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The dangling fate of indigenous oil upstream operators

What is good for the goose is therefore equally suitable for the gander. It is crucial that the government urgently unrolls a fiscal Marshall plan to address the economic emergency in the upstream oil sector

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CBN commences Forex ban on food importation, CBN’s Emefiele congratulates Dr Kingsley Obiora as he assumes office, indigenous oil firms

Governments all over the world have been launching salvos of fiscal relief to several sectors of their economy. Nigeria has also been active in this respect.

It is a right wake-up call for Nigeria on economic diversification and therefore there is an urgency to counter the economy-wide threats of the coronavirus pandemic. Curiously, the industry that lays the golden egg, which unfortunately appears to be the centre point for the transmission of the disastrous effects to the rest of the economy is seemingly missing from the list of fiscal intervention beneficiaries.

In his op-ed, the central bank governor marshalled out a relief plan for the SMEs, pharmaceutical industry, manufacturing industry as well as the transport infrastructure provision strengthening.

All three sectors – SMEs, manufacturing, pharmaceuticals, and transport – are to enjoy fiscal reliefs to the tunes of N50 billion, N500 billion, N100 billion and N15 trillion respectively within the next 36 months.

Intriguingly, the oil sector seems unremembered in this scheme of palliatives. Yet, this sector apart from being the critical revenue provider and foreign exchange source to the government is also the worst commercially hit by the pandemic.

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READ ALSO: Banks to recover N6.125 trillion loan from oil firms 

Both the banks and oil companies will experience substantial levels of financial discomfort except with generous extensions of relief interventions to them. Since year 2000, bank financing of the oil and gas sector had grown fourfold from 6% to approximately 24% in 2010.

For some banks, it is as high as 40% of the total portfolio. In general, the banking sector concentrated more than 25% of its balance sheet in the oil and gas sector. Much scholarly research has shown a strong inverse relationship between banking industry concentration in the oil sector and its profitability.

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Based on the Nigerian banking industry data between 2007 and 2019, banks’ liquidity position on average appears to improve by 45% for every 1% increase in the crude oil export price. On the flip side, a 1% increase in crude oil price leads to about a 67% drop in the banking industry non-performing loans on average.

The upstream oil sector, on the other hand, faces a unique dilemma. The first is running loss position on its products which trades below current production cost. This scenario is likely to last slightly longer pending the resumption of economic activities globally.

READ MORE: Oil firms’ debt status: How it affects Nigerian banks

The second is the growing size of the unsold inventory; a penalty for global oil production cost leadership. For instance, while our average production cost is approximately $16 per barrel that of Russia and Saudi Arabia are $4 and $5, respectively. These cost advantages give them enormous discount granting capacities.

Accordingly, both Russia and Saudi Arabia can conveniently extend between 25% and 30% discounts and remain profitable per barrel of oil sold. We lack the capacity and are therefore stuck with our wares until these large volumes, and low-cost producers exit the market.

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Despite all of these force-Majure induced market disappointments, costs of the bank facilities deployed in the production keep running. Without a deliberate intervention, if this crisis persists for up to six months, indigenous oil firms will have to grapple with financial overloads that may lead to cataclysmic collapses.

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The future of oil prices does not look very bright in the short term. It does not appear as if this virus pandemic will quickly vanish unless economic activities return to full blast. That can only happen if there are fully approved and endorsed cure vaccine made available across all the countries of the world. It also does not seem as if that is an immediate possibility.

READ ALSO: COVID-19: Short-term reforms needed to reduce impacts on the Nigerian economy -NESG

The implication is that recovery will be in a gradually cautious and stepwise fashion to maintain the balance between mass reinfections and the revamp of economic activity in many countries. So far, the easing of lockdown in many countries have followed that process. What it therefore means is that the oil companies may have to look at a twelve-month horizon for a possible full-scale activity return.

In the interim, their entrepreneurial destinies will unwrap in tandem with the gradual easing of economic activities globally and the consequent oil price improvements. Unfortunately, three months into the pandemic, many indigenous upstream oil producers are already defaulting in their bank obligations. But that is just one of the many potentially bank-specific devastating after-effects.

The other is the threat to the local content policy of the government in the oil and gas sector. The implication, therefore, is that leaving the local operators in the industry who do not possess a comparable level of access to global financing as their foreign counterparts without adequate rescue plan will set the policy back by several decades. And with the previously painted twelve-month picture of slow, and gradual economic recovery, these defaults will most likely get worse.

The drastic consequences of allowing this scenario to play out will be far-reaching not only on the local upstream oil operators and the exposed banks but to the economy as a whole through a host of other indirect channels. There are at least four ways in which banks receive the impact. The first is through the reduction in interest income as well as overall profitability.

READ ALSO: Where next for oil prices?

Other effect transmission channels include the possible adverse effects on bank balance sheets as well as potential increases in their operational costs. Again, it is also possible that if this very-low crude oil price regime lasts for more than six months without significantly sustained interventions in the banking sector, that confidence issues may crop-up.

An initial reduced confidence trigger may take roots among the not-too-strong banks that are also severely exposed. If not properly managed, this may worsen depending on the degree of withdrawals and liquidity mismatch experienced by such banks. It is needless to state that the indirect transmission channels can be as devastating as the direct impact points.

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Furthermore, allowing this crisis to considerably hurt local operators in the upstream segment of the oil and gas sector will deal a devastating blow on the local representation in that industry. Nigeria has come a long way to have a foothold in the oil and gas sector, which is a supposed exclave economy that consequently determined our domestic economic success for several years.

The local content policy, which is a complementary feature of that foothold, will be disastrously affected without a consciously mapped out plan to save the local operators in that sector. The policy enhances local participation and capacity development of the Nigerian people and their resources.

Since its implementation in the oil and gas sector, it has expanded the value chain of embedded services provided by the Nigerian people. And in the natural order of things, Nigerian owned firms are always more disposed to engage authentically Nigerian businesses as part of the local content policy.

READ MORE: Naira drops to N460/$1 in parallel market, puts pressure on official exchange rate

Therefore an error of policy design in a crisis time excluding them from salvific fiscal incentives will cost us a substantial share of the investment ownership and the human resources in the sector. We estimate the loss of up to 40% of economic activities in Nigerian owned firms – mostly engineering, construction as well as training and consulting firms – along the entire upstream oil and gas value chain if that potential faux pass is allowed.

Although the income-depressing effects on government and corporate earnings of the low oil prices are well-known and increasingly provisioned through varieties of interventionist programs to activate other sectors. However, we must know that ignoring, the upstream oil sector in these plans can only make matters worse.

The negative impact on governments income and many corporates with their economic activities embedded in the upstream oil sector’s value chain will, albeit at varying degrees, affect their capacity to repay their obligation to banks. In the same vein, the dilemma of our dangerous dependency on crude oil export for foreign exchange and our huge import dependency and appetite will naturally put pressure on both the exchange rate as well as the supply of foreign exchange.

The adjustments that will ensue will result in spikes on the cost of doing business. Many businesses will close shop as a consequence. These effects will aggravate the size of non-performing loans of the banking sectors. The severity of all of these potential consequences will depend on the extent to which the government’s fiscal interventions facilitate the revamp in the oil and gas sector as well as these other non-oil sectors.

The need for a comprehensive agenda for rebooting the economy that specifically recognises the unique challenges of the local players in the upstream segment of the Nigerian oil and gas sector is vital at this time. The dynamics of the current oil market crash and the attendant harsh economic reality differ from the 2015–17 oil price shock.

It, however, appears as if the central bank of Nigeria is still carrying-over and implementing its controversial ‘aloofness’ policy which it adopted in the 2015–17 situation to this present crisis. It would be very unwise to do so. While the pursuit of economic diversification is critical, it is essential to note that the oil sector is not dead on account of the current market crisis.

All industries occasionally face bumps in their market conditions. Governments always bail banks out, given its strategic importance. Nigeria’s upstream oil and gas sector in some sense possesses the same calibre of value.

What is good for the goose is therefore equally suitable for the gander. It is crucial that the government urgently unrolls a fiscal Marshall plan to address the economic emergency in the upstream oil sector. Of particular importance in the scheme should be the local players’ who lack the kind of leverage that their foreign counterparts have in accessing low costs funds globally.

Such a program should incorporate significant tax reliefs and perhaps up to a six-month suspension of repayments on loans owed local banks in the country. There should also be an articulated set of buffers for the recovery of local upstream oil operators as the global economy recovers.

Article written by Nnanyelugo Ike-Muonso

Nairametrics frequently publishes articles from experts such as financial analysts, economists, researchers and investors. We also feature articles from guest writers and bloggers who wish to push their views and opinions through our platform. To get your articles on Nairametrics, kindly send an email to [email protected] and we will publish it within 24 hours of approval by our editorial team.

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Coronavirus

Covid-19: Africa prepared for possible second wave – Africa CDC

Africa CDC has confirmed its preparedness for the possibility of a second wave of COVID-19 pandemic in Africa.

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Covid-19: African Union in talks with China and Russia over vaccine

The Africa Centres for Disease Control and Prevention has confirmed its preparedness for the possibility of a second wave of COVID-19 pandemic in Africa, especially with the current upsurge of active cases.

This disclosure was made by the Director, Africa CDC, Dr. John Nkengasong, during the teleconference Weekly Press Briefing on #COVID-19 on November 26, 2020.

According to him, Africa CDC has started to distribute 2.7 million rapid antigen tests with the hope that by mid-2021, the health officials would have been able to vaccinate about 60% of the continent’s population with one of the several promising new vaccines — it all depends on the cooperation and support of the continent’s leaders.

(READ MORE: Reps Committee warns MDAs against failure to render accounts to Auditor-General)

What they are saying

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According to Dr. Nkengasong: To achieve 60% vaccination, we will need to mobilise up to about $10 to $12 billion, including the cost of buying the vaccines and the cost of delivering the vaccines. So, that is the 60% mark that we really want to achieve. And I just really want everyone on this platform and our partners to understand that as a continent, that is our aspiration and goal.”

As the end-of-year holidays are around the corner, Dr. Nkengasong advised: “Do not relent in wearing masks. One message that is emerging across the visits we are conducting across the continent is that people are not masking enough. And in some settings, absolutely it seems like they are not masking at all. And that is extremely dangerous.”

What you should know

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  • As of November 26, 2020, Africa had 2,106,931 confirmed caseloads, with a death toll of 50,628 and 1,781,744 persons recovered.
  • The Southern African region is the worst hit both in terms of the number of confirmed positive cases and deaths.
  • South Africa, Morocco, Egypt, and Ethiopia are the most affected countries in terms of number of positive cases.
  • South Africa is presently the worst hit with active cases of 775,502.

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Coronavirus

COVID-19 Update in Nigeria

On the 26th of November 2020, 169 new confirmed cases were recorded in Nigeria

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The spread of novel Corona Virus Disease (COVID-19) in Nigeria continues to record significant increases as the latest statistics provided by the Nigeria Centre for Disease Control reveal Nigeria now has 66,974 confirmed cases.

On the 26th of November 2020, 169 new confirmed cases were recorded in Nigeria, having carried out a total daily test of 7,101 samples across the country.

To date, 66,974 cases have been confirmed, 62,585 cases have been discharged and 1,169 deaths have been recorded in 36 states and the Federal Capital Territory. A total of 756,237 tests have been carried out as of November 26th, 2020 compared to 749,136 tests a day earlier.

COVID-19 Case Updates- 26th November 2020,

  • Total Number of Cases – 66,974
  • Total Number Discharged – 62,585
  • Total Deaths – 1,169
  • Total Tests Carried out – 756,237

According to the NCDC, the 169 new cases were reported from 12 states- Kaduna (74), FCT (42), Lagos (17), Kano (8), Ogun (6), Oyo (6), Rivers (6), Ekiti (3), Bauchi (3), Katsina (2), Delta (1) and Ondo (1).

Meanwhile, the latest numbers bring Lagos state total confirmed cases to 23,083, followed by Abuja (6,671), Plateau (3,813), Oyo (3,721), Kaduna (3,019), Rivers (2,969), Edo (2,696), Ogun (2,202), Delta (1,824), Kano (1,789), Ondo (1,728), Enugu (1,332),  Kwara (1,096), Ebonyi (1,055), Katsina (1,014), Osun (945), Gombe (938). Abia (926), Bauchi (765), and Borno (745).

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Imo State has recorded 662  cases, Benue (496), Nasarawa (488), Bayelsa (445),  Ekiti (357), Akwa Ibom (339), Jigawa (331), Niger (296), Anambra (285), Adamawa (261), Sokoto (165), Taraba (157), Yobe (94), Kebbi (93), Cross River (90), Zamfara (79), while Kogi state has recorded 5 cases only.

READ ALSO: COVID-19: Western diplomats warn of disease explosion, poor handling by government

Lock Down and Curfew

In a move to combat the spread of the pandemic disease, President Muhammadu Buhari directed the cessation of all movements in Lagos and the FCT for an initial period of 14 days, which took effect from 11 pm on Monday, 30th March 2020.

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The movement restriction, which was extended by another two-weeks period, has been partially put on hold with some businesses commencing operations from May 4. On April 27th, 2020, Nigeria’s President, Muhammadu Buhari declared an overnight curfew from 8 pm to 6 am across the country, as part of new measures to contain the spread of the COVID-19. This comes along with the phased and gradual easing of lockdown measures in FCT, Lagos, and Ogun States, which took effect from Saturday, 2nd May 2020, at 9 am.

On Monday, 29th June 2020 the federal government extended the second phase of the eased lockdown by 4 weeks and approved interstate movement outside curfew hours with effect from July 1, 2020. Also, on Monday 27th July 2020, the federal government extended the second phase of eased lockdown by an additional one week.

On Thursday, 6th August 2020 the federal government through the secretary to the Government of the Federation (SGF) and Chairman of the Presidential Task Force (PTF) on COVID-19 announced the extension of the second phase of eased lockdown by another four (4) weeks.

READ ALSO: Bill Gates says Trump’s WHO funding suspension is dangerous

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Covid-19: African Union in talks with China and Russia over vaccine

The AU and Africa CDC have revealed that they have reached out to both China and Russia over the possibility of vaccine partnerships.

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Covid-19: African Union in talks with China and Russia over vaccine

The Africa Centres for Disease Control and Prevention and the African Union announced they have been in talks with China and Russia over the possibility of vaccine partnerships to ensure that Africa is not left behind when vaccines become available.

This was disclosed by John Nkengasong, Africa CDC Chief, at the Bloomberg Invest Africa online conference.

READ: Covid-19: Pfizer to file for emergency authorization for its vaccine, reaches safety milestone

Mr. Nkengasong said that Africa would not limit itself to only one vaccine partner and that Africa was willing to work with as many partners as possible to provide a vaccine for its 1.2 billion people.

“We are not limiting ourselves to any particular partner. As a continent of 1.2 billion people, we are willing to work with any partner who adheres to our strategic plan for vaccine development and access in Africa.

“The continent is taking the access and development of vaccine very, very seriously. We really need to see clinical trials being done on the continent, so they address issues like background infections from other diseases.”
He disclosed that the Africa CDC resumed talks last week with China, to discuss partnerships with Chinese Drug Manufacturers and also clinical trials in Africa. He added that Russia has been approached with a similar plan.

He said that the WHO Covax programme only covers 20% of the population, but Africa will need 60% of its population vaccinated to achieve herd immunity.

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There are multiple avenues being explored now to make sure Africa has the appropriate doses of vaccines and also that we have that in a timely fashion, not in a delayed manner,” Nkengasong said.

He revealed that the AFREXIM Bank agreed to finance vaccine procurement with $5 billion and is waiting to see how much it will receive from World Bank’s $12 billion vaccine procurement fund for developing nations.

READ: COVID-19: G-20 to extend debt relief to developing nations

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What you should know 

Nairametrics reported earlier this month that Pfizer Inc. disclosed that its experimental vaccine, which is jointly developed with BioNTech, was more than 90% effective in preventing COVID-19, based on initial data from a large study in the ongoing phase 3 trials.

(READ MORE: COVID-19: AstraZeneca vaccine could be 90% effective against the virus)

Last week, a pharmaceutical company, Moderna Inc., stated that its COVID-19 vaccine was 94.5% effective in treating coronavirus, after preliminary analysis of a large late-stage clinical trial.

The G-20 nations also announced a pledge to pay for vaccine distribution to developing nations that could not afford it. The leaders also unveiled a debt extension programme to developing nations during the weekend’s G-20 summit.

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The Federal Government of Nigeria also announced through the Ministry of Health, that it would inaugurate an 18-man Covid-19 Vaccine Task Team, in a bid to ensure vaccine security In Nigeria.

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