Nigeria Oil Firms Cut Contractor Rates After Prices Collapse
NNPC has instructed producers to cut costs: Total letter
Service providers asked to show “understanding”, “cooperation”
Oil companies in Nigeria have instructed contractors to cut their rates by almost half as the industry responds to the dramatic slump in crude prices.
State-owned Nigerian National Petroleum Corp. 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,” Total SA’s Nigerian unit said in a letter to its service providers on April 2.
Oil prices are near 18-year lows as the coronavirus pandemic wipes out global demand and a price war between Saudi Arabia and Russia, which ended over the weekend, brings a wave of unwanted crude to the market this month. Brent, the international benchmark is currently trading around $28 a barrel, after reaching near $70 a barrel in January.
Confirming the letter, Total said in a statement that given the current economic environment, it will “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.
Majors including Royal Dutch Shell Plc, Chevron Corp. and Total pump most of the country’s oil through joint ventures and production sharing contracts with NNPC.
The French oil giant 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.”
Exxon 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.”
The NNPC 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,” said Bala Wunti, group general manager of the state company’s subsidiary that manages its investments in the upstream oil and gas sector. “Our objective is to achieve a reasonable outcome for all stakeholders that can guarantee a sustainable future for the industry.”
Nigerian-owned 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, according to Bolu Odusanya, managing director of TREXM Oil & Gas Services Nigeria Ltd. “We are getting squeezed on both sides,” he said. “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, the letter said.