For close to one year now the price of crude oil has remained below $50 development that has prompted a series of cost saving measures by operators in the oil and gas industry.
But in this interview, the Chairman and Chief Executive Officer (CEO) of Oilserv Limited, Engr. Emeka Okwuosa, admitted that the downturn is certainly taking a negative toll on oil and gas companies, warning that downsizing at this critical period may not be the best way to go.
The Oilserv boss addressed the challenges confronting implementation of Nigeria’s gas master plan and the need to have a cost reflective gas pricing model if the sector is to record the required growth.
Reducing our cost means looking across board. Also let me stress that reducing cost is not about firing stafs, I don’t believe in that. What we are doing is that if we have a scope of job that will take us four months, how do we make it work in two or three months?.
When you reduce the time, you make your efficiency better, and then you reduce your cost. And so, it is about ingenuity. I believe strongly that trying to cut cost by reducing staf strength is the worst thing that can happen to an economy like ours. This is because many would be thrown into the job market there are no jobs thereby increasing stress, crime and desperation.
I know it is difficult for some companies to keep staff. Make no mistake about it, if you don’t have money, how will you pay salaries?
Some companies have brought their workers together to tell them that this is realistically what they have. ‘Can we cut down the salaries temporarily so that they can get something across board for every worker?’ The idea behind this strategy is to absorb everybody and work together to see how the company can grow and increase its intake.
It is a matter of understanding between companies and the workers. But reducing staff strength is the worst thing to happen and whatever that can be avoided should be avoided.
Let me correct an impression that the implementation of local content in Nigeria or its equivalent anywhere in the world jacks up the cost of contract. That is not true. Rather, it brings down the cost of projects and that has been proven in several parts of the world. What is important is how it is managed.
The last Executive Secretary of the Nigerian Content Development Monitoring Board (NCDMB), Ernest Nwapa, moved it from inception and got it to where it was before he moved on because his term of office lapsed.
Now, I believe that the current Executive Secretary is well vast and knowledgeable to be able to deal with issues and I believe he is dealing with the issues.
But what is important is that from experience, I have seen and also by being a part of the development of the local content with Petroleum Technology Association of Nigeria (PETAN) prior to coming to the stage where we began talking about putting it together as an Act as early as 1990, we knew what was expected and we have seen much of the expectations being realized.
But, I can tell you that there are some issues that have come up lately and must be urgently addressed in order not to erode the gains for it not to destroy the entire process. And this issue has to do with briefcase carrying companies, roaming all over the place in collusion with people within the system to destroy the gains recorded over time.
For instance, you now want to raise a bid list for a tender, and you see companies that are just there in the name, coming up under the guise of local content. This, to me, is not right. I believe that we have to encourage people to grow, but there has to be a process and that process must be properly vetted. We should not politicize local content, and if we do not take care of this now, it will be a huge disaster in a long term.
Another issue is going on now in Engineering Procurement Contracts (EPC). I will be specific about this. There are few of us in some local EPC companies that have developed capacity. For us at Oilserv, we have been in existence since 1995, employing more than 500 people; and built so many pipelines more than any indigenous company in Nigeria. But the situation we have on hand now is that we know that most of the pipelines used here are not being produced here.
However, we are aware that most of them are imported.
Ironically, we have NCDMB setting up a system whereby one can qualify by bringing in the pipes by a Memorandum of Understanding (MoU), and then they claim to have done ground breaking after which the licence to import pipes was granted to them.
At the end of the day, indigenous EPC companies are being asked to buy from them. But Oilserv as an EPC company has more capacity. So the issue is, why should I go and buy from a briefcase carrying company who claimed it was going to build a pipe line. And for the past two years, nothing has been done about it. If I go and patronise that pipeline procurement company, they will still go oversees and buy them, thereby adding cost and increasing the cost of the project. This is wrong and has to be addressed. It is a scam. Today, what we see is that, in some tenders, they register them to bid as EPC companies. They don’t employ anybody, they have never welded any line and then, they go there, get the jobs and come back to us to do it for them.
It is a scam that needs to be addressed. I have addressed it with PETAN, and we must have to look at this because there are other parts of the industry where these scams are beginning to occur. It is a scam for any company to wake up and say they are going to build a pipe mill. And for NCDMB to make it a condition, that you must be ready to build a pipe mill , is not the best . If you ask contractors to build a pipe mile, you are going to end up with 100 pipe miles. The question is who will buy them? Where do we need the pipes? Rather, there should be a programme where NCDMB should put together serious EPC companies and should invest to build one or two pipe lines. This is because; you don’t need the whole of these pipe miles to feed the nation.
So, let us be practical. This is an issue that we have to address. This is an issue that will kill the local content if it is not addressed.
Reconciling losses
In terms of numbers, I’m very worried about that. But what is to be noted is that such activities have come down drastically. We can easily say in the past one year, close to 50 per cent of activities have disappeared.
Now, to calculate what it translates to in terms of billions of dollars requires some work, scenarios and picking information from different agencies. What is important is that such activities have dropped and will still continue to drop if oil prices don’t rebound.
I’m saying clearly that I don’t see oil price rebounding even in the next few months or one year. If you find out what is going on, and start to marry demand and supply, we have more potential for oil price to further drop.
This is so because if the likes of Iran could satisfy the people in the West, one will expect more oil to come to the market. That’s a fact. There are also other scenarios. We all know the economy of the world is not doing well. If the perspective is that it is not going to do well in the next one year, it will downplay the oil market and traders will always speculate because the market is all about trading. And once they are speculated, they drag down the price. That is for certain. And if we want to discuss about gas, it is double sided. Gas in oil and gas industry comes in two phases. Associated gas that comes with position of the oil, which is the reason behind gas flaring, because companies do not have the capacity to utilize the gas and then it is being flared.
The other is non-associated gas. And this is purely a situation of a gas field that has no oil or liquid, but they want to produce that gas for the sake of production.
Another fact is that the prices of gas have some correlation with oil but not entirely. This is because gas is priced based on demand and supply internationally. You might be aware that when the prices of crude dropped to $60 per barrel, the gas pricing model was still pegged at $2 to $3 and it didn’t change.
But in the past months, gas price has dropped and that reflected the situation between supply and demand. Also looking at the heating requirement based on the climate. Gas prices internationally are below $2 now and it is still very low.
For instance when you narrow this down to Nigeria, Nigeria is a whole issue because it is peculiar. Again, over the past 10 years or more, we have not been able to develop our gas system.
What is gas? Gas is only meaningful when you can have the infrastructure to transport it. It is not like oil that you can put in tanks and then move. You must match production and utilization. You cannot store gas.
The only way gas can be stored temporarily is by Liquefied Natural Gas (LNG) or Compressed Natural Gas (CNG). But LNG’s are bigger quantity where you liquefy it and then move to somewhere else. That is a different industry. But for domestic gas utilization, you must match production with utilization.
The two key issues are the issues of infrastructures which is not there and that of pricing. The gas pipeline network and treatment centers are not there. What we have is not sufficient. For example, if the gas master plan was fully executed, by now we would have completed building gas pipeline to Kano. Also, we would have sorted out gas pipeline construction to Umuahia, Calabar and Ajaokuta. Many things would have happened for industries attain its peak. And this would have made it easy for manufacturing firms to take up this gas. Also, if the country does not have appropriate pricing for gas, the companies will not produce because they cannot produce at a loss. There is a cost of treatment, transportation before it goes to the network. These costs must be covered. That is why I am always a proponent of willing seller, willing buyer. But there has to be regulation.
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