By Elisha Bala-Gbogbo | From Bloomberg
Small oil-producing companies in Nigeria, facing slumping prices and rising debt, may need to combine to survive, the chief executive officer of one of the companies said.
“We don’t have that much leverage, the rapid drop is unprecedented” for the country’s small producers, Kola Karim, chief executive of officer of Shoreline Natural Resources Ltd., said in a phone interview Wednesday from London. “The reality is there have to be mergers in the industry because it’s difficult in a down market when you’re a small producer trying to weather the storm alone.”
Karim’s Shoreline Natural Resources, with output of about 60,000 barrels per day, is one of more than a dozen small producers owned by Nigerians, pumping between 5,000 and 100,000 barrels daily and accounting for about 20 percent of Nigeria’s production. Others include Seplat Petroleum Development Co., Neconde Energy Ltd., Conoil Producing Ltd. and First Hydrocarbon Ltd. The West African nation produced an average of 2.04 million barrels per day in January, according to data compiled by Bloomberg.
Royal Dutch Shell Plc, ExxonMobil Corp., Chevron Corp., Total SA and Eni SpA run joint ventures with state-owned Nigerian National Petroleum Corp. that pump the rest of the country’s crude.
Most of the smaller companies obtained financing based on a price of $70 a barrel, compounding difficulties from the fall in oil price while they struggle to keep production steady in the face of pipeline attacks and oil theft in Nigeria’s oil- producing region, according to Karim.
“Already at $50 a barrel, we’re under water,” Karim said. “The pressure is not only huge on the debt side, the pressure is also huge on the production side. You face the devil on all sides.”
Armed attacks led by the Movement for the Emancipation of the Niger Delta, fighting for the region’s control of oil resources, cut Nigeria’s oil output by 28 percent, mainly from the delta’s swamps and shallow waters, from 2006 to 2009, according to figures complied by Bloomberg. Though the violence subsided after thousands of fighters accepted a government amnesty offer in 2009 and disarmed, a surge in oil theft in recent years by gangs tapping crude from pipelines has left output hovering close to four-year lows.
Oil price at less than $50 per barrel makes production unprofitable for the smaller companies that pump at a cost of $30 per barrel, and have to pay taxes and incur extra security costs to protect installations, according to analysts including Pabina Yinkere of Vetiva Capital Management Ltd. Oil majors, such as Shell and Exxon Mobil, with larger economies of scale, pump at lower costs of about $15 for a barrel.
Brent crude, which compares with West African crude grades, rose 2.3 percent to $55.95 per barrel as of 8:43 a.m. in London, down 53 percent from last year’s highest point on June 19.
As Shell, Chevron, Total and Eni sold some of their onshore assets in Nigeria over the last two years, they were acquired by the smaller Nigerian-owned companies that funded their acquisitions with debt, banking on high crude prices to repay the loans, Yinkere said in a Jan. 30 phone interview from Lagos.
“It has become very challenging for many of the indigenous companies to sustain their operations and repay loans,” Yinkere said in a Jan. 30 phone interview. “The borrowing was done based on the fact that oil prices will remain high and these companies will be able to make sufficient margins to pay off the debt over time.”
Oil companies account for about 25 percent of Nigerian lenders’ total outstanding credit. At First Bank Plc loans to oil producers account for about 40 percent of its loans and at Access Bank Plc the figure is 35 percent, according to data compiled by Bloomberg. The two banks are the most reliant on lending to the oil industry, the data show.
The lenders are also hurting from the 27 percent plunge of the naira this year under pressure from declining crude prices, the source of more than 95 percent of the country’s export income. Adding to Nigeria’s currency woes is uncertainty about general elections initially scheduled to hold this month and now postponed by six weeks.
Some of the banks have started negotiations on how to reorganize the debts, Dolapo Oni, energy analyst at Lagos-based Ecobank Research, said in a Feb. 2 phone interview. “The banks are already starting to see that their revenues are now so low that they can no longer meet their payments,” he said.
Seplat, the leading Nigeria-based producer, pumping about 70,000 barrels daily, is in talks to take over London-based Afren Plc, which operates fields in Nigeria.
“I foresee a huge combination of mergers in the local market, we’re also looking for opportunities,” said Karim. “You’re better being part of a bigger player, so you can save on your cost and make good margins.”
