Lucky Fiakpa, Adekunle Adekoya, Hector Igbikiowubo, Babajide Komolafe
13 October 2008
(Page 3 of 3)
Checks revealed that owing to the global economic downturn, ongoing projects in Nigeria's oil and gas industry dependent on foreign financing may suffer setback. These projects initially had to contend with security concerns arising from the activities of militants operating in the Niger Delta. With a global financial meltdown well underway, chances are that outstanding projects may take a longer time leaving the drawing board.
A major problem facing Nigeria's upstream oil and gas sector is insufficient government funding of its Joint Venture commitments. There are two major funding arrangements for oil producing in the country: JV and PSC arrangements. Under the JV arrangements, the Nigerian government and its partners contribute to fund projects based on their equity holding.
Under the PSC arrangement, the oil companies' fund the operations and the profits are shared according to agreed terms after the company might have recouped its expenditure.
Since 2003 when federal government objectives of achieving 40 billion barrels of proven reserves and 4.0 mm barrels per day of production capacity by 2010, the Nigeria National Petroleum Corporation has tried to ensure that its funding request is consistent with the government objective.
Mr. Odein Ajumogobia (SAN), Minister of State for Energy (Petroleum) had late last year disclosed that $15 billion was the projected total investments in the sector for 2008 and that while the government is supposed to shoulder $8.8 billion, it had allocated only around $5 billion. The government had asked the oil companies to seek alternative funding for the balance of $3.8 billion on its behalf.
Shell, Chevron, Exxon Mobil, Total and ENI/Agip had explained that the 2008 budget was based on an oil price of 53 dollars per barrel.
A Shell executive who spoke on condition of anonymity explained that the company was going through very difficult times, adding that in 2007 Shell Petroleum development Company (SPDC) spent one billion dollars on pipeline maintenance alone. The company had initially been looking at a total budget of 6.6 billion dollars but pruned it drastically, first to 4.5 billion, then to 2.7 billion.
The multinational operators had gone ahead to secure alternative funding on behalf of government to cover the $3.8 billion shortfall, however, given the current realities in the international financial market, indications are that some other projects including: the Olokola Liquefied Natural Gas (LNG) project, the Brass LNG, the Nigeria LNG trains 7 & 8 expansion and the Chevron Escravos Gas to Liquids project among others may take a longer time coming off the drawing board.
In a recent release of explanatory notes on its operations in Nigeria, Shell served notice that it had so far spent $3 billion (about N351 billion) on gas flares down projects, adding that another $3 billion was requires to achieve government's objectives in the sector. Similar scenario applies to the other operating companies in the country. However, given the current global financial situation, chances are that funding may not be readily available.
In budgeting for the 2009 fiscal year, government had benchmarked the price of crude at $63 per barrel. Unfortunately, in the last two months prices have dropped from an all time high of $147.20 close at a little over $77.26 per barrel last Friday. Although analysts say the chances of oil price dropping below $50 per barrel is far fetched, it is pertinent to note that oil prices are largely driven by the fundamentals of supply and demand.
Financial Vanguard gathered that because of high energy costs, consumers have reduced their gasoline use at the fastest pace since the oil shock of the late 1970s. As prices peaked, oil consumption in the United States fell by six percent in July to its lowest level in five years. Meanwhile, gasoline demand had its steepest monthly decline since 1983, according to the latest figures from the U.S. Energy Department.
Consumption of oil in other developed economies is also dropping. Last month studies revealed that demand for fuels in France had declined by six percent this year.
In a piece published in the International Herald Tribune last week, Jad Mouwad disclosed that in the industrialised world, which accounts for about 60 per cent of global oil demand, consumption fell by 1.3 million barrels a day this year, the steepest decline since 1982, according to analysts at Bernstein Research. That would more than offset growth in consumption from developing countries like China, the analysts said. "A study of the 1980s reaffirms our pessimism about oil demand in 2008 and 2009," the analysts said in a recent research note. "Recent data suggests we may finally be reaching the point of negative demand."
As the global financial crisis takes its toll, indications are that the purchasing power of US and European consumers would continue to shrink with implications for current levels of fuel consumption in these countries. While it is anticipated that demand in China and India as well as South East Asian countries may replace dwindling oil supply demand from Europe and America, it is pertinent to note that the industrial boom in these two emerging economic giants have been largely fueled by consumer demand in Europe and America. Essentially, oil at $50 per barrel or below suddenly doesn't appear a remote possibility given unfolding realities.
Some experts opine that in view of the current realities, the Nigerian government and the organized private sector needs to periodically reappraise the country's level of exposure to the global financial melt down and take steps to safeguard the domestic economy, while seizing the opportunity provided by the development to invest in equities that may yield bumper dividend when the situation turns around.
Government's Efforts to Address the Problem
The pain was more felt, so it seems, the investors down the street. Many who borrowed to invest witnessed their investment collapse in their faces. First they were told it was just a temporary thing that would soon bounce back. But as month roll in months and share prices continue their downwards slide, it became apparent that certain measures must be taken to sustain investors' confidence.
In a bid to stem the meltdown in the capital market, the Central Bank of Nigeria (CBN) only last week granted reprieve to banks with large portfolio of margin facilities by approving their request to restructure such facilities for a longer period.
Margin loans are facilities extended to investors by banks for the purpose of share purchase to buoy up individual and institutional investment portfolio. Some of these facilities have, however, fallen due for repayment but are still outstanding because of the current low share price regime in the stock market, which makes repayment difficult, if not impossible.
The Prudential Guidelines for banks stipulate that facilities that are three months old but not performing should be classified as "doubtful". If after six months, and they are still not performing, they should classified as "non-performing" and said to be "bad" after six months when the banks are expected to start making provision for them.
It is estimated that the banks may have granted as much as N336 billion margin facilities to investors, prompting insinuations that the banks may have lost substantial money to the stock market crash.
The Federal Government had a meeting with the management of the NSE and other stakeholders in Abuja a couple of weeks ago. A number of measures were adopted by stakeholders to stop the tide of sliding fortunes of stocks in the country. The meeting resolved that the office of the Attorney-General of the Federation should issue an exemption to the provisions of the relevant sections of CAMA, to permit quoted companies to buy back up to 20 per cent of their shares to curb the spate of bearish trading in the market.
The CBN was also directed to take appropriate measures to ensure adequate liquidity within the system to oil operations in the capital market. The meeting also resolved that a Capital Market Stabilisation Fund be established, as an intervention instrument to stem the meltdown in the market.
Also, the commercial banks were advised to restructure existing facilities to aid operations of licensed stockbrokers, institutional and individual investors on longer repayment terms. Both the Securities and Exchange Commission (SEC) and the NSE, and all capital market operators also agreed jointly to reduce the burden on investors by cutting fees significantly. It was also directed to review its trading rules and regulations.
The NSE has since cut its fees by 50 per cent and taken the following steps: One per cent maximum downward limit on daily price movement would be allowed, while the current five per cent limit on upward movement is retained.
The CBN on its part, has injected liquidity into the economy through intervention by rolling out a number of measures, which has increased the liquidity by over N1 trillion. The measures include, a reduction in the bank's benchmark interest rate by 50 basis point from 10.25 per cent to 9.75 per cent; a reduction in the Minimum Liquidity Ratio (MLR) from 40 per cent to 30 per cent; and the Cash Reserve Ratio (CRR) from 4 per cent to 2 per cent, and they are aimed at reflating the economy by N1.05 trillion.
Additionally, the CBN has also allowed banks to buy back their securities and extended the lending window to 365 days (one year), as opposed to overnight lending. About six banks have also agreed to provide about N600 billion bailout facilities to the market. Although there are conflicting signals as to the authenticity of the claim, more banks filed out last week in readiness for the bailout.
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