Interview : Tunde Afolabi
What impact has the low cost of oil had on efficiency and cost-saving practices?
TUNDE AFOLABI: The drop in oil price was a double-edged sword for the industry. With oil prices down, it became difficult to service debts and meet contracted obligations, and service providers realised that the only way they could stay in business was to keep operators in business also. As a result, we have been able to cut both operating and capital expenditures. As the banks’ perception of uncertainty has made them reluctant to give out new loans to the industry, it has been more challenging to invest in new capital projects. We have recently seen an upsurge in the price of oil, which has given banks the confidence to provide the industry with much-needed access to financing. During this period of low oil prices, companies also devised cost-saving practices such as facility sharing, boat sharing and combined crude lifting. Going into 2018, energy companies expected that oil prices would not exceed $45 per barrel. With prices higher, we are able to increase capital projects beyond expectations.
How has Nigeria created an empowering environment for new upstream projects?
AFOLABI: It is a difficult environment for the oil and gas sector. Banks need to have diversified portfolios with exposure to different projects across sectors. Even though Nigeria is an oil-based economy, with oil and gas providing the bulk of foreign exchange, projects in our industry are limited to 25% of the banks’ exposure. We should not be limited to the same kind of risk exposure as any other sector; it would be best if at least 45% of banks’ exposure was in the oil and gas industry. The government needs to involve practitioners in the industry, and talk to the banking sector in order to enable improvements. Similarly, the downstream and upstream sectors are often seen as identical; however, upstream loans require longer-term financial involvement. We have seen positive developments in the Petroleum Industry Governance Bill, with lawmakers more open to the industry. The cause of the failure to reform has been the inability to involve all of the necessary players, including international and indigenous oil companies, but thankfully this has changed for the better over the past few years. As foreign banks gradually become more amenable, there is a healthy outlook for foreign investment. Foreign banks have become more comfortable as corruption has diminished in the oil and gas industry, making the investments increasingly attractive.
In what ways can the industry’s local content development be improved?
AFOLABI: There have been impressive developments in local content. There are local companies that have been providing high-quality services for years, though many people have little awareness of their work. In order to continue improving, it is important to both increase efficiency and keep better documentation of all of the available local service providers. For some services, local providers remain more expensive than foreign competitors. It is essential to understand where this gap originates, so that it can be addressed and the competitiveness of indigenous providers can improve. The convenience of having local services is self-evident, but more needs to be done to develop them.
What are some of the ways that Nigerian gas deposits can be developed over the long term?
AFOLABI: While our primary focus remains on upstream activities, we are also venturing into the midstream sector. It is expected that an increasing number of Nigerian companies will do the same over the next few years. While players are not anticipated to quickly move away from oil, gas is clearly the future for Nigeria, and we expect to see a lot more development in midstream projects, such as petrochemicals and embedded power projects, in the coming years.
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