Securing the future of Nigeria’s indigenous oil firms is a win-win for all

Indigenous Nigerian oil producers currently pump about 10 percent of national output and have invested billions of dollars in the past 10 years to position themselves for growth, and to play a bigger role in the sector dominated by International Oil Companies (IOCs).

There are at least 50 small to mid-sized Nigerian producers pumping between 1,000 and 100,000 barrels each day.

However, firms like Aiteo E & P Ltd, Seplat Petroleum Development Company, Shoreline Group and others who operate in the difficult terrain and environment that is the onshore Niger-Delta, have now been hit by an unprecedented global pandemic that has led to demand destruction and supply shock (from the Saudi-Russia price war) which has led to a massive glut.

Today oil prices have collapsed some 70 percent since January 2020 alone, amid a worldwide shortage of storage space for crude.

Dated Brent benchmark, a global reference for nearly two thirds of the world’s physical flows, plunged to $13.24 a barrel last week, its lowest since 1999, according to price reporting agency S&P Global Platt’s.

That means that Nigerian Bonny Light, would now sell under $10 a barrel, as it trades at a discount to the Dated Brent benchmark.

For indigenous Nigerian oil and gas producers this is an existential threat.

First of all majority of them have costs of production in the $30 – $40 per barrel range, largely as a result of the high costs of operation and security related expenses in the onshore shallow water fields of the Niger Delta, where militant attacks on oil and other energy infrastructure is rampant.

The indigenous producers mostly export their oil through the Bonny terminal fed by the Nembe Creek trunkline or the Trans Forcados pipeline.

Both pipelines are regular targets for attacks and sabotage which often leads to force majeure, (a measure that allows companies to delay or skip supply obligations) due to inability to evacuate crude.

Background

Leading up to the current global coronavirus crises and oil slump, indigenous Nigerian firms had just begun to recover from the 2015/2016 slump in global oil prices, domestic recession and militant attacks.

In a 15 months period, between February 2015 and April 2016 for instance, the Trans Forcados Pipeline (TFP) went offline, ensuring that revenues for most of the indigenous firms were hit.

To get around the militant attacks on pipelines, Seplat and other firms invested huge sums of money on acquiring marine vessels for alternative export routes for their crude.

At the same time these firms were coming off a period where they had to restructure loans with banks (due to the 2015/2016 slump), at not too favourable terms.

The 2010 – 2014 period were boom years for the oil sector both globally and domestically, and a lot of Nigeria firms were taking on assets (sometimes encouraged by the Government), being divested by the IOCs who were mostly retrenching from the onshore Niger Delta, due to security concerns.

A lot of the firms bought these IOC assets using loans from banks which were structured based on the oil reserves in the wells being acquired and assumed oil prices close to $80 – $100 per barrel.

Also the loan agreements were often structured in a manner that ignored force majeure.

So it is no surprise that when oil prices peaked in mid-2014 and began to fall soon thereafter, interest on the loans continued to mount (between 2015 and 2017), despite an increase in militant attacks and slump in oil revenues.