Indigenous Nigerian oil producers currently pump about 10 percent of national output and have invested billions of dollars in the past 10 years to position themselves for growth, and to play a bigger role in the sector dominated by International Oil Companies (IOCs).
There are at least 50 small to mid-sized Nigerian producers pumping between 1,000 and 100,000 barrels each day.
However, firms like Aiteo E & P Ltd, Seplat Petroleum Development Company, Shoreline Group and others who operate in the difficult terrain and environment that is the onshore Niger-Delta, have now been hit by an unprecedented global pandemic that has led to demand destruction and supply shock (from the Saudi-Russia price war) which has led to a massive glut.
Today oil prices have collapsed some 70 percent since January 2020 alone, amid a worldwide shortage of storage space for crude.
Dated Brent benchmark, a global reference for nearly two thirds of the world’s physical flows, plunged to $13.24 a barrel last week, its lowest since 1999, according to price reporting agency S&P Global Platt’s.
That means that Nigerian Bonny Light, would now sell under $10 a barrel, as it trades at a discount to the Dated Brent benchmark.
For indigenous Nigerian oil and gas producers this is an existential threat.
First of all majority of them have costs of production in the $30 – $40 per barrel range, largely as a result of the high costs of operation and security related expenses in the onshore shallow water fields of the Niger Delta, where militant attacks on oil and other energy infrastructure is rampant.
The indigenous producers mostly export their oil through the Bonny terminal fed by the Nembe Creek trunkline or the Trans Forcados pipeline.
Both pipelines are regular targets for attacks and sabotage which often leads to force majeure, (a measure that allows companies to delay or skip supply obligations) due to inability to evacuate crude.
Background
Leading up to the current global coronavirus crises and oil slump, indigenous Nigerian firms had just begun to recover from the 2015/2016 slump in global oil prices, domestic recession and militant attacks.
In a 15 months period, between February 2015 and April 2016 for instance, the Trans Forcados Pipeline (TFP) went offline, ensuring that revenues for most of the indigenous firms were hit.
To get around the militant attacks on pipelines, Seplat and other firms invested huge sums of money on acquiring marine vessels for alternative export routes for their crude.
At the same time these firms were coming off a period where they had to restructure loans with banks (due to the 2015/2016 slump), at not too favourable terms.
The 2010 – 2014 period were boom years for the oil sector both globally and domestically, and a lot of Nigeria firms were taking on assets (sometimes encouraged by the Government), being divested by the IOCs who were mostly retrenching from the onshore Niger Delta, due to security concerns.
A lot of the firms bought these IOC assets using loans from banks which were structured based on the oil reserves in the wells being acquired and assumed oil prices close to $80 – $100 per barrel.
Also the loan agreements were often structured in a manner that ignored force majeure.
So it is no surprise that when oil prices peaked in mid-2014 and began to fall soon thereafter, interest on the loans continued to mount (between 2015 and 2017), despite an increase in militant attacks and slump in oil revenues.
Current state of affairs
The key issues facing indigenous oil firms today are the unexpected decline in crude oil prices and the coronavirus pandemic which has taken out demand for crude.
The Saudi-Russian oil price war also made the situation worse because it led to a surge in oil production amid demand destruction, leading to elevated supply and lack of storage space for crude globally.
Indigenous oil firms who typically borrow to finance operations are now caught in the middle of all these.
BusinessDay estimates that Banks’ exposure to the oil and gas sector was equivalent to N3.4 trillion, as at the end of 2019.
The problem now is that the current down cycle in the oil sector is a mismatch to the loans exposure as indigenous firms were just beginning to repair their balance sheets before the black swan event in the form of the coronavirus hit the globe.
Because the firms largely operate in the shallow onshore fields of the Niger Delta, security issues are a major addition to the cost of production, which is much higher than the current market price of oil.
A lot of the loans were taken based on oil prices being above $100 per barrel.
However today prices are 90 percent down from 2014 levels, bunkering and attacks continue to cut output and feed into costs, meanwhile the largely dollar denominated loans continue to grow.
Way Forward
Governments globally have rolled out measures to protect companies deemed critical to national security. The Federal Government should probably do the same.
To be fair the Central Bank of Nigeria has announced some palliatives including a N50bn facility to be disbursed at single digits through the NIRSAL Microfinance Bank for households and small- and medium-sized enterprises (SMEs) that are particularly hard hit by the coronavirus, including hoteliers, airline service providers and health care merchants.
The CBN also suggested that banks give forbearance on loans during this period.
A lot more would however need to be done especially due to the systemic nature of the current crises and danger it poses to the indigenous firms, the banks and the Federal Government.
The CBN working with the Department of Petroleum Resources (DPR), the oil regulator should bring the Banks and the indigenous players together to agree to a moratorium on loans and forbearance for up to a 1 year time period.
There should be some form of interest waiver and reduction, to allow the firms recover as the oil market rebalances and global economies re-open.
Loan contracts should be re-worded to reflect the impact of force majeure or attacks.
There can also be discussions on moratorium on principal repayments for a longer time period of say 2 to 3 years.
The DPR on its part should continue to provide support for these indigenous companies so that once the crises passes they are strong enough to be able to pay all due fees and taxes, ensuring a win-win situation for Nigeria.
