Between January and April, oil price has lost at least $27 per barrel. As at the end of January 2020, Brent crude sold for $63 per barrel as against between $31 and $33 per barrel this month, despite record production cut of 9.7 million barrels per day by the Organisation of Petroleum Exporting Countries (OPEC) and its allies non-OPEC (OPEC+) after the reconciliation of Saudi Arabia and Russia. At the peak of the price war between Saudi Arabia and Russia, Brent crude fell below $25 per barrel.
The coronavirus pandemic also led to an abysmal drop in oil consumption as borders were closed, travel restriction activated across the world, industries and manufacturing concerns as well as the aviation sector were shut, all in a bid to contain the spread of the virus. Currently, oil firms have begun to cut their capital and operational expenditures with likely projects deferments and cancellations.
For Nigeria, the government had since rebased its oil benchmark from $57 per barrel to $30 per barrel and expects oil prices will not fall below the rebased benchmark following the renewed OPEC+ cooperation and production cut. To industry players, there are pains and gains of the fall in oil price.
To the Secretary-General of African Petroleum Producers’ Organisation (APPO), Dr Omar Farouk Ibrahim, the plunge of oil prices to about $20 per barrel portends a difficult period not only for Nigeria, but all oil producing countries in Africa. 2020, he said, really will be difficult for Nigeria and other oil producers on the continent and will require drastic measures by the governments to keep the economies afloat and ameliorate the impact of reality on the citizens.
The APPO chief said, from 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 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. It is a good development that the ‘Declaration of Cooperation’ was recently resuscitated and it is expected to give some hope to the industry.
But considering the supply glut caused by the price war and worsened by decline in oil demand caused by the pandemic globally, there are lots of crude cargoes looking for buyers and a lot more in storage. It will take time for the oil price to pick up even if it doesn’t go below $20 per barrel, he added.
“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 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. The 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 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, revenue from the Nigeria Customs Service and Federal Inland Revenue Service, among others, will be negatively impacted.
“We must be grateful that through right policies and actions, a lot has been put in agriculture. Most of the rice consumed in Nigeria are 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 that 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.”
To the Group Chief Executive Officer of Oildata Group, Mr. Emeka Ene, what Nigeria is facing is an existential threat that could wipe out the gains of Nigeria’s over 50 years of oil and gas operation. Ene, a former President of Society of Petroleum Engineers, Nigeria Council and former Chairman of Petroleum Technology Association of Nigeria (PETAN), said: “We are seeing unprecedented happenings in the world.
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, the locals have to do the jobs now.”
To him, 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 high price for their laxity.
Every country is holding its own. 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 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 fertiliser 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, 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 reality is that we have to rely on indigenous capacity and capabilities.
“As the global oil industry is, for the next 12 months, there will be no reasonable cash flow. Saudi has enough capacity to supply what the world requires, so is 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 prioritise Nigerian firms by giving them support and should not allow any service company to go under. He said: “It is a new world order and a new way of doing business. Nigeria should match dollar for dollar to keep the oil industry and economy afloat.
The solution to current problem doesn’t lie outside Nigeria, but within Nigeria. Let the government maximise use of its indigenous expertise, capacity, capability and resources. 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.
The Chairman of the Major Oil Marketers Association of Nigeria (MOMAN) and 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 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 Federal Government’s capital projects’ development will also suffer 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 subsidy regime, let the consumer pay the right prices for the products consumed.”
On the operation of the downstream industry, Oyebanji said: “It is clear with the continued fall of oil price, imports of refined products will cost less,” noting that the low oil price regime will remain in the foreseeable future. To him, ramping up of oil prices to December 2019 levels may take a very long time.’’
He said low oil price means lower prices at the pumps as seen in the last few weeks, where prices of petrol have dropped from N145 per litre to N125 per litre and further to N123.5 per litre. However, the mechanism of lowering the price in Nigeria is faulty because of the government’s involvement in premium motor spirit (petrol). The government through fiat forces every marketer to sell petrol at a new price it sets.
This system makes marketers to lose money and some to close shops. In other countries, marketers are allowed to sell their old stock and gradually everyone switches over to the new price. For example, the price of diesel in Nigeria drops with low crude price but it doesn’t react swiftly like that of petrol because its price is deregulated.
Oyebanji said: “Reduction of fuel price by fiat kills businesses because it adversely affects bank loans and drafts taken by marketers. If government reduces fuel price by N20 per litre, it can force a small business under. In the first price reduction, marketers across the industry lost between N3.5 billion and N3.6 billion.
The Petroleum Products Pricing Regulatory Agency (PPPRA) that is supposed to look at the interest of all stakeholders including the operators and players and ensure everyone is protected has not done that.
“The PPPRA reviews fuel price every month and forgets that it takes four to six weeks for an imported cargo to land. If the cargo was imported to be sold at N125 per litre and government reduces the price to N110 per litre on arrival of the cargo in the country, the marketer is already losing N10 per litre.
The PPPRA should put the price review at between two and three months and not monthly to enable importers sell their products. PPPRA needs to clear all uncertainties and ensure clarity of environment for business operation.
“Currently, the Asset Management Corporation of Nigeria (AMCON) controls many marketers’ companies because they owe banks. Many more companies will go into bankruptcy with what is happening and this system of changing fuel price without notice.
Many companies will retrench their workers and reduce operations, while the Nigerian National Petroleum Corporation (NNPC) will continue to be the sole importer until PPPRA clears all uncertainty surrounding operations in the downstream.”
Source: The Nation Nigeria