By Clara Nwachukwu

OPERATIONS in Nigeria’s oil and gas industry have cried out against a recent directive by the international oil companies, IOCs, compelling them to cut project costs by at least 30 per cent to cushion the effects of the slump in global oil prices. They have equally complained about recent Central Bank of Nigeria, CBN policy against the dollarisation of in-country services, as a way of strengthening the falling value of the Naira, saying that both policies are inimical to their survival.

Allison-Madueke

Specifically, they argued that if allowed to pull through, the cost cuts will endanger the growth of a burgeoning local industry in an otherwise foreign dominated sector and increase unemployment in Nigeria, as workers are now being laid off and some companies closing shops completely. They also note that the CBN dollar policy demonstrates a poor understanding of the petroleum industry global operations, which is denominated in dollars.

Price review

Concerning the issue of price review, the Chairman, Petroleum Technology Association of Nigeria, PETAN, Mr. Emeka Ene, told journalists on the sidelines of the just-concluded Offshore Technology Conference, OTC, in Houston Texas, that there is need to understand that profit margins of companies in the sector. Ene, who is also, the Chair of the Nigerian Council for the Society of Petroleum Engineers, SPE, said: “Even during the best times, profit margins are not more than 20 to 30 percent.”

Explaining the intrigues surrounding the IOC’s call for reduction in the cost of projects, he said: “There was a panic when the oil price dropped and the immediate reaction was to tell the service companies to reduce their prices by 30 percent. Unfortunately, that sent a very wrong signal to the industry.

“For an industry, whose profit margin is about 20 to 30 percent, if you are being asked to drop your prices by 30 percent, essentially you are asking the company to go out of business. The only way that company can survive is to slash their work force by 60 percent, because probably the average impact of pay roll would be about 20 to 30 percent range.”

For the Executive Chairman, Oilserv Limited, Mr. Emeka Okwuosa, “What the IOCs are asking for is wrong. When the oil prices go up, are we expecting that they will call us back to increase the value of our contracts? No!” Besides, he noted, “A contract is sacrosanct and should be respected. The only thing the IOCs should do is to rationalise and say, they may want to shut down contracts because it doesn’t make a sense for some of the contracts to continue to exist.”

“What does the contract says for cancellation of contracts, as contracts rates and terms remain as far as pricing is concerned irrespective of the oil price. So we are impacted and a lot of our members are impacted, the service companies are impacted by this practice, which is wrong.” Against this backdrop, Okwuosa called on government and industry regulators, especially, the Ministry of Petroleum Resources, and the Department of Petroleum Resources, DPR, to intervene and manage the process in way a way that they should call the IOCs to order.

But beyond calling for government’s intervention on the cost review, Ene also called for a collaborative approach by operators to ensure efficiency in the industry. “I think the better approach, which some of the operators have adopted, is a collaborative approach. How can we improve efficiencies? How can we reduce the cost of doing business? For a service company in Nigeria to mobilise for a job of $10,000 or $100,000 project, he is going to carry police and security; he is going to pay communities. He is going to pay different toll gates along the way. He has to carry his own diesel, his own power.

“The cost of doing business has not reduced, whether you are doing a small job or a big project. Really, at the end of the day, the only way to solve the problem of low oil prices is a holistic approach, where every part of the value chain discusses and collaborates on how to improve the economics and reduce wastes which is right across board. “Now the price has gone up to $60. Have they said we should increase the price again? I think it is very important that the industry should not panic. Rather, the industry should engage to reduce prices.”

CBN policy on dollar

Emefiele

The CBN had on April 17, 2015 issued a circular to all banks condemning and declaring as illegal, the trend of currency substitution and dollarisation of the Nigerian economy. In the circular, the CBN stated unequivocally that transactions originating and consummated in Nigeria should be denominated in Naira. The circular therefore makes it illegal to price or denominate the cost of any product or service in any foreign currency in Nigeria, or consummate a business offer or acceptance in Nigeria in any currency other than the Naira.

However, industry operators and other stakeholders argued that the controversial CBN policy ignored the status of petroleum as a global industry that required the dollar to drive transactions across international boundaries. They therefore called on the CBN Governor, Mr. Godwin Emefiele, to personally intervene and exempt the petroleum industry and other sectors that operate on global business platforms from the dollar restriction in order to make them globally competitive.

Furthermore, UK-based global investment advisory firm, Deloitte, in a tax alert to foreign investors that partner Nigerian companies, cautioned them to remain cautious of Nigeria’s monetary policies. According to Deloitte, the directive exempts foreigners, visitors and tourists who are encouraged to use their cards for payments. “The Circular supersedes the provision of Memorandum 16 of the CBN Foreign Exchange Manual which provides that payments in foreign currency for products and services provided by a Nigerian company to another Nigerian company are optional,” it added.

However, the firm demands further clarity, as the circular is not clear about companies operating in the oil and gas industry whose transactions are predominantly priced in foreign currencies. Also clarity is needed on the continuity of split currency arrangement in oil and gas contracts and continuous use of legitimately earned foreign currency in foreign domiciliary accounts maintained by Nigerian companies whether or not they are subsidiaries of multinational companies.

Again, other transactions between Nigerian companies and offshore service providers whether individual or corporate remain vague. Deloitte also argued that the directive is not also clear on the impact on existing or on-going contracts already priced in foreign currency prior to the new circular. It therefore advised its clients “to evaluate all foreign currency denominated contracts with other Nigerian entities including employment contracts and determine appropriate mitigation measures to manage associated foreign exchange risks that may arise as a result of seeking to comply with the terms of the new circular.

“Furthermore, we expect the overriding principle on eligibility of transactions for foreign exchange to remain applicable.”