As FG Plans Huge Cut in Oil Sector Contracting Cycle

As recently disclosed by the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, the federal government plans to cut the long contracting cycle in Nigeria’s petroleum sector. Chineme Okafor writes on what this means for the sector

Recently, the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, disclosed that the federal government plans to cut the contracting cycle in Nigeria’s oil and gas industry from its current stretch of two to four years to just six months.

Kachikwu at a stakeholders’ interactive workshop on Nigerian Content Policy which was organised by the Senate Committee on Petroleum Resources (Upstream) in Calabar, explained that the long contracting cycle in the country’s oil and gas sector was a major challenge to its productivity.

He noted that it contributes to the high cost per barrel of the Nigerian crude oil when compared with the outputs costs of other member countries of the Organisation of Petroleum Exporting Countries (OPEC).

Listing these challenges, Kachikwu said they include multiplicity of bidders, application of manual tools in bid evaluation and divergent tender requirements by approving entities such as the Nigerian Content Development and Monitoring Board (NCDMB), National Petroleum Investment and Management Services (NAPIMS) and the international operating companies (IOCs).

Represented by the Group General Manager, NAPIMS, Mr. Sajebor Dafe Stephen, Kachikwu said contract approving entities in the country’s oil and gas sector were already implementing his directive for them to strategise and develop a single contracting procedure, which would soon be issued to the industry.

He had said at the last Oloibiri Lecture Series and Energy Forum (OLF) in Abuja that he was working hard to achieve this, saying that project planning and execution were becoming more challenging due to this singular reason.

The minister who confirmed plans to categorise companies that had invested heavily in the economy as local content champions for specific work scopes in a way that would facilitate contract opportunities and enhance transparency and further boost investor confidence, explained equally that the dictates of the Nigerian Oil and Gas Industry Content Development (NOGICD) Act, otherwise known as local content law, would be given prior attention in the planned review.

He said the Act’s provision of first consideration for Nigerian owned assets shall always apply in tenders related to utilisation of rigs or marine vessels, thus assuring a good number of Nigerians who had been motivated by it to invest in the sector for safety of their investments.

With the emergence of a new crop of indigenous owners of marine vessels, he stated that the new focus was on the local construction of vessels, adding that an assessment of shipyards was ongoing and government will provide incentives and enablers that will make local yards to construct vessels at competitive cost.

But why now?

Perhaps realising that there are stiffer competitions around the corner, and that in the last couple of decades, operating costs in Nigeria’s oil and gas sector had consistently escalated through either long approval cycles or other challenges related to security, the government opted to act quickly before it was too late.

Of course, industry stakeholders have often faulted the country’s long contracting cycle as a huge albatross on production efficiency, the fact that oil prices fluctuations was cutting deep into the country’s take from her production and no new investment commitments are made either may have forced the government to begin to think out of the box.

In itself, the dip in oil prices is a huge challenge to the survival of Nigeria’s oil industry which desperately needs to improve on its operational excellence to stay up and afloat.

Industry operators have consistently averred that the industry in Nigeria needs to develop an operational model that enables extant processes, people and system to interact and support each other to achieve optimum results.

Such system according to them is almost non-existent in Nigeria, thus making attempts to prioritise production efficiency as often done by the government almost impossible.

“If those approval cycles could be reduced, it would have a positive impact in reducing project costs. Other high expenditure uncertainties relate to the security cost of protecting people and installations as well as the time value of possible disruptions of the work,” said Mrs. Elisabeth Proust who is the Managing Director and Chief Executive Officer, Upstream Companies of Total in Nigeria.

Proust had at a function in the recent past stated that in terms of exploration, there was stiff competition in Africa, especially between West African producers and Mozambique, Tanzania and Kenya.

She noted that in Nigeria, contractors integrated the cost of uncertainties and the time lag of contract approval cycles in their bid offers, saying it was one of the most critical challenges they would be called on to meet in the coming years.

Additionally, industry operators said the recent crude oil prices drop may not just be the sole driving force behind the need for operational excellence which could come with cut in long approval cycles.

According to them, it is more of a call for action because while other OPEC countries like Saudi Arabia leverages on their reported low production costs to achieve huge market gains, Nigeria with its high production cost can only manage to bring in production outputs at rates that may not guarantee good returns.

Currently, Nigeria’s oil and gas sector is being choked by the unusually lengthy contracting cycle. This ensures that competing African oil producing countries who conclude the same process in shorter periods would get first priority when investment decisions are made and taken by oil and gas investors.

This slow and winding contract processes leave investors with very little options with regards to Nigeria, thus costing the country billions of dollars in oil and gas investment to competing nations.

The decision by the government, notwithstanding reported opposition from oil workers union, could give Nigeria and operators in the oil and gas industry some good openings to target production upswings in a measured and profitable way.

It has the potential of winning back for the country, oil and gas projects and investments which had been diverted away or still kept in abeyance by such acts of long approval cycles.

Thus, with her frequent environmental incidents, declining performance, and drop in prices of oil, Nigeria must take actions that are not only.