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Coronavirus

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.

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.

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?

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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

Smartphone to be used for daily tracking of first set to receive COVID-19 vaccine

Essential workers would get daily text messages on their smartphones enquiring about the side effects.

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Smartphone to be used for daily tracking of first set to receive COVID-19 vaccine

The first set of Americans who get the doses of the first Covid-19 vaccines will be closely monitored by the US Centers for Disease Control and Prevention (CDC) through daily text messages and emails from their smartphones.

This disclosure was made by a federal advisory group on immunization practices during a meeting.

A CDC immunization expert, Tom Shimabukuro, at a meeting of the CDC’s Advisory Committee on Immunization Practices, said that essential workers, who were expected to be the first recipients, would get daily text messages on their smartphones enquiring about the side effects in the first week after they get the shot, and then they would be contacted weekly for 6 weeks.

READ: Polio Debt: Gates Foundation agrees to repay Nigeria’s $76m debt.

Shimabukuro disclosed that those essential workers could be as much as about 20 million people.

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Janell Routh, a CDC medical officer revealed that the advisers also discovered that the CDC and the US Defense Department have set up technical assistance teams to help state and local jurisdictions develop and implement distribution plans, which are due for review and approval by October 16.

While addressing the panel, Routh said, “We are asking states to think broadly. In their plans, I think they should have contingencies for whether there’s an ultra-cold product only or whether there’s more than one vaccine available.”

READ: Official: Japaul confirms it is pulling out of Milost deal

This meeting is coming up at the time when some prominent voices like Bill Gates have expressed their distrust for CDC under its current leadership over their rush for vaccine development which has political undertones.

This is as polls conducted in the past 2 months revealed that majority of Americans expressed worry over the rush in vaccine development and a third wouldn’t get inoculated.

Shimabukuro said the quick detection of safety signals was of paramount importance, while also noting that the data gathered could provide reassurance if no safety concerns were detected.

READ: NCC sanctions Airtel, 9mobile for misconduct

While responding to a question over public safety concerns, Shimabukuro said there would be a chance to opt out of the smartphone program. He, however, pointed out that those who had opted out could also decide to opt back in at a later time.

The head of the panel’s Covid-19 vaccines working group, Beth Bell, said that the advisory group would counsel Robert Redfield, the CDC Director, on how best to get a Covid-19 vaccine to Americans. A vote on specifics though, won’t occur until after the U.S. Food and Drug Administration takes action on a vaccine.

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READ: How the proposed minimum wage will affect those earning above N30,000

The committee is made up of 15 voting members, who are mostly medical experts and academics, as well as government and medical industry representatives.

Every jurisdiction is “heavily involved right now in planning” and have been for some time, Routh said. It’s unclear whether states will know which vaccine could be first available. Each has different storage requirements with some needing extremely cold storage.

READ: China’s Covid-19 vaccine may be ready for general public in November 2020

Kathleen Dooling, a CDC epidemiologist who presented to the immunization panel last month, said 10 to 20 million vaccine doses would be available in November if a vaccine is approved before then.

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Coronavirus

COVID-19 Update in Nigeria

On the 22nd of September 2020, 176 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 increases as the latest statistics provided by the Nigeria Centre for Disease Control reveal Nigeria now has 57,613 confirmed cases.

On the 22nd of September 2020, 176 new confirmed cases were recorded in Nigeria, having carried out a total daily test of 3,177 samples across the country.

To date, 57,613 cases have been confirmed, 48,836 cases have been discharged and 1,100 deaths have been recorded in 36 states and the Federal Capital Territory. A total of 484,051  tests have been carried out as of September 22nd, 2020 compared to 480,874 tests a day earlier.

COVID-19 Case Updates- 22nd September 2020,

  • Total Number of Cases – 57,613
  • Total Number Discharged – 48,836
  • Total Deaths – 1,100
  • Total Tests Carried out – 484,051

According to the NCDC, the 176 new cases were reported from 14 states- Lagos (73), Plateau (50), FCT (17), Rivers (8), Ondo (6), Niger (5), Ogun (5), Edo (3), Kaduna (3), Oyo (2), Bauchi (1), Bayelsa (1), Delta (1), Nasarawa (1).

Meanwhile, the latest numbers bring Lagos state total confirmed cases to 19,055, followed by Abuja (5,583), Plateau (3,304), Oyo (3,233), Edo (2,615), Kaduna (2,359), Rivers (2,263), Delta (1,800), Ogun (1,772), Kano (1,734), Ondo (1,606), Enugu (1,285), Ebonyi (1,038), Kwara (1,025), Abia (881), Katsina (848), Gombe (839), Osun (817),  Borno (741), and Bauchi (692).

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Imo State has recorded 562 cases, Benue (473), Nasarawa (449), Bayelsa (395),  Jigawa (322), Ekiti (317), Akwa Ibom (288), Niger (259), Adamawa (234), Anambra (232), Sokoto (161), Taraba (95), Kebbi (93), Cross River (85), Zamfara (78), Yobe (75), 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.

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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Coronavirus

Covid-19: FG reports 36% drop in confirmed cases, disburses N32 billion to 32 states

Nigeria has witnessed a decline in the number of coronavirus cases in the month of August from that recorded in July.

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NCDC, CORONAVIRUS, COVID-19: Nigeria, other African countries to collaborate with tech giants over misinformation, NCDC and NNPC-IPPG reinforce #TakeResponsibility theme with multi-lingual campaign

The Federal Government has announced a 36% decline in confirmed COVID-19 cases in the month of August, as against what was recorded in July across the country.

This disclosure was made by the Director-General of the Nigeria Centre for Disease Control (NCDC), Dr Chikwe Ihekweazu, during a press briefing on Monday by the Presidential Task Force (PTF) on COVID-19 in Abuja.

He, however, said that it is not time to celebrate as the decline could be attributed to low COVID-19 tests in the states.

“The number of reported cases daily has declined nationally in the last few weeks. We have seen a 36 per cent decline in August compared to July on national figures. Unfortunately, we cannot celebrate this until we test sufficient figures in every state,” the NCDC boss maintained.

Meanwhile, the Presidential Task Force on Covid-19 has disclosed the disbursement of N1 billion each to 32 states in the country amid the coronavirus pandemic.

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This was part of the statement made by the PTF Coordinator, Dr Sani Aliyu, during a press briefing of the task force on Monday in Abuja.

Aliyu said, “We have released money to the state governments recently, to 32 state governments. Each state government was given a billion naira. This is for the purpose of driving their COVID-19 responses and we are asking them to prioritize testing in addition to surveillance activities linked to COVID-19.’

The Chairman of PTF on Covid-19, who also doubles as the Secretary to the Government of the Federation (SGF), Boss Mustapha, called for greater vigilance from both the government and citizen.

While explaining the importance of the call, Mustapha noted that the country’s economy has been devastated by the global pandemic.

The SGF stressed that President Muhammad Buhari’s administration, as a serious government, is pushing through with reforms that will help the nation’s economy recover from the effect of the virus.

Mustapha said, “The call for greater vigilance is underscored by the fact that our economy has been seriously affected by the pandemic and we are pushing through with home-grown economic recovery strategies to cushion the economic impact of the pandemic.”

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