INDUSTRY ANALYSIS ON THE OIL AND GAS INDUSTRY

An Overview The Oil and Gas Industry is a sub-sector of the Petroleum Industry and also a product industry. It accounts for 95% of her Forex reserves, 50% of the GDP&80% of Governments revenue.Globally, Nigeria is the Eighth (8) largest producer of oil (Bonny Light), in Africa; she is the third (3rd) largest producer; and also a high-volume producer in W.Africa. According to BP Statistical Energy Survey, Nigeria has oil reserves of 36.22bpd and 160tr cubic meters of Gas by the end of 2007. The most productive Oil and Gas region is the Niger Delta Basin comprising Bayelsa, Rivers, AkwaIbom, Delta, Abia, Edo, Imo, and Ondo. This industry is divided into the Upstream, Downstream, Service, &Gas sub sectors. Brief History and Major Players UPSTREAM SECTOR: This is the lifeblood of this industry as they engage in drilling and production of Oil and Gas. The major players in this sector based on the production capacity are: Royal Dutch Shell:Shell Nigeria is one of its subsidiaries.It totals 50% of oil production. Its joint-venture is with NNPC (55%), Shell (30%), Total(10%), and Agip (5%).It used to operate next to Shell-BP, but BP has sold all its Nigerian Concessions. It controls two terminals ExxonMobil: It is an American firm also called Mobil Producing Nigeria Unlimited and runs one terminal in Akwa Ibom. Its joint venture is NNPC (60%),Mobil(40%) and is headquartered in Eket. It may overtake Shell as one of the largest producers owing to its offshore operations. Shell has suffered setbacks operating onshore. Chevron: This is also an American firm in joint venture with NNPC(60%), Chevron(40%).it is second to the largest producer in the past and manages one terminal in Warri offshore Total: It is into a joint venture with NNPC and Elf now Total and operates one terminal. Agip: This is an Italian concern operating one terminal in Brass, Rivers state. It is in Joint venture with NNPC (60%), Agip (20%) and ConocoPhilips(20%). DOWNSTREAM SECTOR: Refines, markets and distributes Oil and Gas products. They control about 73% of the market and are amongst others:
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 African Petroleum Warri, Port-Harcourt and Kaduna refineries(based on refinery capacity) Conoil (based on turnover and branch network) Oando (based on turnover and branch network) Total, Mobil (Foreign Markets-Forward Integration) SERVICE SECTOR: This includes among others,exploration support(logging, fishing, cementing),drilling (well drilling, welding), production support (wireline, workover & production services),downstream services(maintenance, product

haulage & marketing).E.g. Halliburton and Schlumberger. The Gas sector Includes; Brass LNG, Nigerian LNG, and ChevronTexaco Escravos Gas projects. Products are Premium Motor Spirit, Household & Aviation turbine kerosene, automobile gas oil and low pour fuel oil REGULATION The Oil and Gas Industry in Nigeria is regulated by NNPC, The Ministry of Petroleum Resources, and several others.Globally, it is regulated by OPEC. NNPC: Taxation is 50% (Nigerian Hydrocarbon Tax), 30% (Company Income Tax) under the Petroleum profit Tax Act regime. It is the holder of oil licenses and engages IOCs as contractors. It works alongside EFCC to regulate fraud.Other subsidiaries include; PPMC, NPDC, etc. it also ensures 10% payment to host communities Ministry of Petroleum Resources: It is the policy arm of the Industry. It monitors and supervises Oil operations and reports to FGN. Department of Petroleum Resources: It regulates monitors and supervises all the activities in the upstream and downstream sectors; it imposes Gas flare ($3.50), Oil spillage and Pipeline bombings penalties, awards OMLs and OPLs. It also approves of all field development plans. Petroleum Products and Marketing Company (PPMC): It controls the supply and distribution of petroleum products across the country, owns 5,000km of pipelines, 24 pumping stations and 23 depots. PORTERS FIVE FORCES MODEL Barriers to entry: Incorporation requirements include; Name search at the CAC, MEMART, statement of share capital, return of allotment shares. All applicants must
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get a least annual turnover of $100m and a net worth of not less than $40m.Successful companies are required to post a$1m Bond via a First class Nigerian Bank. The entry requirements are high and not all potential firms can afford it. Signature bonuses can go as high as $1b or more. Threats to substitutes: There are no substitutes to Oil and Gas. It has same utility, similarity and is key to consumers. Moreso, there is no sunk cost incurred by moving from one supplier to another. Bargaining power of suppliers: The direct suppliers are the Niger-Delta states. Their bargaining powers are moderate as oil has been found in most peaceful African countries and Nigerian States. E.g. Anambra State, Angola and Ghana. While the suppliers of the crude to the FGN are the IOCs granted OMLs & OPLs. Bargaining power of buyers: In the Upstream sector, the bargaining power is low, while in the downstream, it is high as there is no brand loyalty and monopoly. Hence, buyers have bargaining power as the price cannot be raised by one supplier. Price is fixed by FGN and Nigerians will protest if it is on a high scale Threats of new entrants:There is very low threat particularly in the upstream sector considering the few crude Oil States, limited reserves, rigorous Government procedures, high signature bonuses. It is impossible for new entrants to break even. From this, it is safe to say that credit facility can be given to the players in the industry because of the high entry requirements into the industry and other key factors. LABOUR: Labour harbours skilled, semi &unskilled labour. Themajor labour unions arePENGASSAN(Senior Staff) and NUPENG(Junior Staff).They are influential and engage in yearly bargain with Oil firms to increase their welfare benefits. INDUSTRY INFLUENCERS Global Environment: OPEC is one of the key players controllingmost of the Oil and Gas industries except Russia, USA etc.They influence global oil price which sways local price &profit.Now,it is fixed at $96.35 bpd. Locally, this may mean that the signature bonuses of prospective Oil and Gas firms will be high.OPEC is in support of the PIB. Recent boom means more investment and profit for producing countries, although OPEC is yet to steady the fluctuations in global prices.
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Local Environment: This largely constitutes the Federal Government policies and NDDC activities. After the amnesty program for Niger-Delta ex-militants, restiveness is under check. Nigerians also influence the local market price as shown by the last years Occupy Nigeria. MAJOR RISKS&FUNDING: As a Joint venture structure, the Oil and Gas industry funds itself with the NNPC funding in line with the ratio of equity it holds in the companies. The risks include inter alia; Continuing Decline of Dollar: The fluctuations of the dollar in global market may threaten the revenues of the Oil and Gas Industry in their international operations. Youth Restiveness and Oil Theft: Although violence in the region is under check,the activities of BokoHaram &reprisal attacks by militants maycause further disruptions in production with attendant revenue losses. Regulatory Laxity and Unionism: The major regulators-DPR, PPRA & NNPC are very slack in the aspects of imposing the penalties when standards are not met.Theindustrial action by labour unions can stall activities in this sector. INDUSTRY CYCLICALITY&MATURITY: The Industry is non-cyclical. Sales and profit can be affected by the global oil price, unrest in Niger-Delta, and other wild factors. No rise of new products, but new brands can emerge. Rating Score Environment Strategic Stakes BBB 60%- Fairly stable High- moderate 69% to unstable FORECASTS The US is the biggest importer of Nigerias crude, with 34% of e xport volume, Europe (30%) &Asia (17%).However, exports to the US from Nigeria have declined recently, in favor of home-produced crude. TheU.S. is not a major export market for Nigerian LNG, the danger to Nigeria is in potential U.S. export of her shale gas to global LNG market. As the US import of our oil slows, reports show Chinas growing appetite to match what US left. Our estimated LNG production capacity is at 22 million metric tons per year, and no major increase is expected to come online before 2015. Banks can key into the growing opportunity but will have to deal with exchange rate flux. Industry Economics StrongAcceptable Rating Definition Runs in a fairly stable clime, is key to the economy & its basics are strong