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.
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 15-month 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 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 16-month 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 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 environmentally-compliant 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 long-term, from better funded, more efficient, and thus more profitable private sector-managed 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.