Higher oil price seen easing rising oil loan pressure

A higher oil price outlook for 2024 is expected to bring reprieve to oil and gas companies burdened by outstanding loans in Africa’s biggest economy.

Data gleaned by BusinessDay showed the oil and gas firms recorded a 68 percent rise in outstanding debts to Nigeria’s biggest banks from N3.4 trillion in 2022 to N5.7 trillion.

The biggest banks surveyed include Guaranty Trust Company (GTCo), Zenith Bank, Access Holdings, and United Bank for Africa (UBA).

Zenith Bank tops the list of gross loans and advances to oil firms with N2.1 trillion, followed by Access Holdings (N1.5 trillion), UBA (N1.1 trillion), and GTCo (N1 trillion).

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Tonye Monye, a senior risk analyst at a Lagos-based investment house said banks that have bilateral loans with local oil firms will restructure the loans not because they went bad but because of new economic realities of higher oil price outlook for 2024.

“For syndicated loans, it will be more tedious in terms of restructuring,” Monye said.

The average price of Brent, the benchmark for Nigeria’s crude oil price fell by 17 percent to $82.15 in 2023 from $98.95. in 2022.

“Most of the banks book significant impairment charges due to some increased exposure to credit losses due to their exposure to stressed sectors like oil and gas,” Aisha Mohammed, an energy analyst at the Center for Development Studies said.

Year 2023 re-echoed fears of 2016 as a big drop in the international price of crude oil in 2016 as well as production disruptions caused by militant attacks on oil installations in the Niger-delta led to a surge in bad loans in Nigeria’s banking sector.

Nigerian banks were heavily exposed, and still are today albeit to a lesser degree, to the oil and gas sector. Oil and gas firms rose to become to hottest borrowers in an economy that was reliant on the sector for nearly 80 percent of its exports and 70 percent of government revenue.

Banks fell over one another to extend credit to the sector but the party came to an abrupt end after the lengthy collapse in oil prices.

Oil prices averaged $38 per barrel in 2016, the lowest in over a decade while production volumes were set back by almost a million barrels daily to 1.2 million barrels daily. That caused all sorts of problems for oil and gas firms with many defaulting on their loan obligations to the banks whose asset quality was fast deteriorating.

In the first quarter of 2016, bad loans as a percentage of gross loans doubled to 9.72 percent from 4.86 percent in the fourth quarter of 2015.

With Brent nearing $90, experts predict Nigerian banks will offer improved loan offers for independent crude producers, firms who among them pump about 10 percent of national output.

“Our average Brent and WTI price forecast for 2024 to $86 and $81/bbl, respectively, and see prices peaking at around $95/bbl this summer,” according to Bank of America (BofA) Securities analysts.

One of the remarkable features of this year’s oil price rally is that it has occurred with an almost complete absence of market bulls, analysts at Standard Chartered said in a report sent to BusinessDay.

“We were very surprised to note that our Q2 Brent forecast of $94 per barrel is currently the only forecast above $90 per barrel among the panel of 34 institutions used in the computation of the Bloomberg consensus,” the analysts noted in the report.