#1NIGERIAN PETROLEUM ASSOCIATION EXPL LORATIONISTS CURRENT REALITIES IN THE UPSTREAM SECTOR OF THE NIGERIAN OIL & GAS INDUSTRY Abiodun O. Adesanya, fnape February 4, 2016 ONL Degeconek#2Outline ● Introduction • Current realities in Nigeria Economic Security Labour implications 。 Funding Challenges O Niger Delta Insecurity 。 Contracts, Production & Reserves ● Focus of Oil Operators NIGERIAN ASSOCIATION OF S PETROLEUMONIST DHL Degeconek#3Apart from the falling global oil Introduction price trend, Nigeria also has the following issues; • Economic Security 98 97 World Crude Oil Demand/Supply Dynamics 3-year trend window 96 96 ● Funding Challenges -Demand 95 • Renewed Insecurity in the Niger Delta -Supply 94 Price • Low Reserve Replacement Ratio (RRR) 93 92 • Poor Gas Development NIGERIAN High and Uncompetitive Production cost ASSOCIATION OF PETROLEUMONIST 919 MMBL P/D 120 100 80 80 60 60 40 40 20 20 90 Period 0 Oct/12 May/13 Nov/13 Jun/14 Dec/14 Jul/15 Jan/16 Source: Energy Information Administration (EIA) 2015 DHL Degeconek#4● Current Realities in Nigeria ; Economic Security Short fall in foreign exchange. • . 95% of Nigeria's foreign exchange earnings is from crude oil. Budget deficit at a crude oil bench mark of $38 a barrel -2016 budget. Nigeria's current national reserve down to &28.2 Billion. Stagnated excess crude account savings and sovereign wealth fund. • Debt spiking in the nation, especially foreign debts. (LASG. Govt. $200 m loan from World bank) Nigeria has experienced a consistent drop in foreign investments. $8.9 billion in 2011 to $4.9 billion in 2014. OIL OIL NIGERIAN LATION OF PETROLEUMONIST Source: NNPC ONL Degeconek#5Current Realities in Nigeria; Economic Security Nigeria's Leading Economic Indicators (LEIS) GDP Growth Exchange Rate (IFEM) Oil Price (Average) Inflation External Reserves ($) MPR Export Import Trade Balance Net FDI Stock Mkt Cap ● 2014 6.3% N186.10/$ $98.90 per barrel 8% $34.47bn 13% p.a. $82.6bn 2015 2.8% N199.35/$ $53.70 per barrel 9.5% $29.10bn 2016 3.3% N220/$ Below $33 per barrel 11% $28.2bn 9% p.a. $51.9bn 11% p.a. $50.9bn $48.7bn $47.4bn $2.2bn $4.5bn $1.6bn $1.8bn N9.85trn N11trn NIGERIAN $61.6bn $21bn $3.1bn N11.48trn ONL Degeconek Falling oil price has an instant, direct and major impact on Nigeria's Economy ASSOCIATION OF OF S PETROLEUMONIST Source: Financial Derivatives Company Research, EIU, NBS, CBN, Bloomberg, Oil Price.com#6Number of workers Current Realities in Nigeria; Employment/Labour Implications Down sizing and job losses in the Upstream Oil & Gas industry both locally and globally ● About 120,000 direct and indirect job losses in Nigeria (Economist) Layoff prominent in all sectors of Upstream activities (Oil Majors and servicing) 8,500 25,000 Global Upstream sector Layoffs by Oil Majors Global Job cuts by major E&P Service companies 20,000 8,000 7,500 7,000 NIGERIAN OCIATION OF PETROLEUMONIST Number of workers 15,000 10,000 5,000 0 Shell BP Chevron schlumberger Halliburton Baker Hughes Weatherford Source: Economist, Fox business, money morning staff research DHL Degeconek#7• ● Current Realities in Nigeria; Funding Challenges NNPC Joint Venture shortfall. ● ● 53% drop in NNPC cash calls payment to JV operations between 2005 and 2015. Led to a 62% drop in JV production that is masked by PSC production. Plays a part in decline of crude oil production from 2.3 million barrels per day to 2.1 million barrels per day in over the same period. Non-performing loans are ubiquitous; About N5 trillion in loans granted to energy firms in 2013 and 2014, might be impaired. (Vanguard) NIGERIAN OCIATION OF ORATI PETROLEUMONIST Average Daily Oil Production '000 bopd 3000 2500 2000 1500 1000 500 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Year Source: NNPC JV JV_EF_MCA PSC DHL Degeconek#8Current Realities in Nigeria; Niger-Delta Insecurity Renewed security situation in Niger Delta immediately after the last election; • Violence, Insurgency and security threats Pipeline Vandalization Illegal Oil Bunkering Kidnappings and Hostage Taking. • Proliferation of Illegal Refineries • Increase Oil & Gas production OPEX, risk and uncertainty. 5 SIMRAD AVY P301 Militants Illegal Refinery Joint Task Force NIGERIAN TION OF OCIATION PETROLEUMONIST Images: Today News.com ONL Degeconek#9Current Realities in Nigeria; Contracts, Production & Reserves Government directive on Reserve ● and Production; • Address low reserve replacement ratio. • Increase national reserve to 40 billion barrels. • Increase Nations production to 3 million barrels a day. Contract value and cost reduction; Rigs, equipment and engineering are adjusting to new norms based on government directive to reduce rates by 30-40%. Analyzing and understanding the cost structure with the aim of cost reduction. • Companies will manage cost by reducing headcount and renegotiating supplier contracts NIGERIAN PETROLEUMONIST ONL Degeconek#10Current Realities in Nigeria; Operators Focus • Focus on stabilizing production Identify 'low hanging fruits' that require low cost workover/remedial operations. ✓ Optimize production. • CAPEX reduction will come from reduced spending on exploration, facility construction etc. • Embrace Gas development. Identify distressed or underperforming assets. NIGERIAN ✓ Isolate asset which may be falling short due to investment assumptions that no longer hold true. ✓ Focus on high performing asset to maximize production. ASSOCIATION OF $ 3 S PETROLEUMONIST DHL Degeconek#11● Current Realities in Nigeria; Operators Focus Finance; ✓ Operators should focus on managing their financial position; optimizing capital (debt vs equity mix). ✓ Managing Tax and corporate structure. Renegotiating fiscal policies for optimal benefit where possible. They could also divest asset to generate cash flow. • Project management. NIGERIAN Enhances resource allocation in real time. Talent Management ASSOCIATION OF PETROLEUM EXPLORATIONISTS Collaboration. Improve on integrated project delivery for optimum breakeven cost. Integration across the supply chain among all project participants (owners, engineers, contractors, subcontractors, major suppliers). Advanced analytics. To identify early indicators of potential issues that could affect project performance. Integrating external e.g. political unrest data they can model scenarios in which projects typically go off the rails and put mitigation strategies into place in advance. ONL Degeconek#12NIGERIAN PETROLEUM ASSOCIATION PLORATIONISTS Discussion continues... What do we do as Explorationists? Contributions from: ✓ an operator ✓ a service provider & ✓ a financial institution ONL Degeconek