By Michael Eboh

Oil and gas firms that borrowed huge amount of money at high interest rates from financial institutions in the country would be forced to relinquish some of their stakes to the banks if they hope to continue in business, Vice President, FBN Capital, Ms. Rolake Akinkugbe, has declared. Akinkugbe, in an article in: The Oil and Gas Year, warned that marginal fields’ operators that are yet to commence production on their fields will be the worst affected.

She said, “Assets that were purchased during the industry’s up-cycle will be most heavily impact by low oil prices. “For Nigerian companies that have taken on significant debt at heavy interest rates, parceling out more equity than envisioned may be necessary to stay afloat. This is particularly relevant for non-producing marginal field operators that have licences on the cusp of being revoked.”

She lamented that while 30 fields were licensed in 2003, less than 10 have gone on to produce as at 2015, including those operated by exploration and production companies, such as Midwestern Oil & Gas, and Waltersmith.

She noted that some of these marginal fields’ owners will need to de-risk completely and optimise production where possible, adding that attention will also be directed at improving corporate governance and transparency, in order to attract investors, even as they take advantage of local content opportunities.

She said, “While technical capacity is important, no business can function without capital. A buyer’s market has emerged. Only a few independent companies in the market that have a good asset footprint, are cash rich and are looking for opportunities to diversify their portfolio.

“Private equity that has played a huge role in investment in West African offshore exploration may taper out, as disappointing investments in countries such as Ghana and Uganda – where anticipated exit investments of two-three years were not achieved – have made private equity players more conservative in their investments throughout the region.”

Akinkugbe further stated that oil and gas firms will be faced with a tough operating environment in 2015, due to low oil prices, adding that the primary area that will be most affected by the low prices in the West African value chain will be the exploration business. According to her, in 2015, there will be changing levels of activity in the short and medium term as low oil prices and market cycles exert pressure on companies.

She said, “The future of upstream activity in West Africa’s offshore is tied to a host of market- and company-driven factors that will reshape the industry. In the years leading to 2015, there has been a surge in activity and enthusiasm in the potential of offshore oil and gas reserves in West Africa and the Gulf of Guinea.

“In 2015, there will be changing levels of activity in the short and medium term as low oil prices and market cycles exert pressure on companies. However, depending on the size and scope of a company and the health of its income statement and balance sheet, the impact on oil prices will be varied and in some cases may be a blessing in disguise.”

Akinkugbe, however, stated that the downturn in oil prices will not lead to a halt in exploration, adding that instead, companies will be more selective in deciding which assets to pursue. “For each additional barrel of oil produced, a company aims to raise its exploration budget and capital expenditures in order to maintain the reserves-to-production ratio at a certain level.

“Once discoveries have been made, the threshold profit margin for meeting investment approval, which can be impacted by investment cost, asset scope and reservoir characteristics, will probably rise as a result of low oil prices, as per unit revenues will be lower.”