Local content proves useful during Covid-19 crisisMay 19, 2020
Timi Austen-Peters, chairman of Dorman Long Engineering, talks to The Energy Year about the status of the company’s operations, the importance of developing local supply chains and how investors have reacted to the crisis. Dorman Long operates three fabrication yards, including one with a hot-dip galvanising zinc plant.
What changes have taken place on the EPC services and fabrication scene in Nigeria since March 2020?
The obvious change is that we have had to respect a series of local directives about shutting down. Most of the production yards were shut for the whole month of April, and we are just now looking into reopening during the month of May on a skeletal basis. However, offshore and maintenance work has gone on non-stop, as the FPSO, refinery or other essential oil and gas infrastructure must continue rolling.
We still keep and send people on such kit, although we are being very careful about how we do this, even if it means employees will have to work longer hours and irregular shift times. The health and safety of our workers remain paramount at all times.
In terms of Dorman Long’s fabrication and other operations, we had stopped for a while, but now we are starting up again. In terms of FIDs and ongoing contracts, we did not see much impact or have too much negativity there. Only one fabrication contract with an IOC is on hold, and we were told to wait until the end of the year for more clarity. Thankfully, it was not cancelled or abandoned. I think it is just a cash flow issue for them.
But other than that, all work is ongoing. We have daily meetings with project engineers, mobilising the best we can and getting everything ready for the different projects we are doing. Everything for NLNG Train 7 still seems to be on track. The FID is done, and the local content regulator recently issued a press release indicating that all of the criteria from its perspective have been met.
However, we are approaching things cautiously, treading gently and going step by step. Of course, many clients are having issues and indigenous companies are facing cash flow constraints, but we are working with them to see how we can stretch the budgets and manage timelines.
Do you see room for more rate reductions from the service companies?
The reality is that you can always squeeze, but you don’t always want to do that. We have tried to have grown-up conversations and show our clients very transparently that we are still dealing with major cost cuts that were implemented in 2016 and 2017, and we have not raised our prices since then, even when oil prices went back up. Now, to offer a compounded price cut is a bit of a challenge; however, we try to see what we can do. Of course, a 40% rate reduction is not a reality, as our margins were never 40% to begin with.
How clear was the emergency communication from the government?
We are particularly lucky here in Lagos because we have a governor who is very proactive. He seems to have set an example for other states. In some parts of Lagos, people ignore the recommendations, but the clarity is there from the government’s side.
Moreover, we have always been involved with the local community. We support a local technical college, we provide scholarships and on-the-job training, and we get our engineers to give practical lessons there. The need is different right now, so we contributed food and all sorts of packages to the local community too.
Do you see companies in your area searching for new efficiencies to try to weather the crisis?
Absolutely. We use this time to look at everything. We had a couple of strategic discussions in which nothing was off the table. What do we want to be? Where do we want to be? This is a time of opportunity when things are relatively quiet, so we have been using this time to take another look at the company and we are halfway through this process.
Has the Nigerian local supply chain become more resilient to global challenges since 2014?
Because of local content, there has always been a solid bedrock of people we work with, places to buy equipment, etc. So, it is not as if suddenly we cannot get anything because it all has to come from China, the US or the UK. For the most part, we have always looked at how we can collaborate with local subcontractors to purchase equipment instead of picking up the phone to contact companies in the US. In terms of our supply chain, other than the fact that Nigeria does not produce a lot of steel, which is a problem for us, we are in good shape.
Because of the previous crisis, we had already decided to look within the Nigerian market because of price. Now, that trend is just continuing, and we analyse the local market to see if there is any company that can do it cheaper or faster. For the few people who still doubted the importance of local content, this present set of challenges was a demonstration. We need to be able to rely on ourselves within the country so that we can keep going no matter what.
With the borders now closed and people and goods not being able to move, the economy would have had real trouble had this process not taken place. Luckily, projects can still go on, as Nigerians have been trained over years to do the work previously done by expats.
Do you expect an uptick in asset management in this atmosphere?
Yes. We saw this last time because of the reduction in oil prices. Companies did not do anything for a while, but after realising that the situation wasn’t changing and they still need to produce and look after the infrastructure, they started to care about asset management and lifecycle extension. Once there is less money, companies start looking at how their budgets can go further and how the infrastructure can last longer.
What is your message to investors who are hesitant to invest in Nigeria now?
We have a vast industry which needs to keep growing for a very long time, regardless of the emergence of solar panels or electric cars. The world will certainly still need hydrocarbons, and we are contributing to that in a fairly significant manner.
IOCs, whether American or European, have their own peculiar problems. Europeans seem to have a much greater handle on how to go about things, and their level of commitment seems to be completely unshaken. They are moving forward, and they will continue no matter what. I guess they also have more invested here than others.
We have one investor, a private equity company based in England, that is already looking at Dorman Long. We are on the second level of due diligence, and they are pretty much unshaken.