The plunging demand for oil wrought by the novel Corona Virus pandemic combined with a savage price war has in a turn of event left the fossil fuel industry submerged, dismayed and in a phase of survival mode. It faces the gravest setback, one which has never been seen in a century and can best be described as ‘hellscape’ or in the least lurid description, unprecedented. As a result, the key question as to whether this will permanently alter the course of history in the oil and gas sector has been born. As analysts predict, this epidemic now turned pandemic will no doubt shake the fossil fuel realm, possibly leaving no room or at best a space for minimal comeback. Just like other nations have been shaken by the effect of the pandemic, the Nigerian oil and gas sector is no exemption.
Against this backdrop, this treatise embarks on a scholarly exposition into the theoretical framework of the Covid-19 pandemic, bringing to light its effect on the oil and gas sector. It concludes by proffering workable solutions to the menace.
DEFINING THE COVID-19 PANDEMIC
The Corona Virus Disease (COVID-19) is defined as an illness caused by the novel Corona Virus now called Severe Acute Respiratory Syndrome Corona Virus 2 (SARS-CoV-2; formerly called 2019-nCoV) which was first identified amid an outbreak of respiratory illness cases in Wuhan City, Hubei Province, China. It was initially reported by the WHO on Dec 31st 2019.
However, on Jan 30th 2020, the WHO declared the COVID-19 outbreak a global pandemic. This is the very first designation after the declaration of the H1N1 influenza as a pandemic in 2009. Since the emergence of the COVID-19 pandemic with over 2.8 million confirmed cases and 200,000 deaths worldwide, various sectors have been hit heavily, with thousands of people losing their employment and hopes to regain stability globally seeming far from imminent. The oil and gas sector is not left out and it has had its share of the blow. How has this sector been affected?
EFFECT OF COVID-19 ON THE NIGERIAN OIL & GAS SECTOR
A slump in oil prices is normally a cause for celebration in gas-guzzling nations. But for oil-producing nations, “the global Petropolis”, a heavy drop in crude price can spell disaster and hardship for millions of people. It is easy to understand why oil is referred to as Black Gold, as high price implies oil revenues filling the coffers of companies and the government of countries which produce it.
However, with the current state of affair, having oil could be perceived as a curse rather than a blessing. As reported by the BBC, the International Energy Agency has warned that Ecuador, Nigeria and Iraq could be worst hit, with earnings falling between 50% and 85%, assuming a barrel sells at US$30. Oil prices in the USA even plunged below US$1 per barrel as reported by Bloomberg.
Additionally, the market signals indicate that not only will demand for oil become very low, but the global oil industry will experience insufficiency in oil storage facilities. The fall in demand for oil has resulted in storage facilities, ships, terminals and pipelines reaching their brim. The relative fall in demand against supply has caused oil producing nations to seek outlets for their crude through renting of tankers to store surplus supplies, conversely forcing the price of oil into negative territories, bringing about cuts by OPEC which is projected to be eased to about 8million barrels per day between July and December 2020; with further agreement that they would later be eased to six million barrels per day from January 2021. It is crystal that the oil and gas sector have been dealt deadly strokes by the coronavirus pandemic. What effects has this development had on this sector?
- SCARCITY OF BUYERS: The National Bureau of Statistics in its Foreign Trade Statistics Report for the fourth quarter of 2019 stated that the major buyers of Nigerian crude, that is, India, Spain, France and South Africa, have been heavily hit by the Coronairus, with huge impact on their economies. The Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Malam Mele Kyari, stated that the country was having difficulties finding buyers for about 50 cargoes of crude oil and 12 Liquified Natural Gas (LNG) cargoes. As a result of this inability to discard these cargoes, NNPC has discounted the official selling prices for Bonny light and Qua Iboe by US$5 per barrel, to clear the glut of unsold cargoes.
- INCREASED PRESSURE ON THE NAIRA AND FOREIGN RESERVES: The continuous drop in the price of crude oil in the international market has already taken its toll on the nation’s crude reserves. Oil and gas make up for about 90% of the country’s foreign exchange earnings and more than 60% of the country’s revenue. According to a statement made by the Minister of Finance, Zainab Ahmed “Covid-19 has put increasing pressure on the Naira and on foreign reserves as the crude oil sales receipt declines”. This has brought about a slash in the national budget for 2020 which pegged oil price at US$57 per barrel to US$30. As at the present time, prices have plunged greatly in other countries.
- COST CUTTING ACTIONS: In line with oil counterparts around the globe, Oil companies in Nigeria are likely to engage in cost cutting measures, including scaling down their project and slashing down their workforce thereby creating unemployment. For instance, SEPLAT petroleum development company Plc is looking at making a 30% cost cut to counter the fall in crude price.
- DECLINE IN OIL PRICE: The deepening fall in price have come despite OPEC agreement to cut roughly 10% of global crude supply. Reductions of various magnitude are planned to run until April 2022 as part of efforts to stabilize prices. This deal was the largest cut in oil production to be ever agreed. In this vein, the sector is being affected as Nigeria is a member of the OPEC.
- FALL IN DEMAND FOR CRUDE: As the Secretary-General of OPEC, Mohammed Barkindo has reported, the fall in demand for crude may not recover till the second half of the year. He forecasts that global demand for oil would fall by over six million barrels per day. As a result, the Nigerian oil & gas sector as well as those of other nations are at the verge of experiencing one of the most severe oil crises in history.
- DPR DECLARATION OF FORCED MAJEURE: The Department of Petroleum resource (DPR) in ensuring necessary measure has ordered oil contractors and operators to limit the number of operators at operation and construction sites. Further declaring that the situation should be considered as a “forced majeure”. Logically inferring, the effect of this on the economy will largely be felt.
Regardless of the negative effect of the Corona Virus on the economy, it cannot be said not to have come with its silver linings. These include forecast by climate experts which have shown that the world has experienced a 25% percent drop in carbon emissions, bringing about a significant decrease in carbon density in the atmosphere. In view of the negative effects of the pandemic on the oil sector, this essay proffers workable recommendations.
Questions as to whether this is the end of an era in oil have arisen. The plunge in oil price seem to have demolished the lucrative returns to which investors are accustomed to. However, is there a way?
- The federal government needs to diversify the economy as it is heavily reliant on crude oil. The 2017 national petroleum policy recognizes this fact. Increased investment in sectors such as agriculture, manufacturing and real estate will reduce dependence on oil. Diversification is the key
- Government should implement short-term measures in collaboration with oil companies to suppress the loss that may be incurred.
- The National Assembly should implement the Emergency Economic Stimulus Bill 2020 so as to bring to life the benefits associated with it.
- There should be a restructuring of key sectors including the oil sector
- The federal government should disburse funds to mitigate the hardship felt by households and small medium enterprises. While this doesn’t affect the oil sector directly, it indirectly makes up for those affected by forced majeure in the sector.
Governments and industries around the world united as one are grappling with responses to the novel Corona Virus pandemic. The already existent economic slowdown compounded by the collapse of global oil prices has placed Nigeria at a drowning point. Concerns are mounting that the current crisis may mark an unprecedented setback. Will the Nigerian economy recover from this imminent cancerous disaster? The present appears blasted, the future seems bleak. Though the light may seem dim, the Nigerian oil and gas sector still has hope; for where there is a will, there is way.
About the Author
Chijioke Joshua Ucheakonam is a final year student of the Obafemi Awolowo University, Ile-Ife, Osun State. He has keen interest in Medical Law, Criminal and International Law. He is a writer and an Art (aesthetics) enthusiast.
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