-By Victoria Opeyemi
International Oil Companies (IOCs) in Nigeria have instructed contractors to cut their rates by almost half as the industry responds to the dramatic slump in crude prices.
The Nigerian National Petroleum Corporation (NNPC), has told producers, “to take immediate steps to reduce our operating costs, budgets and re-negotiate our contracts downward by 40% in the face of this adverse situation.”
The Corporation opined that oil prices are near 18-year low as the coronavirus pandemic wipes out global demand and a price war between Saudi Arabia and Russia, which ended recently brings a wave of unwanted crude to the market in April. Brent, the international benchmark is currently trading around $28 a barrel, after reaching near $70 a barrel in January.
One of the IOCs, Total, in a statement confirming the letter sent to it, said that given the current economic environment, we shall “have ongoing discussion with all our contractors in Nigeria on the subject of cost reductions.”
“The outlook remains acutely gloomy and the trend is forecast to continue in this trajectory for the foreseeable future,” according to the letter.
The Shell Petroleum Development Company (SPDC) of Nigeria Limited, Chevron Nigeria Limited (CNL), Total and ExxonMobil pump most of the country’s oil through joint ventures and production sharing contracts with NNPC.
Total has asked its contractors in Africa’s biggest crude producer “to show understanding and cooperation in our effort to ensure cost optimization for the survival and sustenance of current and future mutual business interests.”
On its part, ExxonMobil said in a statement that, while it won’t comment on third parties’ business, it is “looking to significantly reduce spending as a result of market conditions” caused by the coronavirus pandemic and “is evaluating all appropriate steps to significantly reduce capital and operating expenses in the near term.”
A spokesman for Chevron said it is working with the NNPC and other partners “to explore ways of reducing costs in the current price environment to sustain our business.”
According to Group General Manager, Investment Upstream of NNPC, Bala Wunti, the corporation is working with its “upstream partners both in the JVs and PSCs to review their work program and budget to levels which can be supported by the low crude oil price environment. Our objective is to achieve a reasonable outcome for all stakeholders that can guarantee a sustainable future for the industry.”
Oil services companies have significantly increased their share of contracts in the last decade since the country introduced a law to boost local participation in the sector.
Margins of these businesses are being hit simultaneously by producers’ belt tightening and additional costs generated by lockdowns imposed by governors of some oil-producing states.
Managing Director of TREXM Oil & Gas Services Nigeria Limited, Bolu Odusanya, said in a statement that “Costs are going up and clients are trying to renegotiate all contracts.”
Total requested that its contractors accept the 40% reduction from April 9 “without compromising” on service quality.
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