The Oil and Gas Industry: Versatile vs Volatile

The global oil and gas industry has experienced a steady decline in the last three years primarily driven by the African and Middle East region, but the current instability in the industry does not deter a positive outlook as operators are positive that the industry will continue to grow over the next three years. It is expected that the industry will continue to be profitable based on an average benchmark oil price of $85-$90 per barrel.

Operators are implementing cost reduction strategies and focusing on operational excellence and innovation as a way of increasing their profitability despite declining revenue.

Local content has become a significant issue for the oil & gas industry, especially across Africa. Given the drive by governments to enable locals play more significant roles within the energy sector, we would expect increased pressure on operators to justify the utilisation of ‘non’ local resources. Nigeria has recorded some measure of success in this light. A report by the Nigerian Content Development and Monitoring Board, an enforcement and Implementation body for the local content law states that engineering in the oil & gas industry is now done 90% in country, fabrication of all the field development facilities now has 50 per cent of the tonnage done in Nigeria. There is however scope for improvement in manufacturing which is where the knowledge and technology resides.

Fraud and corruption ranked high as an impediment to companies achieving operational excellence. The perception of the oil & gas industry is that it is one of the sectors where companies are more likely to be confronted with corrupt activities. Some of the reasons given for engaging in questionable practices is to bypass customs bureaucracy inefficiencies and the related cost of delays to companies. Others include mismanagement, lack of skills, dealing with public institutions, government employees who are often poorly paid, difficulty with monitoring in remote locations, huge tender and bid profit possibilities and supplier kickbacks. A positive sign is that some respondents indicated that they are prioritising and spending money on prevention of fraud and corruption with more on ethics and business conduct training and senior management locally and globally encouraging companies to be legally compliant in all countries where they operate.

Growing regulatory requirements is forcing companies to recognise safety, health, environment, and quality and are striving to maintain strict adherence to quality standards in line with global practice.

The outlook for the industry is positive and operators can look forward to a dynamic future with an ever changing competitive landscape characterized by divestments and new acquisitions as new market entrants continue to seek a share of the industry’s significant growth potential.

This article was produced by the communications team of RusselSmith group with excerpts from ‘Review of the Nigeria Oil and Gas Industry 2014’ by PWC.

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