We have been able to suc­cess­fully re­struc­ture our balance sheet and we are ex­cited by the re­newed con­fi­dence shown to us by our lend­ing part­ners. Part of the re­struc­tur­ing en­tails im­prov­ing ef­fi­ciency to make a leaner balance sheet still prof­itable. We are work­ing very hard with our JV part­ner, Nige­rian Petroleum De­vel­op­ment

A great deal of our way of life on this planet is in­flu­enced by petro­chem­i­cals, from plas­tics to cloth­ing, elec­tri­cal com­po­nents and even the vast por­tion of ma­te­ri­als that will be used to build an elec­tric car.

Com­pany, to make our op­er­a­tions more ef­fi­cient and to drive down cost.

Re­new­able en­ergy is not an en­emy of the oil and gas in­dus­try as most peo­ple seem to think. It will not re­place the many great in­no­va­tions and prod­ucts that the ex­trac­tive oil in­dus­try of­fers to­day. Most peo­ple talk about elec­tric cars, and even if most of the de­vel­oped world moves to elec­tric cars in the next 20 years, the di­rect im­pact on oil con­sump­tion will be far less than 10% of global oil pro­duc­tion. Most of the elec­tric­ity that will be re­quired to power the ve­hi­cles will still come from fos­sil fuel. Nei­ther so­lar nor nu­clear, for var­i­ous rea­sons, will be able to com­pletely fill the gap.

A great deal of our way of life on this planet is in­flu­enced by petro­chem­i­cals, from plas­tics to cloth­ing, elec­tri­cal com­po­nents and even the vast por­tion of ma­te­ri­als that will be used to build an elec­tric car. Fos­sil fuel has a whole lot more us­age than fu­elling cars, all the more in a grow­ing global pop­u­la­tion. How­ever, the per­ceived threat of re­new­able en­ergy must be em­braced and en­cour­aged as I be­lieve both en­ergy forms are ben­e­fi­cial to the world.

JA: So­cial and en­vi­ron­men­tal sus­tain­abil­ity in oil and gas is cru­cial, given the his­tory of con­flicts in oil pro­duc­tion in Nige­ria and else­where. What is SNR do­ing to pro­mote Sus­tain­abil­ity in its op­er­a­tions?

LB: Sus­tain­abil­ity in the oil and gas in­dus­try is a re­spon­si­bil­ity we take se­ri­ously in SNR. So­cial and en­vi­ron­men­tal sus­tain­abil­ity starts from the in­di­vid­ual staff and ex­tends to our host com­mu­ni­ties and the planet. We are en­vi­ron­men­tal­ly­compli­ant in all our op­er­a­tions. When there is an en­vi­ron­men­tal is­sue caused by 3rd party to our op­er­a­tion, we take ac­tion to cor­rect it be­fore we ap­por­tion blame.

SNR is work­ing hard within quite chal­leng­ing con­strains to re­duce gas flar­ing, and flare out com­pletely, in com­pli­ance with gov­ern­ment di­rec­tives and our cor­po­rate ethos. We are very ac­tive within the frame­work of Nige­rian Ex­trac­tive In­dus­try Trans­parency Ini­tia­tive. De­spite our small size, we rank very highly in NEITI's score card, and we are very proud of that. I am also a mem­ber of the Steer­ing Com­mit­tee of SITEI (Sus­tain­abil­ity in the Ex­trac­tive In­dus­tries). It is a recog­ni­tion of the cor­po­rate value we put on sus­tain­abil­ity. JA: The Fed­eral Gov­ern­ment plans to sell some of its in­dus­try as­sets in 2018 to fund the bud­get. Ear­lier hint of this gen­er­ated some con­tro­versy. Do you sup­port the as­set sale plan; and re­gard­less of its pos­si­ble ben­e­fits, are you con­cerned the plan may fuel in­dus­trial in­sta­bil­ity, which has be­gun to rear its ugly heads since late last year in the form of in­dus­trial strike and petrol scarcity?

LB: It is a pop­u­lar say­ing, both lo­cally and in­ter­na­tion­ally, that “gov­ern­ment has no busi­ness in busi­ness.” In my view, sell­ing in­dus­try as­sets owned by the gov­ern­ment is a win-win sit­u­a­tion for all stake­hold­ers. To­day, most of gov­ern­ment-owned up­stream and mid­stream (re­finer­ies and de­pots) as­sets are in­ef­fi­cient. If the as­sets were ex­am­ined like a busi­ness unit, they are prob­a­bly mak­ing sig­nif­i­cant losses.

In the up­stream sec­tor for ex­am­ple, the gov­ern­ment owns ma­jor­ity stake – be­tween 55%-60% – in most joint ven­ture com­pa­nies. If a cal­cu­la­tion is done, most of the value the gov­ern­ment re­al­izes comes from tax, roy­alty and petroleum profit tax (PPT), as op­posed to div­i­dend from the prof­itabil­ity of those op­er­a­tions. By sell­ing down its ma­jor­ity stake in the JVs, the gov­ern­ment will make a sig­nif­i­cant up­front in­come from the as­set sale. How­ever, the bulk of real gov­ern­ment in­come will come in the mid­dle- to longterm, from bet­ter funded, more ef­fi­cient, and thus more prof­itable pri­vate sec­tor­man­aged JVs. This will lead to much higher reg­u­lar re­ceipt of both roy­alty and PPT. JA: Over all, what is your out­look for SNR and the oil & gas mar­ket in 2018?

LB: As Richard Quest of CNN says, we live in in­ter­est­ing times. The oil and gas in­dus­try in Nige­ria has suf­fered sig­nif­i­cant down­turn from the low oil prices and the sup­ply dis­rup­tions by the mil­i­tants. The in­dus­try is just re­cov­er­ing from all this. From a high of over $100/ bar­rel to barely $30/bar­rel, most of the play­ers man­aged to stay afloat. I ex­pect from what an­a­lysts pre­dict that oil prices will av­er­age $50-$55 in 2018. This is not great, but it is pos­i­tive and we an­tic­i­pate that the sta­bil­ity will aid plan­ning. Noth­ing is more desta­bi­liz­ing to busi­ness than un­cer­tain­ties.

I think the gov­ern­ment of the day seems to be work­ing out a good re­la­tion­ship with groups ag­i­tat­ing pre­vi­ously in the Niger Delta. This has given some rel­a­tive se­cu­rity and peace. But a whole lot still needs to be done.

We are also mind­ful that we are en­ter­ing an­other elec­toral cy­cle. This can blow ei­ther pos­i­tive or neg­a­tive winds. We hope the politi­cians will be able to pass the PIB into law be­fore elec­tion­eer­ing takes over most of the gov­ern­ment. There are also geo-po­lit­i­cal ten­sions around the world that have the ca­pac­ity to al­ter the oil and gas in­dus­try neg­a­tively or pos­i­tively. Over­all, there is a cau­tious op­ti­mism. This is, in part, be­cause we have re­cently hit the bot­tom; the only way to move now is up. We hope this is true.

Ladi Bada, Man­ag­ing Di­rec­tor/CEO, Shore­line Nat­u­ral Re­sources Lim­ited

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