An Extensive and Executive Summary of the Effects and Remedies of the Falling Oil Price in Nigeria By: Adebiyi Adeyemi
“In performing the hemostasis processes to clot the blood the bleeding of the oil industry, renew/replenish the economy cartilages and tendons of the falling apart oil companies and rebuild the bones of national and international oil economy, the options of merger and divestment seem to be our cotton wool and iodine”- Adebiyi Adeyemi
Though the oil industry is often eulogized or pampered with its history of booms and busts, the tumultuous nose-dive in the price of crude oil over the past few months has created for nothing short of a tenacious quiver down the spine and bloodstreams of our global and national economy. Accordingly, the price of oil round the world, which was fairly stabilized at around $110 a barrel over the last few years, has now dipped below $48 a barrel. What bloodshed in price? The diminishing feat attained by the falling oil price is somewhat bestowed as monumental, bearing in mind that the price of oil per barrel has not sunk this low since the depth of recession in 2009. Consequently, the overwhelming plunge in the oil price and the rippling effect that heralds the truncated oil economy is quite magnanimous, however benevolent or malevolent, to the economy of our nation and the world.
Consonantly, it may be sufficient to say that the ongoing global phenomenon in the national and international oil economy isn’t all sunshine and daffodils as there are obvious winners (consumers at the gas pump) and there are losers (oil companies and oil-rich countries). From the consumers’, hither to, the advantageous perspective; in a country like ours that highly consumes/produces oil, the plummeted oil price resultantly leaves more money in the pockets of consumers thereby increasing the purchasing power of their income as they are now able to spend less on fuel and more on other goods or services. The logical reason behind this is that, for a country that consumes a lot of oil, the economic effect of a big cut in oil prices is similar to that of a reduction in taxes for consumers. That is, it increases consumers’ discretionary income – and all which adds up to indispensable elements in determining the economic growth of our nation and the world.
Undeniably, the fallen oil price is fast crippling the financial backbone of most oil companies and amputating their income limbs, as the oil stocks are being negatively affected. Observably, a fall in oil price may make the production of oil in Nigeria economically unfeasible wherefore affecting investors via their investment books, making them to rule out or pend most of their major to-do investments in the oil industry. That is, the drowning oil price has exteriorized as delay in the operation of the oil industry wherefore acting as if a clog in the wheel. However, though oil companies bear the hopelessness and headache of this economic predicament, it is not of their making but that of the falling oil price which has succeeded in incapacitating their finance and destabilizing their usual high-cost operating system.
In the same way, the lowering oil prices is gradually pressurizing some oil and gas producers to halt drilling, forcing them to scale-down rigs and hastily cut investments in exploration and production, since some fields will no longer be economically viable and sustainable. That is, the slump in oil price could also reduce the capital budgets of the biggest oil firms, whose cash balances are already strained in today’s economic climate.
Acknowledgedly, on the oil panoramic view, the adverse effect of the falling oil price often has a multiplier effect on the economy of a nation and the world in general. While the theoretical explanation behind the falling oil price in the world holds that it is as result of oil supplies outstripping that of demand and causing commodity prices to fall, the summed-up or vector effect of the two sides of the coin – of the fallen oil price – stretches beyond the oil sector and touches down to the crust of our nation and global economy big bang.
Unarguably from facts, the falling stock price of oil has rebounded as the pulling back on investment spending, oil companies /investors having to retrench or layoff their workforce, suspending payments of dividends, cutting of dividends , buying back their own shares and there’s also been a worldwide reduction in capital spending .Consequently, earnings are down for companies that have recorded big profits in recent years and as a result, there’s been a powerful re-sketching of the economic landscape owing to the drastic down-slide in oil price.
Reportedly, gross steep in oil price also have had an impact on the country’s banking sector, where about twenty-five percent of loans are made to oil companies. Mr. Obi Ejimofo, Managing Director, Lamudi Nigeria, said recently that Nigeria’s current currency devaluation- an offshoot of the falling oil price- has resulted in less available funding for property development which might have a long term effect on the real estate sector if it persists. In other words, industries like retail, banking or the housing industry are susceptible to suffering from the dampened demand due to the slowdown and bumpy ride in the oil industry.
Implication and repercussion of falling oil price
Note worthily, the oil industry is by nature designed to be highly reliant on high-cost projects, including offshore drilling and oil extraction. For instance, the cost of water exploration and development has quite increased over the few years when oil price was high. The oil industry is a capital intensive business having to spend over half of the percentage of the money being made back into the business. As such, companies increasingly now have less amount of cash to reinvest in business and this will impact capital investment and slow growth in production in the now and future. It’s however quite more a pathetic case for small oil producing companies who, from cash flow that comes down to them, have lesser to invest back in the business as this will seriously impair their growth rate and that of their production.
Thus, the prevailing condition in the oil industry makes it entangling and intractable for small oil producing companies to cope and or stay afloat in the industry and oil economy. Notably, some big oil firms are already cutting capital budgets and jobs in response to lower oil prices, but it is smaller players in the industry that are feeling the pain most acutely.
Regrettably, the situation at hand is more excruciating for smaller oil producing companies that, in the past, have gone out to borrow a lot of money and have been spending above their means as there is going to be a real stress and strains on their businesses. Presently, in Nigeria, Small oil-producing companies are facing rising debt beyond what they can handle. Recently, Kola Karim, chief executive of officer of Shoreline Natural Resources Ltd made emphasis on the need for small oil producers to garner leverage by merger (corporate solidarity as have chosen to call it) as the rapid drop in oil price is unprecedented.
Correspondingly, small producers may face serious problems in sustaining themselves especially the ones that are heavily in debt who may be forced out of business, ardently pressuring some banks that have lent to them. In other words, Small oil-producing companies in Nigeria may need to combine to survive because smaller players in the industry might be squeezed out if they remain isolated. As such, merger seems to be the only or quickest way to beat the tides by the oil companies.
Extrapolating from the aforestated, the pitiful shoes in which the world oil economy finds itself; the newly shaped topography of the oil industry landscape- it is expository and glaring enough for us all to discern that the bearing and status-quo of global and national oil is in perilous times and the onus is on us to manage and mitigate, as best as we can, the adverse effects.
Drawing from history, this is a time in the oil industry when the whirlwind and tornadoes are blowing through, sweeping off companies that don’t have solid foundation hitherto a robust capital base and solid management. This is a time in the oil industry when the titanic companies of the oil industry might get struck down by a singular iceberg of the falling oil price or where other smaller companies in the industry might get blown away or capsized by the stormy weather. In other words, this is a time in the oil industry when boys will be set aside from men.
For Nigeria, the present situation we have in the oil sector is quite synonymous to what we had in the banking industry a few years ago when a new capitalization base was enforced which went a long way in determining how successful and resilient some of the banks were and could survive in trying times till date. As such, the new down-turn in economy in which the oil Industry is throat level immersed makes it compelling for small oil producers (small ones especially) to tinker with the idea of mergers as an option, as it’s difficult in a down market when one is a small producer, yet trying to sail through the storm alone.
Option of Merger
inferably, it can be equally said in the oil industry that the falling oil prices necessitates and impels the companies, especially small oil producers, to recapitalizes themselves, else the shortage of cash and cutting of budget spearhead by the falling oil price will bury or keep their head under the water for as long they chose to remain adamant or close-minded to this option.
As a result, devising a principle to win in such die-hard times is to buy into a strategy that concretizes a company’s foundation and structure- that is, capitally and managerially. In other words, mapping out a strategic that reinforces and refortifies a company’s foundation (capitalization & cash inflow) so that it doesn’t get leveled to ground by the wind of the falling oil price or eroded by the water of daredevil fall in oil price. It is a principle that imbibes constructive and detailed fusion of two or more ‘weak’ companies to become bigger, stronger and better. Thus, the newly attained level of the company gives them, as a whole, leverage on both the rainy days and sunny days of the industry and economy. This explains the idea behind ‘merger’ as it is called in the corporate environ.
However, a bigger and better picture of what merger resonates is necessitated as many characterize companies that go into merger as showing signs of high volatility and instability. Contrary to the common but inferior understanding of merger people generally have, it is convincing for us to note and always remember that it was during the depths of the recession that swept the country’s and global economy of her feet in 2009, Platform Petroleum Limited and Shebah Petroleum Development Company Limited merged to form an independent company(Seplat Petroleum Development Company) which represents a landmark consolidation that took the both independent Nigeria companies to a new level.
The establishment of Seplat Petroleum Development Company, an exploration and production company incorporated and operating in Nigeria, marked a milestone in the operation of the Nigerian independent companies as it became the first Nigerian company to hit a production capacity of 70,000 barrels a day. Bolstered by the success of Seplat, more Nigerian companies have come together to synergize and form consortia that positions them readily balance, financially and technically, to expand upon acquisition of bigger acreages being relinquished by the IOCs.
Option of Divestment
On the other hand, the alternative winning principle required to sail and save the sinking ship of the oil industry in Nigeria is that which follows an opposite approach to merger. More or less, it is better explained as an act of offloading excess load from ship till it reaches a weight level that affords it an increased sustainable stability. The process, divestment or divesture, as it is called in corporate circle, makes it possible for a company to concentrate on its core competency leaving out the extra workloads and operations (assets) which do not longer contribute majorly to its profit margin or existence.
Divestment, like merger, ought not to be looked as an act of corporate cowardice or in light of a company downsizing. The decent idea behind a company divesting is that such company is shedding off its excess or no-longer wanted weight, hitherto its responsibilities or operations by selling the company’s assets to new or other companies who will afterwards, take up these assets on a more competitive note and concentrate their resources on it for profit making. Accountably, Oil companies looking to raise capital and drive shareholder value will be separating core from non-core assets, and/or divesting underperforming or non-core assets in order to put capital to use more constructively profitably.
More so, bearing in mind that part of the winners in this new cheap-oil world will be the firms that have cash to spend and governments that are good at attracting scarce new investments, the option of divestment is not farfetched. In fact, some independents and indigenous oil companies in Nigeria are decisively and likely to consider farm-outs and divestments. With oil prices in the pit or basement, the capital available for exploring new basins is tightening and firms are becoming much pickier about where they invest or rather divest their money. However, it is postulated that the next several years could experience a good number of diversification of world oil supply—a good thing for all major fuel consumers since oil security is first and foremost a function of diversity.
Recently, it was said in the news that the Nigerian oil and gas industry is expected to see more asset sales by International Oil Companies and smaller firms this year as the steep fall in prices continues to take a down toll on their revenue. Accordingly, IOCs including Shell, Chevron and Total have, over the past few years, divested some of their onshore assets in the country- largely as a result of operational and financial risks. The reason(s) for this move, hither to, heavy lifting of capital investment underlies in the logic that divestment enhances the concentration of companies on the assets or responsibility they have selected to stick-to or introduce in place of the ones they have discarded (sold), having rigorously and satisfyingly compared and analyzed their strength and weakness in like of what obtainable in today’s and the nearest future economy outlook.
In truth, divestments creates a gateway for healthy competition and mops the industry floor of the incapacitated or incompetent (weak) company, making the industry roomy and ventilated enough for ready investors who are readily willing to leave a mark in the industry. In other words, divestment frees-up the congested atmosphere of the oil industry of the impotent or retired asset a company may be still be tolerating. That is, surrendering the assets to new investors, thereby making it more conducive and possible for the new investors who have a new or renewed hunger and thirst to push and manage the newly acquired assets more innovatively and competitively unto an much more effective and profitable production for the betterment of the economy. For example, new Plc like Frisson Oil and Gas Ltd and V.S.O.P. Oil and Gas Company, are set to kick off onshore operations including the haulage services of oil and gas products by tapping into the assuring and rewarding options of merger and divestment.
Lessons to be imbibed from the banking and telecommunication sector in Nigeria
There are lessons, from the past, to be learnt from the Nigerian banking and telecommunication industry to drive the point of merger and divestment to point of absolute clarity and objectivity. The call of merger, as it is presently and heavily witnessed with small oil producers, is similar to the CBN reform, in 2005, to consolidate the banking sector through drastic increase of the minimum capital base of commercial banks from two billion naira twenty-five billion that led to a remarkable reduction in number of banks. However, it is notable that at the end of recapitalization deadline in December 31st, 2005, the number of operating banks in the country reduced from 89 banks to 25 banks but later reduced further to twenty-three banks. Today, the number of banks has increased and the efficiency of the survival banks have also increased, pointing to the fact that merger works and it creates an atmosphere for competition. As such, merger should greeted with high hopes and great enthusiasm instead of low morale and buy-in.
Similarly, a few years ago in the telecommunication industry, when a few companies were grappling with shortage of funds and increased cost of maintenance of their facilities beyond what they could cope with, the options of divestment and merger were aptly exploited. Whilst some companies resulted to selling their assets, others resulted to constructively coming together to become big, better and stronger.
Specifically, there was a merger of surviving CDMA operators involving Multi-Links, MTS and Starcomms into what is now known as Main one. Today on the achievement list , the move has bountifully yielded good tidings in communication as it created a headway for competition and mopped the industry floor of the ‘incapacitated or incompetent’ company, creating a more free and economical open-space for ready investors who wish to establish their ground in the industry’s lithosphere.
Comparatively, while the bank recapitalization (merger) was compelled by a governmental reform in the banking industry, the merger being experienced in the oil industries (particularly with small oil producers) is as a result of the falling oil price that has pushed the debt and cash strain of these companies to the wall or limit. The coming together of small oil producers to become refortified and rejuvenated is better pictured with the example given of the telecoms industry mention in the previous paragraph.
However, the two processes, merger and divestment, could take different tones and coloration when carried out. The objectives of these two processes is to create resilience weather by adding weight to its financial and managerial substratum as in the case of merger or by the depilation of weight to a threshold level where the companies can sustain and operate sufficiently and effectively.
Gaining indigenousity of oil operations in Nigeria
For the discerning mind, the divestment of the falling oil price and stock is a blessing in disguise considering the opportunities this has offered indigenous oil players. Recently, The Nigerian National Petroleum Corporation, NNPC, stated that the Federal Government has maintained that there was no cause for alarm over on-going divestment of petroleum assets by multinational oil companies operating in the country, since those assets are readily taken up by indigenous operators. It is also observed that a lot of the oil assets that have been divested by the oil majors have mostly been beforehand abandoned and it was a quite positive thing that they are being taken over by domestic participants for a promising, onward and prosperous exploitation or production of crude.
Referentially, the current wave of divestments appears to represent a shift in IOCs’ strategy towards the offshore and portends the re-balancing of asset portfolios towards the offshore which now accounts for at least 80 per cent of Nigeria’s total production. Shell, for example, divested about five assets which were taken up by indigenous operators. More so, there have been more divestments by the IOCs, including Conoco Phillips, Total and Exxon Mobil, and these assets are expected to end up in indigenous hands. What good news!
Likewise, just last year, French oil giant Total concluded the sales of some assets, including the divestment of interests in Nigerian fields. The oil major said it would sell $5bn worth of assets globally in 2015 as it plans to accelerate its asset sale programme of $10bn from 2015 to 2017. It is also encouraging that there are other companies that could potentially put up their small stakes in Nigeria for sale, to be purchased by indigenous firm, as a way to improve their cash flow position. In addition, it reported that expatriates (due to their high salary and wages, even much so that are being paid in foreign currency) have been increasingly sacked while more indigenous vacancy have been made open.
The blessing of merger is best showcased using SEPLAT as a perfect exhibit. Formed through a consolidation in 2009, the development company has now grown into Nigeria’s largest indigenous and independent company. As such, other companies and investors should be encouraged by their exemplary leadership and see this period in the oil industry as a conscious effort to build the capability and capacity of indigenous operators in the upstream sector of the oil and gas industry.
Opportunities that lie within
Just as it is said that there are pros without cons on any issue of life, it is believed that the slump in oil price may also create a sizable opportunity for new oil exploration projects, especially in deep-water oil and gas fields. Purportedly, there could be a shift in oil exploration—the drilling of new wells in new fields—away from the traditional basins to underexplored places. The fascinating thing about this is that companies that have capital to deploy for deep-water exploration and development still have attractive opportunities to do so as new growth in deep-water will come in part from underexplored basins where the governments is ready to attract foreign capital.
Invariably, the fallen stock price of oil is an uncommon and ample opportunity for anyone willing to invest in the oil to get more shares for lesser sum or price. In the way, Lower costs today are joyful news for projects that are now in the exploration phase and expected to produce five to eight years in future, when prices speciously could be higher. The idea behind the water exploration is applicable to many other frontiers in oil exploration and production, especially those in the onshore fields.
On the contrary, The Nigerian National Petroleum Corporation (NNPC) through the Group Managing Director of NNPC, Joseph Dawha, recently expressed fear that the declining crude oil prices may lead to delay or cancellation of three major deep-water projects in the country because the oil price drop has made capital for exploration scarce. However, this is not to deter the hope or potential of exploration in the oil industry as it holds magnificent promises to daring investors.
Fate of our nation in the face of falling oil price
The falling oil prices would affect different countries in different ways. However, what general obtains from the dramatic drop in oil price poses a big challenge for oil-rich countries all over the world, especially Nigeria, where the oil industry can’t function without high prices. The awful situation of the oil industry makes it particularly difficult for the countries (Nigeria) that are mostly dependent on oil revenues for optimally maintaining their social programs and balancing her budgets.
Recently, the Coordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala had to do a resubmission of the national budget to the National Assembly approval, on basis that Low oil receipts has disrupted Nigeria capital spending plans. Accordingly, Nigeria has more than sliced capital expenditure to less than 10 percent of 2015 spending, freezing the needed infrastructure investment and slowing growth, due to the collapse in the price of oil which is country’s main source of revenue.
In the same vein, the fall in oil prices may lead to lower oil exports and, consequently, lowering demand for the Naira. Quoting Lamudi Nigeria, ‘Changes in the price of crude oil and the resulting currency devaluation have had a significant impact on the Nigerian economy.’ That is, the low oil prices are detrimental for oil exporting countries as it would lead to lower oil revenues for our country. Vis-à-vis, the low oil price would lead to a depreciation of our currency, negatively impacting our economy.
Emphatically, with about 70 percent dependency on crude oil for external revenue, the drop in world oil prices is tremendously affecting the Nigerian business space. From the look of things, it is posited that the persistence of the oil price crises may lead to lower GDP growth and higher unemployment in the nation and other oil-rich countries across the globe.
Fingering of politics in oil in Nigeria
Globally, the evidence of the corruptible finger of politics, though detestable, has been detected to be meddling with the affairs of oil even in the national context. Notably, the hesitance of OPEC, of a cartel of oil producers, to agreeably intervene and stabilize prices and output levels of oil production is descried to have to some political taints at an international level. Rather than stepping in to still the stormy weather of the oil industry by working t to push prices back up by limiting production to balance price, it is espied by some oil executives that the Saudis want to hurt Russia and Iran, and so does the United States.
However, the efficacy of fuel crises is quite delicate and major as almost anything that affects oil resolves and revolves to affect the world’s economy. We ought not to forget so quick that in the 1980s, the down-slope in oil price did help bring down the Soviet Union As such, oil talk is quite economical sensitive and generally impacting therefore cannot be easily shaded by political shadows being thrown at it, national and across the borders.
Recently on the Nigerian periscope , the Former Governor of Lagos State, Alhaji Bola Tinubu, in an essay on “Slump in Oil Prices: A Progressive Way Out’’, in response to Federal government resolution to adopt austerity measures as a way to curb the effect of dwindling oil prices on the economy argued that the austerity measures proposed by the government would further enrich the affluent, fastening the grip of the wealthy on the economy, while weakening the position of the middle class and the poor-as a result, put average Nigerians into more hardship and economic depression.
Conclusively, the confounding reality of the jeopardize oil industry is that it may end-up reverting the world and our nation economy to a sea-bottom level of recession. Today, the oil industry is quite vulnerable to price decline compared with what it was during the previous five or 10 years. As such, unless the industry takes a different well structured and nurtured approach, investors and the oil companies or countries might meet their economic waterloo which can be tantamount to an absolute catastrophic economic disaster.
As such, the options of divestment and merger cannot be over-emphasized as they have been identified as the few possible, effective and efficient ways for the gasping breath companies in the industry to regain strength from their fainting state (particularly financially) , since the industry’s reliant on high-cost projects, including offshore drilling and oil extraction or exploration.
Auspiciously, oil investors or companies, globally and nationally, by tapping into the effective options merger and divestment can better contain and mitigate the consequential cancellation of drilling projects, significant reductions in oil investment, hurrying of asset sale programme, retrenching of workforce and suspending/cutting dividends payments- all of which are due to the high cost operations and exploration the oil industry is inevitably dependent upon.
Increasingly, divestment and merger is sounding more and more like the smart play for investors as both approaches or doctrines have been greatly admissible in the oil industry in enabling the cushioning of the economy from exogenous shocks by attaining the required resilience needful to surmounting any price or economic resistance, bearing in mind that the reliance of the industry on high cost and budget is inseparable.
In recapitulating, these options also enhance and invigorate the chances and conduciveness for indigenous oil companies and investors in Nigeria to have access to control and management of oil assets and operations. The indigenous control and management gained would in turn result in a positive shift for the Nigerian economy as we would have an upper edge in stabilizing price. That is, the local ownership and management of the oil assets would further solidify the independency of our national economy thereby ameliorating and stabilizing our grossly devalued Naira against other international currencies.
Notably, French oil giant Total, commendable for demonstrating an hallmark of resilience in Nigeria has continued investment and operation in the country despite the unfavorable and harsh economic and political environment, especially that of the falling oil price and political instability. The survival and youthful mechanism repeatedly adopted by this company in face of the crumbling oil economy is sourced from the option of divestment among others.
In closing, in performing the hemostasis processes to clot the blood the bleeding of the oil industry, renew/replenish the economy cartilages and tendons of the falling apart oil companies and rebuild the bones of national and international oil economy, the options of merger and divestment seem to be our cotton wool and iodine.
Bsc Unilag (2013) . NYSC (2014) . Ad Dip. in HSE& Project – Mgt (2013, 2015) . Seeks Graduate Mgt Trainee (oil and gas 2015) firstname.lastname@example.org