Oil and Gas Market in Nigeria

The Nigerian oil and gas industry can be divided into 3 broad sectors, namely; upstream sector, downstream sector and services sector.

The Upstream sector is characterized by exploration and production of crude oil and gas. The upstream oil sector is the single most important sector in the economy, accounting for over 90% of the country’s exports.

The downstream sector is responsible for refining and distribution of petroleum products. The major players being Oando, Forte Oil, Total Plc, Mobil Oil and MRS.

The Oil service sector is wide and can be classified into Multinational and Local players. Any group of persons deemed to be providing support to the upstream sector is deemed to be oil service companies.

In the Oil and Gas Division, we strive to have a diversified portfolio of healthy and sustainable risk assets driven by low cost funds. We focus on deals and transactions where we have carved a niche for ourselves. Due to low crude oil prices, we are closely monitoring existing exposures. The ultimate goal for the Energy Banking is to be “bank of choice” to the top 10 names in each sector of the Oil and Gas industry.

IMPACT OF LOW CRUDE OIL PRICES ON THE OIL & GAS SECTOR IN NIGERIA.

There are many factors that affect the impact of low crude oil prices in the Oil and Gas sector in Nigeria. The downsizing or scale back of new projects plays a large role as low crude oil prices have significantly reduced the level of investible funds of the IOCs International Oil Companies (Foreign-owned companies e.g. Shell, Chevron, ExxonMobil) and have also made it very difficult for the FG(Federal Government) to meet its JV (Joint Venture). This is a form of partnership between 2 or more parties funding needs. Furthermore, this has stalled investment by IOCs, NOCs (National Oil Companies (Government (Nigerian) owned companies e.g. NNPC, NPDC) & LOC (Local Oil Companies- Fully or majority owned by Nigerian individuals)– yield and return on investment is the key consideration for rational investors. Secondly, militancy, vandalism, non-payment of cash call arrears, non-passage of the PIB have all combined to make the Nigerian situation dire compared to other oil producing economies. Lastly, budget cuts have played a significant role in this. Redundancy and layoffs at all strata of the oil and gas value chain is now the order of the day. The multiplier effect of the downsizing cannot be overemphasized; reduction in taxes, erosion of purchasing power etc would further entrench the recession which is now its third quarter.

CURRENT CHALLENGES IN THE NIGERIAN OIL & GAS INDUSTRY

There are many challenges in the Nigerian Oil and Gas Industry, some of which include the following:

1.    Near unavailability of FCY(Foreign Currency) for asset creation.

2.   The current low price of the crude oil has significantly affected the applicable income in some deals, as the volumes remain the same.

3.  Financing focus will be on the big names with strong balance sheet and operational efficiency. Banks are competing and undercutting further on these names.

4.    Credit risk of clients is real in the downstream sector.

5.    Crude oil price volatility a threat to profit margins which could lead to credit default.

By: Razak Shittu, Directorate Head of Energy Banking at United Bank Africa Plc.