Despite price recovery, cost discipline remain key drivers in oil, gas industry

FRANK UZUEGBUNAM

The oil and gas industry has survived some tough years due to weak demand and low prices. While the low price lasted, oil and gas companies aggressively slashed capital expenditure (CAPEX) budgets, bringing drilling activity to a fraction of what it was at its peak.

Evidently, prices are beginning to recover. Crude oil futures recently hit a near three-and-a-half-year high, bolstered by geopolitical risk with July Brent crude futures trading as high as $80.18 per barrel.

“Supply overwhelmed the market but the Organisation of Petroleum Exporting Countries (OPEC) cooperation with non-OPEC oil producing countries helped to rescue the market which marked the beginning of oil price recovery”, said Ambrose Ojiako, Chairman, Seplat Petroleum Development Company at a recent breakfast meeting on “Emerging trends in oil and gas sector” organized by Olaniwun Ajayi Law firm.

OPEC’s “declaration of cooperation” with a group of non-OPEC oil producers did speed up the rebalancing of the international oil market and accelerated the stabilization of the global oil market. The oil cartel, which along with 10 non-OPEC allies led by Russia, cut about 1.8 million barrels per day production which helped to draw down crude oil inventory levels.

As the oil and gas industry strengthens, with eyes on rising commodity prices, maintaining cost discipline remains a critical factor considering the profligacy that has always been associated with high oil prices in the past.

“There were a lot of financial indiscipline during the past boom period. Projects that needed 10-year loan were given 5-year duration loan. There was a huge compromise of balance sheet such that when the bust happened, the impact was not restricted to the oil and gas sector”, said Hakeem Adedeji, executive director at HydroCarbon Advisors.

Though in the past three years, oil and gas companies learned to live with the lower prices, a tighter capital spending program and a much stricter cost discipline, however, there is always that temptation to reset costs amidst the rising crude oil prices.

“There are still limited capital available locally, thus, increasing cost discipline cannot be over emphasized. I agree that there is a shifting dynamics with focus on leveraging producing assets and focusing one core business, but this is the age of prudence” said Rolake Akinkugbe-Filani, head, energy and natural resources at FBN Quest Merchant Bank.

Credit rating agency, Moodys, in a recent report stated that “an increase in oil production and higher oil prices support Nigeria’s slow economic recovery and the 2.8 per cent growth we expect in 2018.” The agency, however, says that Nigeria’s economic recovery is cyclical and that the government will need to take further reforms to boost the economy.

According to Ojiako, “there should be an understanding that the Petroleum Industry Bill (PIB) is critical to reforms in the sector. There is need to remove uncertainties, straighten out the fiscals so that people can project with certainty.”

The post Despite price recovery, cost discipline remain key drivers in oil, gas industry appeared first on BusinessDay : News you can trust.