In Nigeria, a spotlight on cost reduction

Nigeria

Pedro Omontuemhen, partner at PwC Nigeria, talks to The Energy Year about the impact of low oil prices on the Nigerian industry and promise in the country’s gas developments and marginal fields bid round. International accounting and consulting firm PwC’s involvement in Nigeria includes performing assurance, consulting and tax services for many IOCs, indigenous oil and gas companies, regulators and other stakeholders in the oil and gas other industries.

How have low oil prices impacted the Nigerian industry and what do you expect to see moving forwards?
Countries like Nigeria that are oil-dependent have been harshly affected by the oil price slump. This year’s annual budget stood on an estimated USD 55-per-barrel benchmark but since the global price of oil nearly halved, the federal government has had to take action and reduce this benchmark to around USD 30. We are currently witnessing a gradual increase in oil prices, and it is projected that they will reach USD 50 in the coming year.
Also, NNPC is a major participant in the industry, particularly with respect to joint-venture financing. Given the situation, both the quantity and the price of crude have been reduced, which has also meant that the capital available for funding joint ventures has been impacted. Many projects have also been suspended. The strategy the government and companies have adopted is that of cost cutting, which has been reflected in NNPC’s directive to reduce production costs by 30-40%, reaching USD 10 per barrel by the end of 2021.

What does the marginal fields bid round represent for the industry and its players?
The launch of the bid round was a very bold initiative taken by the government, especially in the midst of the pandemic. It is a clear indication of the eagerness of Nigerians to move forward, exploit the opportunities in the market and further grow the industry and the Nigerian economy at large.
Due to the nature of marginal fields, the volumes produced will be relatively low, which means that companies will have to be very effective in cost management. It will be a crucial moment to separate the “boys from the men” to see who has the experience to produce at an efficient rate. The challenge will be not only in the ability to acquire the licence, but also in the ability to start producing. Technology will therefore play a key role.
In fact, one of the stipulated requirements for bidding was to demonstrate knowledge of the industry and have appropriate production capabilities. Some indigenous companies will have to partner with IOCs and independent companies who can support them with the requisite technology and industry knowledge.

At what stage is Nigeria in its quest to enhance natural gas utilisation?
Nigeria has just started its journey towards maximising value out of its gas, and there is still a lot to be done. Investment is being pumped towards the construction of gas pipelines and there are already plenty of gas-to-power projects either run by Niger Delta Power Holding Company or by private firms such as Shell or Agip.
Nigeria is more of a gas haven than an oil one. There are huge reserves of gas and thus there is a lot more we can do to monetise it. The government is pushing to upgrade the country’s pipeline network, seen for instance in the AKK project, the OB3 venture and Seplat’s ANOH gas scheme.
The challenge is actually getting the financing for these endeavours and to further ensure they can fittingly cater for the domestic market. We will witness an uptick of gas utilisation in the coming years. Additionally, the government is planning to have [up to 1 million] commercial vehicles run on gas, so filling stations will offer gas instead of petrol for these. So, all sorts of initiatives are being presented which underscore that gas is the future in this country.

How important is it to monetise natural gas for the domestic market?
Nigeria wants to monetise the abundant gas it has but the underlying question is how to achieve this goal. The gas-to-people rhetoric pushed from above reinforces the efforts to make this resource useful for the sake of our economy and our people.
Exporting gas, as we are doing with our LNG scheme, encounters many competitive challenges so we must look inwards at the various opportunities we have here. For example, we do not have enough cooking gas and have to import it from abroad. We ought to monetise our own gas and make it available to the local market at an affordable price.

How is the country pushing ahead with its “refining revolution”?
The country is betting strong on the downstream sector. The Dangote refinery project is still under development and aims to process 650,000 bpd, which will totally change the downstream landscape in West Africa. We will be able to compete with the rest of the world in terms of supply of refined products, transforming the country from a net importer to a net exporter. It will also have a huge impact on the supply chain within the country.
Likewise, we also have modular refineries. Many licences have been handed out but there are only around 10 modular players that have started doing design and harnessing offtakers. Although these refineries deal with small volumes reaching 20,000 bpd, the total will account for about 200,000 bpd. One could say that the push towards building these smaller refineries is another gateway to the deregulation of the downstream sector. Through liberalisation, any modular refinery can produce petroleum products and sell them freely.
Lastly, government-owned refineries have proven to have very low utilisation rates, which today stand below 20%. These facilities are bringing in negative returns so privatising them would be a plausible option moving forwards.

What challenges has the power sector reform encountered in recent years?
The deregulation of the power sector was a positive move which opened doors to private investors. Yet, one of the challenges was that some of the players entering the sector did not have the required experience or capital. Also, even though the government privatised the sector, they still maintained strict control over power pricing. As a result, private players are not making enough money out of power sales to further invest in the sector. These firms have garnered enough experience to manage the business and there are people who are willing to invest. Yet there has to be a change in pricing schemes.
In addition, while GenCos [generation companies] generate enough power, not enough of it is transmitted or distributed. As a consequence, the state-owned Transmission Company of Nigeria and the World Bank are investing significant sums to reinforce the transmission infrastructure across the country.

Where should investment be allocated to overcome these gaps in the power sector?
Investment is required along the entire power value chain. The country has around 12 GW of installed capacity, the majority of which comes from gas-fired plants. However, many of these power stations do not have enough feedstock, which means that investment should be focused on building pipelines to take gas from the numerous fields in the Niger Delta to these facilities.
Secondly, the government ought to ensure that the power generated is actually being transmitted. Capital must be granted to transmission companies so they transfer the power to distribution firms. Support should also be given to distributors to ensure an efficient and effective supply of power to the end user. In addition, the implementation of meters and regulations is essential to avoid power theft issues. Thus, a holistic approach to the power sector is required to upgrade its coverage and overcome hurdles.

What specific services do you offer to the Nigerian energy industry?
We have a strong footprint and deep expertise in the energy sector. Apart from auditing, tax advisory and consulting on raising finance, we also focus on cost reduction strategies for oil and gas companies and market entry strategies for some power distribution firms. We are very involved in the local market, covering upstream, downstream and the power sector.
On the hydrocarbons side, we are providing audit services for major E&P firms. Given the deregulation of the downstream sector, we are also preparing many companies to restructure their businesses. In the power sector, we are strong when it comes to offering audit, accounting, tax and consulting services for DisCos [distribution companies] and generating companies.

Given the economic scenario, which of PwC’s services are now the most in demand?
Due to the challenging environment, the services most required by the energy sector now include cost reduction and cost containment. We have also seen an increase in requests for fundraising support, particularly among the local indigenous players. We have carried out M&A-related activities within the sector as well.
Moving forwards, cyber security and data analytics are areas we are watching. There is going to be an increasing demand for these services in the energy sector in the coming years, and we aim to be at the forefront of providing them.

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