The Oil & Gas Industry across the globe is currently facing a major upheaval with oil prices crashing to an average of about $50 per barrel in 2015 from an average of around $100 per barrel in the preceding four years. The global supply of crude oil has increased significantly in the last five years from unconventional oil production in countries such as the United States of America (USA) and conventional oil production in Arab States such as Iraq. However, the global demand for crude oil has not risen at a commensurate rate with economic growth in Europe yet to recover in the aftermath of the subprime crisis and Asian economic growth fading.
The slower growth in demand for crude oil and the attendant lower crude oil prices have left many of the exploration and production companies across the globe with no option but to rein in on costs. The quickest path to achieving such cost cutting objectives for oil and gas upstream companies is through a review of investment plans with the aim of limiting capital expenditure to all but the most critical or profitable projects. Globally, oil and gas servicing companies have therefore been the first to fall under the sword of the significant decline in crude oil prices and the consequent cost cutting drives embarked upon by exploration and production companies.
The Oil & Gas Servicing Industry’s goods and services such as drilling, seismic data acquisition, pipelines, equipment, valves, fittings and engineering, procurement and construction are largely procured during the development phase and thus represent capital expenditure.
The Nigerian Oil & Gas Servicing Industry is estimated to be worth around $4.2 billion per annum or about 2.5% of the global market for oil & gas servicing, which was valued at $167 billion in 2014. The militancy in the Niger Delta followed by the uncertainty surrounding the conditions and passage of the Petroleum Industry Bill (PIB) had put a damper on the growth of exploration and production in Nigeria and therefore the growth of the Industry.
However, the Government’s Amnesty Program and a number of pro-indigenous oil & gas upstream policies have brought significant reduction in militancy in the Niger Delta and encouraged the development of previously shut-in wells as well as marginal fields. This led to growth in demand for oil & gas servicing goods and services which was largely met by indigenous servicing companies.
The Nigerian Oil & Gas Servicing Industry is, however, expected to witness some decline in activities in the short term amidst the harsher operating environment due to the significant drop in crude oil prices. The decline is, however, not expected to be as steep as that witnessed in the United States of America, Canada and other unconventional oil producing regions due to the lower cost of producing Nigeria’s oil deposits, which are primarily conventional.
The militancy in the Niger Delta and the impasse of the Petroleum Industry Bill had already suppressed the level of major exploration and production activities in the Nigerian oil & gas upstream industry with many of the International Oil Companies (IOCs) choosing to delay investments while the uncertainty around these two issues remains high. Therefore, the decline in activity in Nigeria is expected to come mainly from the development of smaller wells as the cost of production can be as high as $60 per barrel on these marginal fields.
The Nigerian Oil & Gas Servicing Industry has great potential to develop but this is highly dependent on the development of the country’s oil & gas upstream industry from where demand for servicing is derived. The decline in crude oil prices is expected to work in favour of the Nigerian Oil & Gas Servicing Industry in the medium term as Nigeria remains one of lower cost crude oil production areas in the world. We expect to see the resources of many oil majors diverted from the higher cost crude oil production locations such as the oil sands in Canada and shale in the USA to low cost of crude oil production countries like Nigeria. There will therefore be a marked increase in crude oil exploration and production activities in Nigeria and thus demand for the Oil & Gas Servicing Industry in the medium term.
Resolution of the uncertainty surrounding the PIB will be imperative for the Buhari administration in light of OPEC’s decision not to cut output but to target growth in market share by leveraging the cost advantage the organisation’s members have over non-OPEC producers. OPEC, led by the resolve of Saudi Arabia, has seemingly switched to a new crude oil market strategy of targeting market share gains as opposed to the former price targeting strategy.
This new strategy will have serious repercussions for each OPEC nation’s revenue optimisation strategy. Under the price targeting strategy, developing production capacity was secondary to ensuring there was commitment to cutting production when crude oil prices needed propping up. Pursuing a strategy of targeting market share gains, on the other hand, will require commitment to developing excess capacity to adequately nullify the threat of increased production from Non-OPEC members or higher cost producers.