We ask four local experts about the real effects of the current crisis on their business and the wider oil and gas industry.
Dayo Okusami, Partner, Templars
COVID-19 has effectively suspended almost all commercial activities in the country. On the good side, we have seen the private sector rally to assist with hospitals being built, equipment and hundreds of millions of dollars being donated to fight the spread of the disease. On the bad side, the suspension of all but essential economic activities has led to us seeing early signs of a recession, a devaluation of the Naira and our foreign exchange reserves hitting its lowest level in decades. It will take months, if not years, to assess and recover from the economic damage.
COVID-19 has negatively impacted the oil and gas sector; even though the government is trying to maintain business as usual, it is difficult to see the likelihood of continued, uninterrupted operations. In this regard the industry regulator, the Department of Petroleum Resources, on 30th March 2020, issued a notice to all oil and gas operators stating that they consider COVID-19 a Force Majeure event which is an unforeseeable event that would prevent parties from fulfilling contractual obligations. If you couple an already shaky start to 2020 with oil prices tanking even before COVID-19 and a further slide in prices due to the ‘Coronavirus Effect’, it is hard not to see a negative impact on future capex and opex spending and operations which will lead to jobs losses and reassessment of future projects.
Mazi Bank-Anthony Okoarafor, Chairman, Petroleum Technology Association of Nigeria
Service companies are facing complications due to the virus. Rigs’ contracts were terminated, most projects are being deferred or cancelled and clients are demanding discounts of up to 40% on existing running contracts. Meanwhile the lockdown and restrictions on movement are affecting crew changes, maintenance, spares, fuel supply, and food supply to job locations. The delay in payment of existing legitimate invoices is also negatively impacting cash flow. Without rate cuts, or a deferral on bank loan repayments and support from government, many service industries will go under in the long term.
As for the economy, our 2020 budget was based on US$57 per barrel of crude oil and about 2.18 million barrels of oil per day. With the COVID-19 causing blockages in economic activity; the Russia/Saudi oil price war; the decreased oil demand from China; our weak and non-existent infrastructure; our dwindling foreign reserves; and our blatant refusal to diversify during boom times, our economy is in great danger because we cannot even implement the budget.
The general economic landscape is not optimistic. The general welfare of the masses will remain depressed for a long time. Nigeria is a major oil producer, the sixth in the world, and obviously has had a fair share of oil price windfalls. What strategic advantage did we get from these oil windfalls? We can still turn around with bold and strategic actions such as de-regulating the downstream sector, implementing fiscal policies to make investments more attractive, or investing time in planning the full privatization of our refineries.
Ikemesit Effiong, Head of Research, SBM Intelligence
The Nigerian economy, which is heavily dependent on the swings in global crude prices, will almost certainly contract as government spending shrinks and sub-national units see their federal allocations, the most significant portion of their income, shrivel. The effects on the petroleum industry are, however, more nuanced. Upstream players will be the most affected as dwindling demand abroad combines with an already uncertain regulatory climate to add further pressure to their balance sheets.
Downstream players are already positioning to reap the benefits of a government-sanctioned drop in domestic fuel prices, which might prop up demand. The gas players, on the other hand, seem to have it a little easier. In part due to a fiercely competitive international gas market and the long-term contracts the NLNG has with its customers, the gas players will be somewhat insulated through Q2 and much of Q3, giving them time to activate contingency plans. If the pandemic persists through the rest of the year, however, they would have to contend with an adverse export market and domestic gas consumption, while growing, will not be sufficient enough to plug the gap.
Timi Austen-Peters, Chairman, Dorman Long Engineering Limited
The combined impact of the COVID-19 and depressed oil price on Dorman Long has been fundamental for staff welfare and business continuity. We have sought to overcome these challenges in a number of ways. Our number one priority is the safety and wellbeing of our staff. Those who can work remotely have been encouraged to do so. Our fabrication and galvanizing workshops have been shut down in compliance with Federal and State regulations. The core crews on oil and gas infrastructure of national importance, especially offshore, remain at work and we have arranged for limited rotation to maintain the constant operation of the infrastructure. We have also embarked on cash preservation strategies given that we do to know how long this period of uncertainty will persist.
We are fortunate to run a diversified business. Whilst the fabrication and galvanizing business have ground to a halt, the maintenance business endures so that at least a fair number of our staff are still kept busy and there is some continuing economic activity which will lead to some revenue accruing if not now, then in the near future.
The biggest lesson I have taken away from the current situation is the heightened importance of local content. It has allowed for business continuity where relaying on expats would have made this impossible. This is important not only for the company to keep people at work; it also ensures some revenue stream. Local content is also critical for the country to keep essential oil and gas infrastructure operational, pumping oil, producing gas, and generally ensuring the energy security of Nigeria.