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Smooth, rough roads for oil and gas operators

Published by The Nation on Wed, 07 Jan 2015

Stakeholders in the oil and gas sector industry are to brace for positive and negative changes this year. AKINOLA AJIBADE writes on what will shape the energy sector.The oil and gas sector is replete with good and bad; gains and pains. In recent times, so many issues have dominated the industry. They include: the global prices of crude oil, the fixing of the budget below the oil benchmark of $65 per barrel, the fear that the Federal Government may cut the benchmark further in the event that oil price continue to fall, the introduction of austerity measures to mitigate the effects of falling oil prices, refineries maintenance, dwindling crude oil production and oil theft. They all have the capacity to determine the tempo of activities this.The divestment of shares in the nations oil industry by the multinational oil companies, governments decision to increase the domestic price of gas to encourage power sectors growth, approval of N231billion power intervention fund by the Central Bank of Nigeria (CBN), increase in tarrifs for the industrial concerns and the plans to extend it to household consumers of electricity, planned take-off of the Transitional Electricity Market (TEM) and rolling out of pre-paid metres by the power distribution companies (DISCOs) before the end of the first quarter would also determine where the pendulum will swing.Industry observers said the issues are not only germane but capable of influencing the direction which the sector would move this year. They said these issues would directly or indirectly affect the growth of the industry. Of note is the noticeable decline in the global prices of crude oil, a development partly attributed to the rising profile and growing acceptability of the United States Shale oil in the global market, crisis in the Middleeast among others.Below are the synopsis of the issues, and how they can shape events in the industry.Falling crude oil priceThe prices of oil in the global market will be one major factor that would determine the economy outlook. With the oil market experiencing a sharp fall in prices from over $120 per barrel in August to $57 per barrel in the last quarter of 2014, coupled with the likelihod that prices may slide further, observers said the issue will affect Nigeria because it depends on oil for sustenance.A professor of Petroleum Economics and Policy Research, University of Port Harcourt, Wunmi Iledare, said the government derives between 70 to 80 per cent of its revenue from crude oil transactions, arguing that the crash in oil prices would stall the implementation of many critical infrastructural projects.He noted that Nigeria, being a mono-economy nation, which depends grealty on oil for growth, will be affected by the slide in the price of oil and rub off on the operations of the federal, state and local governments.He said: The country is experiencing the harsh-effects of the falling crude oil prices, going by the various adjustments made in the 2015 budgetary allocations. The government has introduced austerity programmes to cut spendings. What this means is that some fiscal projects would suffer in the light of unsavoury developments in the global oil market. In the event that the price falls further, the government may have to review its fiscal activities for growth.Iledare, who is the President, International Association of Energy Economics (IAEE), however, said the country will make up for the loss incurred from dwindling oil prices, if things change.His words: From my own assesment of the happenings in the international crude oil market vis-a-vis Nigerias macro-economic environment, I think at $57 per barrel, the country is still in a safety zone. The market dynamism is there, which means that the market reacts to the forces of demand and supply.Price volatilities could change anytime from now. Nobody can say exactly when the price would change. Whether now or in the future, what I know is that Ngeria would benefit once the oil price improves.But the Chief Executive officer, Financial Derivates, Bismarck Rewane, said the austerity measures might not absorb all the impacts of the price decline.According to him, the government unveiled austerity measures as its immediately response to the falling oil prices.Rewane said the austerity programmes as introduced to guide the fiscal activities, though good, was not enough. He urged government to come up with other measures cushion the effects of the price fall.Rewane said:What we are seeing now is not a short-term phenomenon. Whether the theraphy is adequate is another issue. But I think it is a good move and the government has not ruled out other moves.Power to GasThe approval of an increase in the price of gas to the power plants from $1.5 to $2.5, excluding $0.8 transportation cost, making a total of $3.3 per million British thermal unit is a welcome development in the power sector. According to the operators, the idea will help in improving electricity generation and further impact on the larger economy positively.Power Minster Prof Chinedu Nebo described the increase in gas price signals as a good omen for the sector as it would improve electrcity generation and distribution. Nebo, told reporters in Lagos that the price increase would benefit gas suppliers and power plants.The minister argued the idea will have multiplier effects on the sector. He said power would improve, once problems such as gas shortage, distribution network and transmission challenges are tackled.Also speaking, the Chairman of the , Nigerian Electricity Regulatory Commission (NERC), Dr. Sam Amadi, said the increase in the gas price will not onle attract investors into the oil and gas sector but also ensure adequate power supply to industries.He said:With the new gas price, we expect some increase in power production. Already, some of the gas suppliers have made some commtiments but we are certain that this new gas price will help in the longer term, because people will on that basis begin to make investments in gas infrastructure, knowing that the price is good and will be indexed. It has the potential of enhancing the capacity of gas to power going forward. It will unlock the sector for more investments and in the interim, it will ensure that we have more gas to power our generators.He urged the ministry of power to hands off the transmission company and allowing it to have a board with clear directives.Amadi said such step will encourage private investment in transmission, saying the industry would be the better for it.Legacy debt paymentBefore the end of last year, the Central Bank of Nigeria(CBN) approved N213 billion as power sector intervention fund, out of which it paid N36.9 billion as legacy debt owed gas suppliers.According to operators, the development has not only eased the problems of gas suppliers but stimulate their operations.The Chief Executive Officer, Seven Energy International Limited, Philip Ihenacho, said any attempt to reslove the problems facing stakeholders would lead to the growth of the sector.According to him, what operators such as gas suppliers, pipeline contractors, power plants and others in the electricity value chain want is the enhancement of their operations.He said that any intervention geared toward the improvement of their operations would bring about a corresponding increase in power generation and supply.Crude oil productionFor sometime, Nigeria has been battling to increase its crude production above 2,500 million barrels per day and it is not likely that production would increase soon.Iledare blamed the the low crude oil produc on internal and external factors, arguing that the inability of the government to tackle the problems headlong would further affect production.He listed probelms such as crude oil theft, pipeline vandalism and other untoward practices as thsoe affecting oil production and exploration activities, as well as eroding confidence in the industry.He said:With the country struggling to produce above 2.5 million barrels per day, it is not likely that there would be increase crude production this year. Giving the fact that there are many problems in the industry. It is somewhat difficult to prop up crude production. If Nigeria decides to increase crude oil production, it is not likely going to get real value on investments considering the fact that the international oil prices are crashing.Refineries maintenanceThe four refineries namely: Warri, Kaduna, Port Hardourt 1 &2) are performing below installed capacity because of decades of neglect by successive governments. The Turn Around Maintenace echanism (TAM), introduced by the government to ensure that refineries resume full production has yielded little or no results.A lecturer in Petroleum Economics, University of Ibadan, Prof Adeola Akinnisiju, said the operation of the refineries might not improve, unless the government take urgent steps to address the problems. Akinnisju said lower output from the refineries would continue since the government is not ready to repair them.Spokesman fof the Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN), Babatunde Oke, said governemnts inability to repair the refineries would further affect their operations in 2015.Power sector trainingThe Director-General, National Power Training Institute of Nigeria (NAPTIN), Rueben Okeke, has foreseen a bright future for operators in the sector, following governments decision to establish the institute.According to him, a competent and dedicated workforce will emerge this year because the agency has trained thousands of workers in the previous year. Rueben, an engineer, said the institute had in December last year, trained workers that would work in the 10 National Independent Power Plants (NIPPs), from where the government hope to inject additional 5,000 megawatts of electrcity to the national grid to improve electricity supply.The post Smooth, rough roads for oil and gas operators appeared first on The Nation.]]>
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