Certainly the hard times are here. Oil price crash and coronavirus pandemic, which don’t yet have solutions insight, are serious concerns to Nigerians. All experts’ projections for 2020 have been rubbished. Industry operators say it will take huge interventions from the government to sustain and prevent the economy from total collapse, reports EMEKA UGWUANYI
OIL and gas industry operators and stakeholders didn’t mince words in explaining the hardship ahead of the country following the crash of oil price and the ravaging COVID-19 pandemic. Coronavirus pandemic caused drastic reduction in global oil consumption as borders were locked, travel restriction activated across the world, industries and manufacturing concerns as well as the aviation sector was shut down to contain the spread of the virus. To the operators, Nigerians should expect severe recession, austerity measures, job losses from companies, capital expenditure cuts, projects cancellation and deferments and owing of salaries by state governments.
The oil consumption slump caused by coronavirus was further worsened by unrestricted oil production and supply by oil-producing countries resulting from the failure of agreement between Saudi Arabia and Russia under the OPEC and Non-OPEC alliance.
How oil price crash started
It all started during the 2015 economic downturn, oil price fell below $30 per barrel. To stem further price fall, the Organisation of Petroleum Exporting Countries (OPEC) led by Saudi Arabia, and Non-OPEC led by Russia came together to form OPEC+ and agreed to reduce the oil supply. The two countries have supply capacities in excess of 10 million barrels per day (bpd).
OPEC and non-OPEC reached an agreement to cut production by 1.8 million bpd. The implementation of the agreement called ‘Declaration of Cooperation’ started on January 1, 2017, and compliance with the pact was high and that made oil price to. They further agreed to increase the production cut to 2.1 bpd to stabilise the price at the international market.
When coronavirus disease broke out in December 2019 in China, the price of oil started to fall again because China is the world’s largest crude importer with over 10 million bpd imports. Due to the lockdown in China, consumption dropped abysmally coupled with the gradual spread of the disease at the beginning of 2020.
During the OPEC+ meeting in Vienna, Austria on March 6, 2020, Saudi Arabia suggested a further production reduction of 1.5 million bpd to bring the total reduction to 3.6 million bpd to buoy price but Russia refused. To Russia, the continued production reduction was making competitive the price of United States’ shale oil and gas that is more expensive to produce than conventional oil.
The disagreement led to the collapse of the ‘Declaration of Cooperation’ and free-for-all production by OPEC+ members and freedom to sell at any price, hence the price war. The cost of crude production in Saudi Arabia and Russia is low between $8 and $10 per barrel.
The disagreement happened on Friday and by Monday price of Brent crude dropped from $45.18 per barrel to $35.45 per barrel and currently below $25 per barrel. Between December 31, 2019, and end of March 2020, global the oil price has lost $38 per barrel has fallen from $63.35 per barrel on December 31, 2019, to $25 per barrel as at March 2020 due to COVID-19 and price war between Saudi Arabia and Russia.
How COVID-19 and oil price crash will affect Nigeria Oil producers’ view
To the Secretary-General of African Petroleum Producers’ Organisation (APPO), Dr Omar Farouk Ibrahim, the plunge of oil prices to around $20 per barrel portends a difficult period not only for Nigeria but all oil producing countries in Africa.
He stated that 2020 really will be a difficult one for Nigeria and other oil producers in the continent and will require drastic measures by the governments to keep the economies afloat and ameliorate the impact of current reality on the citizens.
The APPO chief said, from the look of things, the price of oil will not pick up but even go further down below $20 per barrel. He explained that the collapse of the agreement also known as the ‘Declaration of Cooperation’ between the Organisation of Petroleum Exporting Countries (OPEC) and its allies including Russia, which resulted in the price war between Saudi Arabia and Russia is also a big blow to the global oil market.
Considering the supply glut caused by the price war and worsened by the decline in oil demand caused by COVID-19 pandemic globally, there are lots of crude cargoes looking for buyers and a lot more in store. It will take time for the oil price to pick up even if it doesn’t go below $20 per barrel, he added.
He said: “If it is just the problem caused by COVID-19 pandemic, the oil market would have recovered by the end of 2020. In the last one month, oil produced and put in the storage is enormous due to lack of demand. Therefore, even if COVID-19 problem is solved today and oil price stops falling, it will be difficult for the oil market to recover to what it was last year.
“For Nigeria, we need to brace up for austerity measures. The 2020 budget was premised on $57 per barrel benchmark with oil production of between 2.1 and 2.2 million barrels per day. Government has revised its budget oil benchmark to $30 per barrel from $57 per barrel while oil price has dropped to about $25 per barrel. Actual production has also gone down because there is no demand for oil. This implies that half of the government’s expected revenue has gone.
“The reality is that it is not going to be easy. If things go on like this, the government needs to act very fast to introduce austerity measures, otherwise, the situation will have unpleasant consequences in the long run.
“It is good that part of the funds meant for 2020 budget implementation will come from loans. If the entire budget implementation was hinged on revenues from oil and internal sources, it would have been disastrous. The loans can be used to cushion the effects of the collapsed oil price. Remember that the situation now is not only about oil, the industries and manufacturers are not producing. Also, revenues from Nigeria Customs Service and Federal Inland Revenue Service, among others, will be negatively impacted.
“We must be grateful that through the right policies and actions, a lot has been put in agriculture. Most of the rice consumed in Nigeria is grown in-country, it would have been terrible if it has not been done.
“Our consumption pattern as a country is oriented towards import. We imported about 80 per cent of our rice in the past and even sugar and other items, which took a good part of our foreign exchange (forex). Today, we have gone far in terms of rice production and this cuts across every part of Nigeria.
“Meanwhile, the government doesn’t have the money to do all expected of them by the citizens, hence Nigerians should be patient with the government especially at a period like this. We are very critical people but we need to be aware there is no perfect government anywhere in the world especially in democratic environments.
“We will overcome this situation, but let us use this opportunity to learn how to live our lives well and do things properly, look inward and see what we have learnt from the situation and make corrections.”
Oil service sector’s view
To the former President of Society of Petroleum Engineers, Nigeria Council; former Chairman of Petroleum Technology Association of Nigeria (PETAN), and Group Chief Executive Officer of Oildata Group, Mr. Emeka Ene, what Nigeria is currently facing is an existential threat that could wipe out the gains of Nigeria’s over 50 years of oil and gas operation.
We are seeing unprecedented happenings in the world now. Different countries have adopted different measures to tackle their problems. Every country is looking inwards, finding solutions to their problems from within, and Nigeria should toe the same line. The criticality of the present is such that it is not a period of flying in an expert from Houston, Malaysia or Aberdeen, locals have to do the jobs now, he said.
The coronavirus disease is a good example of what Nigeria should learn to do and be doing going forward. Countries that were serious and proactive were able to manage the containment of the disease, while those that were not serious are paying a high price for their laxity, he said.
Every country is holding its own now. America recently announced a $2.2 trillion support to sustain its industries, what is Nigeria doing? The current situation if not well managed by the government will kill our manufacturing, agriculture and trade (MAT). Just recently, the government appealed to gas producers to continue with domestic supply, despite the debts owed them, to sustain the running of the economy.
He said: “The oil industry affects MAT in different ways. Manufacturing depends on power, oil and gas derivatives, and agriculture depends on fertilizer while trade depends on cash flow. Oil is the major source of our cash flow. Therefore, the government like other countries should protect its own. Oil industry is sustained by the oil services sector with over 4000 registered services.
“In 2015 downturn, the cost of services by the oil and gas services sector was cut down by 40 per cent and when the oil industry rebounded, nothing was done to encourage the players. Now we are facing even a worse downturn, there is nothing to cut, and the current reality is that we have to rely on indigenous capacity and capabilities.
“As the global oil industry is now, for the next 12 months, there will be no reasonable cash flow except if Saudi Arabia blinks. Saudi has enough capacity to supply what the world requires now, so it is with Russia. Their cost of production is low, therefore they can afford to produce as many barrels as possible and sell at any price, even at $10 per barrel.
“Nigeria has to also produce as many barrels as possible, even three million barrels per day or more and sell at a discount even if it is at a loss. Currently, Nigeria’s cost of production is about $30 per barrel and oil sells at about $20 per barrel. But she has to produce and sell at any price, not minding selling at a loss to sustain the industry and the economy and ameliorate the impact of the downturn on the economy and Nigerians.”
Ene said the Federal Government should prioritize Nigerian companies now by giving them support and should not allow any service company to go under. He said: “It is a new world and a new way of doing business. Nigeria should match dollar for dollar to keep the oil industry and economy afloat. The solution to the current problem doesn’t lie outside Nigeria but within Nigeria. Let the government maximise the use of its indigenous expertise, capacity, capability and resources now. Produce as many barrels as possible, sell at a discount and at any price, if we should come out of this situation strong at the end of the day,” he added.
Downstream sector’s view
Chairman of the Major Oil Marketers Association of Nigeria (MOMAN) and the Managing Director of 11Plc (former Mobil Oil Nigeria Plc), Mr. Tunji Oyebanji, said: “On the economy, the continued fall of oil price will put severe pressure on the government because there will be less inflow of revenues to enable it to meet its obligations.
“More naira will be pursuing few dollars as the government’s major source of foreign exchange earnings is through oil and gas sales. The import of this is that the value of naira will fall as well as the purchasing power of the citizens.
“It will also affect the state governments. The revenue allocation to states from the federation account will also drop drastically, and many states may not be able to pay salaries let alone carry out capital projects.
“The Federal Government may also limit its responsibilities to recurrent expenditure because it will be difficult to reduce its workforce. Unlike the private sector that in situations like this, lay off staff and reduce expenses by cutting down its spending pattern on all areas of operation, government enterprises hardly do that. This implies that the Federal Government’s capital projects’ development will also suffer a setback.
“Fuel subsidy will continue to take a chunk of the scarce foreign exchange that the government earns. To me, let’s never go back to the subsidy regime, let the consumer pay the right prices for the products consumed.”
