Nigeria: Drop In Oil - What This Means For Small Indigenous Oil &Gas Co In Nigeria

Last Updated: 16 January 2015
Article by Ritch Wingo

The oil price has now fallen by more than half since June of last year when the price stood at $110 per barrel. Less than a week into the New Year, it traded at below $50 a barrel, the first time it will be dropping so low since April 2009. Analysts have blamed weak global demand and booming U.S shale production as reason behind the price plunge and with the Organisation of Petroleum Exporting Countries (OPEC) reluctant about cutting output, it is likely that we will see further decline in the coming weeks towards the $40 mark.

While the drop is good news to consumers and businesses in countries that import the product, oil producing countries such as Nigeria, Russia and Venezuela where oil is the main stay of the economy have taken some hit. Nigeria for example, needs oil at $123 to balance its budget and has since revised the benchmark for the 2015 budget and devalued the Nigeria Naira as part of fiscal measures to cushion the effects on the economy.

Should we panic?

Naturally, there is some measure of apprehension in the oil & gas industry especially among small indigenous oil and gas companies. These are largely companies that sprang up in the last couple of years following the implementation of the Nigeria Oil and Gas Industry Content Development Act (NOGICDA) which makes provisions to enable locals play more significant roles within the energy sector. With weak capital bases, a lack of specialization and given that often times 3 or 4 of these companies are deep in the transaction of a project, these companies are likely to have their profitability adversely affected.

It is important that we do not panic however. On the one hand, projections indicate that oil production will remain high and oil will continue to be important to the global economy. On the other hand, the current situation is not entirely new. As recently as 2008, oil prices fell to as low as $38 per barrel from $146 -a drop of over $100 (see figure below). Essentially, the Industry is not going anywhere. However, the companies that will survive and continue to play in it are those that are disciplined and able to implement relevant strategies that have been outlined here. The way we see it, this is a fantastic opportunity for small indigenous oil & gas companies to look again at their business model, do a review of their internal processes and ensure they are solid and attractive to investors.

Strategies for survival

  • Companies should look at forging partnerships with companies of similar size who have expertise in specific areas of the industry. This will build the partnering companies' capacity to bid for and execute projects while making them more competitive and attractive.
  • For other companies to find you attractive for a partnership, you need to bring something to the table. This informs the need for indigenous companies to define their niche along the areas they have competitive advantage and expertise. Currently, a lot of companies claim to offer virtually all the services in the value chain but on closer observation are not specialists in any.
  • Cost control and working capital management has never been more important. Companies need to become innovative in the way they run their operations and quit the stereotypical show of affluence associated with the industry. Unnecessary travels, unjustifiable recruitments, unrealistic pay packages etc must be cut down. For example there is absolutely no need for two staff to fly business class to Abuja for an hour meeting that can be held via Skype.
  • Closely related to cost cutting is the need for companies to put the right processes in place for risk mitigation. Critical to doing this is carrying out in-depth planning before engaging in any activity and ending the culture of spontaneous decision making.
  • It is also important to invest in your people through trainings. This might seem contradictory to the call to cut costs but it is not. Your employees are your most important assets and they determine how successful you can be. Having identified their area of expertise, companies should sponsor their people to be trained and certified in such areas. The importance of this cannot be over emphasized.
  • This is also time to have frank discussions with your bankers. Given the decline in revenue, some companies might be at the risk of defaulting on loan covenants. It is important to avoid such embarrassing situations by discussing with your bankers and exploring opportunities for waivers and renegotiation of repayment plans.
  • Active business development and relationship building is another key activity for this period. This is not the time to sit in the office. Your people should be out there making cold calls, revamping old relationships, creating new ones, attending the right events etc. A lot of this can be done by innovatively using the internet and social media. It is amazing how much one can achieve using LinkedIn alone.
  • If you are able to do all the above; specialize, review processes, cut cost, train your staff and actively expand your network, you are in pole position to attract attention within the industry. This may be the right time to open up to equity investment or to explore opportunities in mergers or formation of joint ventures.

When the going gets tough...

It is expected that many pretenders will altogether choose to leave the industry or be forced out at this time. Only the tough and resilient companies who are clear about their vision and strategy will stay going. Survival will entail being on top of every aspect of your business and ensuring that you are operating at an optimal level.

Volatility in oil prices should naturally elicit apprehension, but savvy business leaders are able to ride the storm to profit and uncommon successes.

Ritch Wingo, is a Director, Oil and Gas Advisory for the Nigeria firm of PwC (PricewaterhouseCoopers). PwC is the world's leading advisor to the energy industry and has been helping energy companies succeed for more than 100 years. We work with every segment of the business — from upstream to midstream and downstream —providing business solutions tailored to meet clients' needs. Our industry specialists understand the issues that indigenous Oil & Gas companies face and have the experience and expertise needed to address them and recommend sustainable solutions that help these companies outlive their founders while also positioning them to compete better in the international market. At PwC, we constantly monitor key developments in the industry, analysing the potential impact that they will have on our clients and generating solutions to assist companies in managing these ever-changing dynamics. Ritch has been living and working in Nigeria since 2008 and has many years of experience working very closely with indigenous Oil and Gas companies in West Africa. He can be reached for enquiries and consulting engagements at ritch.wingo@ng.pwc.com.

www.pwc.com/ng

When the going gets tough...

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.