NewsEast & Horn AfricaOil & Gas: The dance of the cost cutters


Posted on Friday, 26 February 2016 18:02

Oil & Gas: The dance of the cost cutters

By Nicholas Norbrook

Dimeji Salaudeen, Head, Africa oil and gas sector, KPMGThe crash in the oil price is causing damage across the sector, but on the up-side it gives cash-rich companies a chance to take advantage of cheaper services, grab market share and rejig their business models for greater efficiency.

The Africa Report: How will Africa be hit by cheap oil?

Dimeji Salaudeen: Virtually all of the players have had to find or are having to find creative ways for cutting costs right across the sup- ply chain, including with service providers. At the same time, it's a great opportunity to take a second look at your operating model, to take out inefficiencies. For companies that have a healthy balance sheet, service is cheap. You can get a significant discount to hire a rig compared to two years ago. So, for companies with the cash, this is a great time to pursue high-impact, high-value projects.

Cash-rich companies can seize market share – is that what you're saying?

Absolutely. But Nigeria may not be a good example because of the other issues affecting the sector at this time. There has been a transition to a new government, and that government is yet to ar- ticulate its economic direction. The Petroleum Industry Bill has dragged through parliament for close to a decade. So there's quite a lot of uncertainty. Because of those reasons, generally we're not seeing activity at all in Nigeria.

What about smaller indigenous operators that bought a lot of the downstream assets from international oil companies (iOCs)?

It's going to be tough for them. Before the end of 2016, you may begin to see some shake-out in that sector. Shell sold high and made a lot of money because they sold when the oil price was at its peak two years ago. And then the business plans and the financial models that the buyers of those assets had did not envisage that the oil price would be at the level that it is today, so that's one dimension.

The other dimension is that the bulk of the financing of the acquisition of the assets actually came from the bank, including a sizeable chunk of it from the local banks. So basically the acquirers of those assets, we know that most of them are actually struggling with work- ing capital right now. We know that most of them are struggling with meeting their obligations to the banks. And virtually all of them have had to actually go back to the banks and restructure their facilities on a longer-term basis.

Of course, what that means is that their ability to mobilise the kind of capital expenditure that you need – working capital to optimise those assets and raise production levels – is significantly hampered. So there is a view in the industry that perhaps one or two of them may have to find people to buy them or do some kind of consolidation.

Any idea who looks the most likely to crumble?

If you take a company like Aiteo, they bought OML 29, the Shell asset, which at peak can actually do in excess of 200,000 barrels per day [...]. There have been reports in the press regarding the true ownership of that asset. Nobody has the facts, but there are a number of political risks that may add to the normal challenge that all players face at this point. So it is difficult to predict who wins and who loses.

What about the indigenous oil services companies like Ladol and Jagal Group?

They are challenged because of the reduced activity. They are challenged because the IOCs are basically asking for better rates. So it is really tough for them as well. In the sector, they have to do some rationalisations. They have to ensure that they keep the costs within control. And that is something that has had the effect of rolling back some of the gains in terms of growth that had been experienced with the indigenous service segments in the past few years on the back of the local content regulation. ●


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