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Oil and gas sector crisis looms as FG, states relax more COVID-19 restrictions

Oil and gas sector crisis looms as FG, states relax more COVID-19 restrictions

Oil and gas sector crisis looms as FG, states relax more COVID-19 restrictions

Nigeria’s oil and gas sector could take a plunge as federal and state governments relax restrictions further. The country has reported 304 new confirmed cases of the Coronavirus (COVID-19) as the death toll jumped to 888. Nigeria Centre for Disease Control (NCDC) made this known on its official twitter handle on Sunday,

  Data from the NCDC showed that the 304 new cases were spread across 14 states, and the FCT. The centre noted that five deaths were recorded in the country. It added that till date, the country recorded 43,841 confirmed cases, 20,308 discharged and 888 deaths in 36 states and the FCT.

   It showed that the 304 new cases were reported from 15 states, namely Lagos (81), FCT (39), Abia (31), Kaduna (24), Rivers (23), Plateau (16), Cross River (13), Ebonyi (12), Ondo (12) Ekiti (11), Edo (11), Benue (10), Nasarawa (10), Ogun (6) and Gombe (5).

   But with the worrying spike, the nation’s critical oil and gas sector could be headed for troubling times. While the pandemic is affecting a wide range of energy markets: coal, gas and renewable, its impact on oil markets is particularly severe. This can be seen from the supply glut currently witnessed in the market and the persistent drop in crude oil prices.

   As a result of the rapid spread of the virus, movement of people and goods had been curtailed worldwide. This is dealing a heavy blow to demand for transport fuels, according to Dr Fatih Birol, Executive Director of International Energy Agency. According to him, this is especially true in China, the largest energy consumer in the world, which accounted for more than 80 per cent of global oil demand growth last year.

   The International Energy Agency had forecast that global oil demand was expected to decline in 2020 as the impact of the new COVID-19 spreads around the world, constricting travel and broader economic activity.

   Nigeria, among others, has cause to be concerned, as the global spread of coronavirus, and the drop in the price of crude oil in the international market would take a heavy toll on the nation’s economy as oil and gas account for over 90 per cent of Nigeria’s foreign exchange earnings and more than 60 per cent of the country’s earnings.

   The National Bureau of Statistics in its Foreign Trade Statistics Report for the Fourth Quarter of 2019, had stated that the major buyers of Nigeria’s crude oil are India, Spain, Netherlands, France and South Africa, among others. These countries have recorded cases of the coronavirus and the disease had impacted negatively on their economies.

   To reaffirm its impact on the oil and gas sector in Nigeria, the Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Malam Mele Kyari, had maintained that the coronavirus pandemic was taking its toll on the Nigerian economy.

  Kyari said that in the face of the coronavirus global pandemic, countries like Saudi Arabia were giving discount of eight dollars and Iraq five dollars respectively, to their off-takers in some locations, meaning that when crude oil sold at 30 dollars per barrel, countries like Saudi Arabia was selling at 22 dollars per barrel and Iraq selling their crude at 25 dollars per barrel.

   He noted that due to the uncertainties of the global crude oil market, countries that produce at the cheapest price would remain in the market, while jurisdictions with high cost of crude oil production would not be able to cope with the competing prices.

   To reduce the effect of the coronavirus, member countries of the Organisation of Petroleum Exporting Countries (OPEC), had met early March, with a few non-OPEC member countries to agree on a production cut that would see major crude oil producers cutting their export output by an additional 2.5 million barrels per day.

   Participating countries at the meeting failed to reach an agreement, so the output cut deal failed to materialise. As a result of the failed output cut deal, the fight for international market share of crude oil between Saudi Arabia and Russia was renewed, and as both countries, among other countries, increased their crude oil output, the price of crude oil began a steep slide, hitting new lows last seen almost a decade ago.

   Meanwhile experts are of the opinion that the Nigerian economy is placed at a disadvantage, as the country would struggle to find buyers for its crude oil output and would have to settle for low prices, when it eventually gets buyers.

   Mr Andrew Akpan, an energy expert, said that the situation would cause a major strain on the country’s finances and its budget, especially as the country is relying heavily on crude oil sales to finance the 2020 budget.

   The 2020 federal budget was based on 57 dollars per barrel oil bench mark and 2.18 million barrels per day oil production and an exchange rate of N305 per dollar. Currently, the price of Nigeria’s Bonny Light has dropped to 33.73 dollars per barrel, 40.8 per cent below the 57 dollars per barrel budget benchmark.

   Akpan said that the 57 dollars per barrel benchmark and 2.18 million barrels of crude oil per day output the government is targeting, as well as the oil revenue of N2.64 trillion would likely not be achieved.

   “Therefore, with the decline in crude oil price, the ability of the country to meet its N2.64 trillion oil revenue target has been curtailed by about 40 per cent, while the country’s budget deficit is expected to rise by about 40 per cent. With the inability of the country to meet its revenue target, it would face serious constraints in its ability to pay workers’ salaries, as well as carry out most of the projects listed in the budget.

   “With all these challenges, to avoid a major crisis or shutdown of the country, the government might resort to drawdown of the already depleted excess crude account or outright borrowing, both locally or internationally, to meet its obligations to its workers and to undertake significant infrastructure projects.

   “This would worsen the country’s debt situation and plunge the country into another debt trap with a high risk of default, as the country’s foreign reserves faces the risk of depletion due to an expected devaluation of the naira,’’ he said.

   Mr Chinedu Onyeizu, a petroleum engineer said that the impact of the virus would be felt with foreign reserves and defending of the naira by the Central Bank of Nigeria (CBN). He noted that with the low foreign exchange earnings from the already challenged crude oil sales, monies in the foreign reserves would be used to finance import of other critical goods. He said that this would lead to the depletion of the naira, as well as making it difficult for the CBN to effectively defend the naira.

   “With the decline in the value of the naira, prices of goods and services in the country would rise sharply; inflation rate would skyrocket, unemployment would increase and poverty rate in the country would worsen,’’ he said

   Mr Aly-Khan Satchu, a Nairobi-based investment analyst, and Chief Executive Officer of Rich Management Limited, said that Nigeria currently has between 16 billion and 18 billion dollars, “sitting in short term certificates,’’ such as Open Market Operation (OMO) bills, adding that with the uncertainty posed by the falling oil prices, the country would be at risk when most of these foreign investors chose to cash out of the country.

   “There is about 16 billion to 18 billion dollars sitting in short term certificates, OMO, where investors are getting double digit in dollars. The premise of that returns is that the currency remains stable. With the oil price falling more than 20 per cent since the beginning of the year, the entire premise of that double digit return has been knee-capped. Most of the investors would be looking to hit the eject button as soon as they can,’’ he said

   To tackle the challenge, President Muhammadu Buhari had constituted a committee to assess the impact of the virus on the economy and best practices to adopt. The Minister of Finance, Hajiya Zainab Ahmed said that the committee would revisit the crude oil benchmark and lower the price.
  She said: “Mr President has formed us into a committee, with the Minister of State, Petroleum Resources, the CBN governor, the GMD NNPC and myself as members. Our mandate is to make a quick assessment of the impact of this coronavirus on the economy, especially as it affects the crude oil price.

   “We will be writing a report and brief Mr President, and after that we’ll also have more substantial information for the press. But it is very clear that we will have to   revisit the crude oil benchmark price of 57 dollars per barrel, we have to revisit it and lower the price. Where it will be lowered to is the subject of the work of this committee. Definitely, there will be reduced revenue to the budget and it will mean cutting the size of the budget. The quantum of the cut is what we are supposed to assess as a committee.’’

   This is coming against a worrying backdrop of skepticism about the existence of the coronavirus. Many Nigerians still crowd markets, buses, banks and other public places without wearing face masks. Only few keep to the protocols.

   A businessman at Eke-Awka Market in Awka, Mr Godwin Okala, is among those who do not believe the virus exists in Nigeria. “If COVID-19 is here as they claim, dead bodies would have been lying on the streets and more people would have been infected, going by the way the banks, markets and even some places of worship are crowded,” he claimed.

   A civil servant who gave his name simply as Uche believes that COVID-19 is a `white man’s disease’ and cannot affect the black man. I do not believe this disease is here in our country because it originated from the white man’s country. Africans are genetically immune to the disease,” he claimed.

   Mrs Mary Anyamele, a trader at Okpuno in Awka South LGA, is of the opinion that Nigeria’s weather is too hot for novel coronavirus to survive. “I do not believe any individual has the virus in our country. I am yet to see anybody with a confirmed case of COVID-19. Until I see one, I can’t believe,” she said.

   To some analysts, it is, therefore, not surprising that many individuals ignore COVID-19 precautionary measures, while some contracted the disease and are even having symptoms refuse to report for treatment.

   United Nations Resident Coordinator in Nigeria, Mr Edward Kallon, expressed concern over the denial, saying: “To ignore expert advice at this time is dangerous, not only to the people involved but other people around them and their various communities at large. There is only one way out and that is diligent adherence to NCDC and WHO guidelines. The UN is working with the government at both the federal and state levels to flatten the curve of the pandemic. This will be difficult to achieve if members of the public don’t do their part, which is, abiding by WHO and NCDC guidelines.”

   Dr Olisaeloka Lotenna, a public health physician at the Nnamdi Azikiwe University Teaching Hospital, Anambra, is sad that many Nigerians, even the educated, seem not to care as they believe that government is manufacturing the number of cases.  “This is dangerous. It is helping to spread the disease.’’

   Lotenna suggested that COVID-19 survivors should help to convince Nigerians that the disease is real. “Maybe the government needs to start sensitising discharged patients on the need to tell their survival stories,” Lotenna added.

   Prof. Innocent Ujah, a former Director-General of the Nigerian Institute of Medical Research, blamed refusal to observe COVID-19 precautionary measures on misinformation and disinformation. Ujah said there is the need to make COVID-19 survivors advocates of compliance with the protocols so as to send out convincing messages to doubting Nigerians.

   “We do not need to see dead bodies on the streets to believe that COVID-19 is real. The reality is that this disease is real and it is killing people in large numbers. The National Orientation Agency needs to work with survivors and adopt a sustainable and expanded communication strategy to make our people to stop doubting but take responsibility for their health,” he said.