Tackling Nigeria-Specific Risks in Oil and Gas Industry

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Operating risks peculiar to Nigeria’s environment have continued to drive the costs of oil and gas projects in the country above the global benchmark.

Despite the efforts of the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu and the oil and gas-producing companies to drive down the costs of projects in Nigeria, the industry operators have continued to be challenged by cost premium, which falls outside their direct sphere of influence.

The cost premium, which is dictated by Nigeria-specific drivers, according to the operators, represents costs above the global benchmark.

A study conducted by the Oil Producers Trade Section (OPTS) of the Lagos Chamber of Commerce and Industry (LCCI) identified these cost drivers to include insecurity, overregulation and bureaucracy; and absence of infrastructure.

Indeed, insecurity, especially in the oil-producing Niger Delta region, posed the greatest threat to the survival of the oil and gas industry in Nigeria, inflating the costs of projects beyond global average.

The Executive Director in charge of Projects at the Niger Delta Development Commission (NDDC), Mr. Adjogbe Samuel told THISDAY in a recent interview that apart from pipeline vandalism, insecurity had also killed industries in the Niger Delta.

“In those days when we graduated from the university, you would not say that you were looking for a job if you had not had the opportunity of coming to Trans-Amadi Industrial Layout in Port Harcourt because there were chains of industries along that layout. Let us go back to Warri in Delta State where I come from. Enere too was a popular area. From the beginning to the end of Enere road, there were chains of oil services companies. But today, those places are like desert. Nobody exists in those areas anymore,” Samuel explained.

Samuel said the Niger Delta was like a lawless area, stressing that the narratives have to be changed as the Niger Delta has gotten enough technical skills to survive.

“But perhaps, what is missing is the sub-skills – the skill to recognise that if you assault me, you can be prosecuted and jailed; the skill for us to recognise that if you go and burst a pipeline – it is not an agitation but economic sabotage. So, our own value system and attitude should change,” he added.

Oil industry perspectives

To the Oil Producers Trade Section (OPTS) of Lagos Chamber of Commerce and Industry (LCCI) insecurity in the Niger Delta has created a Nigeria-specific cost premium for the petroleum sector, with operating costs and projects costs significantly higher than in other countries by as much as 100 per cent.

In a report titled “Nigeria Cost Premium and Drivers: Petroleum Sector,” the oil and gas producers stated that they spend five times more on security than their global peers, with over $500 million spent in 2016 on security services such as escort vessels, convoys and guards.

According to the operating companies, they also rely on costly transportation options for personnel and goods, such as helicopter transport and aviation as a result of the insecurity of Nigeria’s waterways.

The producing companies identified a cost premium of between 15 per cent and 65 per cent for operating costs, and 35 per cent and 100 per cent for costs of projects.

OPTS also identified insecurity, overregulation and bureaucracy, as well as inadequate infrastructure as the major divers of costs in Nigeria.

The report noted that security environment in the country has remained volatile, particularly in the Niger Delta, adding that security challenges result in cost premium for the oil and gas sector, affecting both operational and project costs.

“Operational costs are impacted by incessant militant attacks and sabotage, illegal bunkering, piracy, kidnapping and armed robbery. In June 2016, production dropped to its lowest level in 20 years following a series of attacks on petroleum producing assets, including the Forcados pipeline, Escravos 24-inch gas pipeline, and Qua Iboe export line,” the report explained.

The report further stated that when security incidents occur, unforeseen costs and losses are incurred.

The oil and gas producers cited such unforeseen costs and losses to include; unplanned expenditure for emergency repairs arising from attacks and vandalism, as well as deferral of production and loss of income for the government and the operators as a result of disruption of operations.

On average, the report said about 400,000 barrels of oil equivalent per day was deferred in 2016 as a result of security challenges.

The report also noted that preventive costs to safeguard lives and property in Nigeria are significant, adding that Nigeria’s oil and gas operators spend five times more on security than their global peers.

According to the report, over $500 million was spent on security services in 2016, while huge amount was also spent on costly transportation options for personnel and goods, such as helicopter transport and aviation as a result of the insecurity of the waterways.

On the issue of overregulation and bureaucracy, the operators argued that Nigeria’s regulatory environment is fragmented, with duplicated agencies, overlapping regulations and overregulation, culminating in excessive bureaucracy.

The report stated that excessive bureaucracy results in increased costs for both the government and the operators.

The operators identified the Department of Petroleum Resources (DPR), Ministry of Environment, National Oil Spill Detection and Response Agency (NOSDRA) and the National Environmental Standards and Regulations Enforcement Agency (NESREA) as overlapping agencies with jurisdiction over the same aspects of the oil and gas industry operations.

The report also cited multiplicity of tariffs, levies and fees as some of the costs drivers.

According to the operators, the contracting cycle in Nigeria is about 36 months while it is only six or eight months in Angola, Saudi Arabia, Venezuela and Indonesia.

The Chairman of Shell Companies in Nigeria and Managing Director of Shell Petroleum Development Company of Nigeria (SPDC), Mr. Osagie Okunbor, who is also Chairman of OPTS, said in a recent OPTS event in Lagos that the challenging fiscal regime, security and environmental circumstances had continued to hamper investments.

“As complex and difficult as the Nigerian business environment may be described, there are opportunities for improvement and opportunities for growth. That is what we see in OPTS. Working with governments at all levels, we have the responsibility to get the right policies for our people and for the country,” Okunbor added.

Chief Executive Officer of Waltersmith, Mr. Abdulrazaq Isa had argued that the country needed a competitive fiscal regime to attract investments, adding that the reform in the industry has protracted for too long, thus leading to dearth of investments for 10 years.

According to him, the country needs to conclude the reform to stay competitive, adding that Nigeria still needs oil to get out of oil.

Isa charged the government to make the environment attractive as capital only goes to where it is welcome.

While charging the federal government to incentivise the operators to make investments, Isa argued that “squeezing the golden goose for more eggs will lead to its dearth.”

Also speaking at the recent OPTS event in Lagos, the Vice President of Nigeria, Prof. Yemi Osinbajo identified security and environment, funding issues, high technical costs and obsolete legislations, as some of the major challenges and noted that the federal government is addressing these challenges.

To address these Nigeria-specific risks, which have pushed cost of projects in the country above the global benchmark, the producing companies have recommended government-led initiatives, supported by the operators.

The oil and gas producers noted that addressing the issues of insecurity, overregulation and bureaucracy, as well as inadequate infrastructure would improve business climate in the country and increase its global competitiveness.

According to the operators, this will help attract the investment required to boost oil and gas production, and increase government’s revenue.

To the NDDC director in charge of projects, the Niger Delta of his dream is a Niger Delta that is working like Lagos.

“I challenge the governors of Niger Delta to make deliberate efforts and formulate laws and policies that will enhance peace in the region. That is the Niger Delta of my dream. The environment that we have has different business opportunities but because of the insecurity in the area, nobody is harnessing those opportunities, rather people are running away on daily basis. Here in Port Harcourt, some people are selling their houses and relocating. My friend has placed his own premises on sale for the past one year for N40 million but nobody has shown interest on the property,” Samuel added.

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