COVID 19: Re-shaping Oil and Gas as we know it
The coronavirus pandemic has hit the world and is likely to have a lasting impact on energy demand. Governments around the world have closed businesses and restricted freedom of movement for people, consumption of oil, gas and power has also fallen.
Consumption of oil and gas and the effect of the pandemic
Already, the International Monetary Fund has cut its projection for Nigeria’s 2020 economic growth to 2% from 2.5% due to plunging oil prices stemming from the coronavirus outbreak. Nigeria is the continent’s biggest producer and depends on crude for 90% of its exports. The oil price shock, due to the coronavirus, came as a great surprise to Nigeria and the impact has put substantial strain on the budget and the currency. The government may have to adjust its 2020 budget, which was based on a crude price of $57 a barrel. The low demand for oil and gas products is already causing difficulties for producing countries in trading their outputs in the market.
In April 2020, Oil prices moved into negative territory for the first time in history after demand dried up and lockdowns across the world spread due to COVID-19. In response to the shocks in the oil market, the Organisation of the Petroleum Exporting Countries (OPEC) and non-OPEC oil producing countries recently agreed to cut almost 10 million barrels per day (mb/d) in oil production. The agreement will see participating countries adjusting their crude oil production by 9.7 mb/d from May for an initial period of two months. OPEC announced that from July to December the total adjustment period would be 7.7 mb/d, followed by a 5.8 mb/d adjustment for a period of 16 months (January 2021 to April 2022).
Governments role in Nigeria/Globally during the pandemic
The demand for oil has plummeted because of the reductions in road transport and air travel. However, some clear trends are already visible. Businesses and politicians are debating the merits of complex international supply chains and questioning whether they have increased efficiency at too high a cost in terms of greater vulnerability to disruption.
COVID-19 pandemic may have exposed the current reality to Nigeria’s policy makers on the need to block leakages. This is because Nigeria has used the opportunity of lower crude oil prices to announce removal of fuel subsidy on premium motor spirit (PMS). The implication is that money for fuel subsidy would be free for other infrastructural development. It is an opportunity for Nigeria to wrap up production, shore up its reserve on a low-price regime and offload when prices go up.
Following the recent OPEC+ meeting to curtail production, Nigeria’s Minister of State for Petroleum Resources, Chief Timipre Sylva, announced that Nigeria has joined its other OPEC+ counterparts to bring into effect the agreement to cut 9.7 million barrels of supply following the alignment of Mexico. “This will enable the rebalancing of the oil markets and the expected rebound of prices by $15 per barrel in the short term. This also promises an appropriate balancing of Nigeria’s 2020 budget that has been rebased at $30 per barrel.“As agreed, Nigeria will join OPEC+ to cut supply by 9.7 million barrels per day between May and June 2020, eight million barrels per day between July and December 2020 and six million barrels per day from January 2021 to April 2022, respectively.
What is at stake for Nigeria?
The new cuts now set Nigeria’s daily production to an average of 1.4 million barrels per day; 300,000 barrels less than the 1.7 million barrels in the adjusted 2020 budget, signalling leaner days ahead for Africa’s biggest oil producer.
Nigeria is already stuck with unwanted cargoes of crude oil and liquefied natural gas (LNG), as coronavirus takes its toll on our biggest buyers. Nigeria is involved in a volatile market in which it has little control over. Today’s oil price position gives us a peek into the future. With low oil prices backed by massive low-cost and quickly deployable reserves, concentrated in the Middle East; Nigeria cannot continue without taking effective actions.
What can Nigeria do differently?
The coronavirus will not last forever, but a larger threat to the oil industry awaits. The use of renewables is rising fast and is gradually eating away the demand for oil. Soon the game will change. The Saudis recognize this, and Nigeria should keep its eyes open. With new innovations, old industries die. Nigeria desperately needs to build an economy that is resilient to the volatility of oil and gas markets. Such resilience requires political cohesion, economic diversification, investments in education, science, technology, and manufacturing capacity.
Impact of the Corona virus in Africa and Globally
When experts made 2020 predictions for the energy sector, no one pictured the coronavirus pandemic. The spread of COVID-19 has been responsible for the drop in global oil demand by 30%, putting all previous forecasts to bed. The International Energy association (IEA) predicted that year-on-year global oil demand would reduce by 90,000 barrels/day – the first time since 2009.
African countries that depend largely on revenues from oil and gas exports may find it difficult to match the serious competition and price war by Saudi Arabia and Iraq. The price war will be harmful to public finances in parts of the Gulf as well. For the most politically and economically fragile producer states, the reckoning could be severe.” No doubt, the implications of low oil and gas prices would be severe for African producers.
The emerging long-term challenges ahead
Businesses in the oil and gas sector face numerous potential risks and losses. Price borders, where they exist against falling oil prices, are likely to be short-term only. Measures taken to cut budgets and costs may bring about breaches of licensing obligations. Cash calls will not be met, joint ventures will come under strain and default rights will be threatened where oil prices have not already rendered projects uneconomic and brought them to a halt. Revenue drops are inevitable, which in turn is forcing businesses to proactively cut investment and costs. Long-term contracts for gas supply could see repricing formulae triggered, and global oversupply will place pressure on storage.
Preparing for the opportunities in the new world that lies ahead once the immediate crisis is past.
This massive reset grants us the option to launch aggressive, forward-thinking, and long-term strategies leading to a diversified, secure and reliable energy system that will ultimately support the future growth of the world economy in a sustainable and equitable way.
In the long run, a sustained decline in the price of oil may not be a bad thing for African oil producers if it pushes them to diversify their economies away from dependence on oil and gas. Though oil makes up a huge proportion of exports and government revenue in these countries, their combined share of global output is not substantial. African countries need to invest in critical sectors of their economies such as education, health, infrastructure and agriculture to provide a solid base for industrialization, local value added, economic development and sustainable growth.
How businesses in the oil and gas industry should deal with the impact of the Covid-19 crisis?
As Governments around the world are introducing measures to shore-up national economies, businesses are now turning their minds more towards the economic impacts and risks of the current situation. As the world settles into varying extents of social and economic lockdown, business focus is looking beyond the implementation of continuity planning. Many considering the steps that may need to be taken to avoid or mitigate loss.
Part of that exercise will require businesses to assess their contractual arrangements, obligations, and exposure (whether financial or otherwise). They will need to identify and consider them availability of mechanisms in each contract or at law to alleviate or exclude liability and loss. The most prudent and best-organised businesses will have already started to identify and quantify future risks and devise and implement strategies in response.
The blend of the coronavirus epidemic, and the slump in global oil prices, means that investment will contract sharply this year, especially in the energy sector, and export growth will slump. The coronavirus pandemic poses a lot of challenges to African oil and gas producers in terms of revenue loses and the trading of their products in the international oil and gas market. As a palliative measure, the countries should put in place strategies and policies that would reduce the socioeconomic impact of the decrease in revenues from oil and gas sales due to market interruptions. Such policies should include the diversification of their economics, efficient management of revenues, commitment to local value addition in the oil and gas industry through national industry participation and a drastic reduction in corruption and misallocation of limited resources.