|When the going gets tough: EBH Namibia: Providing solid support for the oil and gas industry
to weather oil price ‘storm’
|02 March 2015
As one of the leading contributors to the economy of Namibia, ship repair company Elgin Brown & Hamer (EBH) Namibia, is keeping a close watch on the sliding oil price. The company is fully cognisant of the impact the downturn has already started to have and regarding the potential further severe economic impact - not only on the downstream oil and gas sector in which it operates - but on the Namibian economy as a whole.
While a low oil price is not a new phenomenon and tends to be cyclical, both the global economy and the oil and gas market in 2015 are presenting new circumstances and challenges, and players in the downstream oil and gas industry, such as ship repairers and supporting services, would be well advised to guard against complacency.
This is the view of Hannes Uys, Chief Executive Officer of EBH Namibia, who has steered the company through a period of sustained growth since 2012.
Offshore oil and gas exploration activities in southern Africa have increased significantly in recent years, and EBH Namibia has positioned itself as a strong contender in the international ship repair market, servicing a number of offshore support vessels operating off the west coast of Africa. In order to meet demand, the company significantly increased its operational capacity in 2013 by investing in a third floating dock - its Panamax-sized ‘Namdock 3’.
A large portion (80%) of EBH Namibia’s core market operates in Angola, the second largest oil producing country in Africa.
“It is now officially confirmed that a few days ago the Angolan Government slashed its national budget by 51 Billion USD directly due to sustained low oil price. Oil accounts for more than 50 % of Angola’s GDP, 80% of tax revenues and 90% of export earnings.
The impact that the burgeoning West African offshore oil and gas industry has had on Namibia, and specifically Walvis Bay, has been significant. Between Africa’s top two oil producing countries Nigeria and Angola, placed 13th and 15th as global oil producers respectively, there are currently in the region of 322 off shore support vessels and 68 oil rigs. On average for each oil rig operating, up to 6 support vessels are required,” Uys notes.
He explains further that the average cost of oil production on the West Coast of Africa, being mainly off-shore, is currently very close to the selling price, and for some specific projects it is higher.
This reality compromises not only producing countries’ economies, which are heavily dependent on oil revenues (both from taxes as well as their high participation in exploration) to balance their budgets; but production as well, especially ultra-deep offshore ventures which have higher production costs.
Potential risks for Namibia and her ship repair industry
“As a result of the oil price drop, from over 100 $US (on average for the past four years) in the middle of last year, to below 60 $US currently, we have seen a reduction in the utilisation rates of rigs and OSV’s of 11% and 8 % respectively,” he advises.
Despite decreasing or even, in some cases, increasing production - depending on the stakeholders’ strategies - the immediate and possible long-lasting impact of the drop in oil prices, is the reductions which oil majors are pressured to effect in their production costs.
“It is important at this point to ask the question: just how badly will the sustained low oil price affect the Namibian economy and the ship repair industry? Some might argue that the drop in the oil price, for a country that does not produce or export oil, is a good thing – and certainly both private individuals and large energy-producing industries can only benefit from a lower fuel bill as a result of the low oil barrel price,” says Uys.
“However, for Namibia and its ship repair industry, there are very real risks in the wake of the current economic crisis which oil producing countries find themselves in, as a result of the sustained low price of crude oil. The questions remain, how serious are these risks, and how do we, as a country and an industry, safeguard ourselves against them?”
New challenges in an ever-changing market
Noting the “undeniable historic link” between the oil price and the strength of the US dollar, Uys also highlights some important differences that have manifested themselves in the global market.
“While it is useful to look to recent history and the impact of past downturns in the oil market, there are some fundamental differences between the 2008 economic downturn and the situation we find ourselves in, in 2015.
In the past, a low oil price has been typically followed by a weakening dollar. However, the recent breakthroughs which have been made in the shale oil reserve industry in the US have meant that the US is now less dependent on oil importation. This has important implications in terms of the costs of producing shale oil versus the costs of offshore oil production.”
According to Uys, other drivers affecting the oil price include the fact that no significant progress has been made in the quest to find commercially viable, renewable sources of energy as an alternative to fossil fuel, and the national debt situation among leading oil-producing and exporting countries reaching catastrophic levels.
While major oil producers are speculating about the likely duration of the downturn in oil price, many predictions in the industry are stating that the price will most likely only properly stabilise at the end of 2016.
No-one is immune
In order to cope with what looks set to be a tough two years, oil majors are taking remedial actions to counter the effects of a loss of revenue, including worldwide retrenchments, cost-cutting (in capital and operational expenditure) and putting projects which are not in the final phase on hold, if not terminating them.
“No-one linked in any way to the oil industry is immune to the impacts: if you ‘close the tap’ at the top (that is, the major oil producing companies), not only ship repairers, but every single player downstream in the channel will feel the effects,” comments Uys.
EBH Namibia’s downstream economic impact of N$ 5 billion
As the leading shipyard in Namibia, EBH Namibia’s estimated downstream impact on the economy, since inception in 2006 to date is in the region of N$ 5 billion. With 845 employees, it is estimated, too, the downstream effect to be at a multiple of 8, resulting in a total of direct and indirect employment of 6,760 Namibians. In addition, the company procures annually an estimated N$ 400 million in service and materials (representing a local vs. international split of 9/1).
In order to ensure that it is armed with the very high-performance skills set required to deliver a world-class service in ship repair along the west coast, EBH Namibia has invested an estimated N$ 6 million annually in the training and development of its people.
Extraordinary times call for extraordinary actions
“It is for these reasons, and the fact that EBH Namibia has an average of 130 docking-related projects over a calendar year, that as a company, we need to be extremely concerned about the potential impact of the sustained low oil price on our industry, the Walvis Bay region and Namibia as a whole. It has led us, at EBH Namibia, to ensure that we carefully apply our minds, so that extraordinary thoughts lead to extraordinary actions, which in turn lead to extraordinary results.”
Uys urges those in the ship repair industry – whether they are feeling the effects of a low oil price or not – not to be complacent, and to join forces against a common threat.
“We need to entrench, on a wider scale, a culture of high-performance and discipline, and in order to do this, we have to become more efficient, even aggressively so,” he maintains. “For EBH Namibia, this means that the strategies we have in place to constantly improve on our core competency - selling our services to international clients - must be executed more rigorously in order to achieve high-impact results over a short space of time.”
With regards to the time-frame of the current crisis, Uys emphasises that a wider understanding of, and agreement on, the likely parameters is crucial:
“While this is certainly a ‘red flag’ time, it is also important to remember that, because the oil price is a cyclical phenomenon, the situation will recover and oil majors will continue to operate as normal when the price per barrel stabilises. Once the oil price per barrel reaches the US$ 80 mark, a more sustainable recovery period will begin.”
In the meantime, he calls for a unified stance among all Namibians, in all sectors of industry, to immediately adopt a proactive stance and embrace a culture of high performance. He highlights, too, the importance at this time of strategic partnerships: “EBH Namibia, with its major shareholder, Namport, acknowledges the high value of partnerships. Our government views ours as a prime example of a highly successful public-private partnership (PPP) in the context of its long-term national development plan (NDP). Industry players should embrace strategic partnerships with leading clients in order to ensure that we devise clear, win-win situations for all concerned in order to survive this 24 month period.
While the ship repair industry needs to stand together against the ‘common threat’, this is not to say that we do not encourage healthy competition among players, even during volatile times,” he notes.
He continues: “It is important that all of us, in the private and public sectors, understand the potentially devastating effect of a sustained low oil price on Namibia and its position on the west coast of Africa as a recognised ship repair option. We need to collectively understand the risks involved as other African countries try to strengthen their own positions in this industry.
“This is undoubtedly a crisis period. It is imperative that our affected clients, including the offshore supply vessel (OSV) owners, feel that the industry is being backed by our government and other industry stakeholders, and that we are seen to be taking serious, urgent and significant steps to accommodate them over this period.
For our part, EBH Namibia as a company is resolved to intensify our energies in achieving even higher efficiencies, enhanced flexibility and cost reductions as part of our strategy to weather this storm, while committing to the ongoing high-quality servicing of our clients’ fleets, for which we have become known,” Uys concludes.