Crude oil has become a basic commodity to the whole world exposing it shifts in global movements, such that local geopolitical tensions in one location generate shocks across the globe. This makes oil and gas companies vulnerable.
The last shock in 2014 shaved a collective $63 billion in revenue receipts of the crude oil-exporting countries in Africa. Additionally, the environmental cost of oil, as well as the socio-political tensions it engenders is driving climate change policy, technological change and consumer preferences to switch global demand away from it. The severity of each shock and cyclicality of occurrence is driving countries and firms to seek ways to mitigate its exposure.
Presently, the COVID-19 pandemic induced shock is anticipated to cause an estimated $14b – $19b drop in crude oil exports and an overall 5 percent decline in Nigeria’s real gross domestic product (GDP) growth according to the International Monetary Fund.
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“Rather than fear, a better approach is to take positions, develop frontier fields and wait for resurgence,” Ayodele Oni, energy partner at Bloomfield Law Practice said.
These are unprecedented times that are challenging the entire oil and gas industry. EY, providers of advisory, assurance, tax and transaction services, recently held a webinar with key industry experts to understand the impact of the COVID-19 pandemic and future implications for the industry.
It turns out 70 percent of board members state that their organisations are not very well prepared to deal with a crisis event. Experts who participated in the webinar outlined for actions point to help oil and gas companies manage the crisis and build resilience.
To build resilience requires putting people first, the experts stated. People are the most important asset. While the need to ensure business continuity remains, technology such as mobile working, remote monitoring of operations or designation of alternating onsite teams should be leveraged in developing contingency working arrangements.
The report advises clear communication regarding operational activities. “This situation requires proactive engagement with all stakeholders.” This may include actions such as keeping customers acquainted with impacts on product or service delivery and staying in contact with suppliers regarding the ability to deliver goods and services. Others involve mitigating disruption risk with technology, innovative business models and collaboration; consulting legal teams for advice on potential liabilities with governments or regulators and proactive dialogue with creditors and finance providers.
In the context of this crisis and in building resilience, the cash is king mentality is needed. Visibility on short term cash flows may be limited and given the fluidity of the situation, forecasting may be unreliable and ineffective.
More than ever, focus must be on managing liquidity and cash resources, which may include: maximising one-time revenue opportunities and reducing the cost base, particularly all nondiscretionary costs. Other measures are maximising liquidity by drawing down on all lines of credit before they remain more difficult to access and moving costs from fixed to a variable to increase resilience and agility.
The report argued that this is a time for building financial and operational resiliency designed to navigate through the crisis in order to come out of it leaner, stronger and more dynamic.
Fluidity and rapid movement of events means that risk management processes need to be better understood to measure the impact of extraordinary events on business continuity. This will involve establishing regular cross-functional status and decision meetings, confirming responsibilities and delegated authorities under contingency measures, agreeing on trigger points for mitigating actions and agreeing on key measures for tracking developments.
For Nigeria as a country, crude oil development has had a long, but unhappy history. The outcome of Nigeria’s oil dependence is a rentier political economy that is focused on creating allocative mechanisms for the sharing of oil rents, at the expense of developing productive capacities in the wider economy.
Any urgency with regard to driving economic diversification, beyond reactionary attempts during the period of oil price shocks, is eroded and soon abandoned on market recovery. Nigeria’s budget is still benchmarked on (volatile) oil earnings and the focus is solely on developing oil capital, rather than income from other productive capacities.
