Ayo Shote

There must be continued emphasis on the importance of using integrated services along the value chain, particularly during completion works.

Ayo Shote Managing Director for Nigeria and Equatorial Guinea Baker Hughes

in figures

Baker Hughes drilled its first well in Nigeria1959

Share of nationals in local workforce97 percent

Baker Hughes’ emphasis on integrated services in Nigeria

December 10, 2014

Baker Hughes managing director for Nigeria and Equatorial Guinea Ayo Shote discusses the impact of domestic operators on the industry and evolving business practices in the market. Baker Hughes drilled its first well in Nigeria in 1959 and is now one of the largest international oilfield services companies in the market.

Since 2013, what progress has been made in shifting the industry from contractual practices of bundling services towards integrated services?

Unfortunately, not enough progress has been made on this front. Traditional practices in the industry are a barrier to oilfield services moving beyond their role as contracted providers for specified services. While a shift in business practices always takes time in the oil and gas industry, there must be continued emphasis on the importance of using integrated services along the value chain, particularly during completion works.

Early adoption of this trend is most likely to come from the up-and-coming domestic operators that do not necessarily have the in-house expertise to manage operations on their own. These clients are the most likely to be open to the idea of running services through an integrated offering in order to take advantage of the knowledge and experience of international services companies.

Looking at the recent growth of domestic operators, what level of activity can be expected from them in the coming years?

Over the past three years, there has been a major rise in domestic operators contracting with oilfield services companies, such as Baker Hughes, at levels ranging from tens of millions to hundreds of millions of dollars. The producing side of the market is seeing exponential growth by domestic operators, driven primarily by international oil companies (IOCs) divesting concessions and marginal fields to these new operators.

As an oilfield services company, you could ignore these domestic companies in 2010. You can no longer do that if you want to remain competitive in today’s market.
However, in the medium term IOCs will continue to dominate a share of service companies’ revenue portfolios. The financial value of deepwater offshore projects far exceeds that of onshore projects. While onshore projects are growing in importance as domestic operators fuel their growth, the complexity and scope of offshore projects is much more significant. This, coupled with the increasing demand for game-changing technology and equipment from these plays, mandates much larger contract values than what you typically see for onshore projects.

 

Upcoming projects from Total and ExxonMobil will be big drivers of growth in activity, particularly for services companies that are primary or sole suppliers. Nevertheless, the gap between the IOCs and domestic operators will continue to narrow in the market and, over the long-term, domestic firms that are already moving aggressively into shallow-water plays could begin to mount large-scale projects of their own.

What is the biggest hurdle for domestic operators furthering their operational growth and building capacity?

Access to financing is the most significant obstacle to growth for domestic operators. The easier it is for these companies to get access to funds, the better it is going to be for us to deal with them. There are two major sources of funding: local and international. Due to the financial crisis in 2008, access to international funding has decreased, with the exception of local companies that have international companies as shareholders.

For purely domestic operators, however, local banks have had to assume a large role. Right now, banks are the largest source of funding in the Nigerian financial market. Unfortunately, the financial landscape in Nigeria does not offer the same level of low interest rates that you might see in international markets. These interest rates, when factored over time, may render some of the loans uneconomical in the eyes of the operators.

If domestic companies are able to keep sourcing funds successfully, how will this affect the balance of activity coming from joint venture (JV) and production-sharing contract (PSC) projects?

There is a need for oilfield services companies to better develop their strategies with respect to domestic operators. Upstream concessions can be broken down into JVs and PSCs. Some of the domestic operators have JVs with the Nigerian Petroleum Development Company, but in many cases they are in PSCs where they themselves must source the funds. JVs have slowed down in 2014.

There is no access to cash from JV partners, and as most IOCs’ concessions operate under a JV agreement, their activity has decreased somewhat. JV funding will in all likelihood return after the 2015 general elections, but this does not mean that the growth of PSCs will slow down.

In the next few years, the current trend seen with domestic operators onshore will begin to take hold in certain offshore plays. If domestic operators continue under the PSC or independent framework as they move into offshore plays that necessitate larger-scale projects, this could have a big impact on the industry.

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