Lockdown throws energy sector into chaos

When the first case of COVID-19 was reported in Nigeria, February, Jude Emelike was providing support services to vendors at an oilrig in Eket, Akwa Ibom State.

The next month, March, President Muhammadu Buhari announced a lockdown to contain the spread of the virus. Following this, the Department of Petroleum Resources, the sector regulator issued a circular directing oil company to relieve non-essential workers as part of COVID-19 measures.

Jude was declared a non-essential staff and sent home. One year after he is yet to return to work. The project has run into trouble including the lay-off of workers, suspension of service contracts, and even the oil major executing the project, ExxonMobil, has seen the worst erosion of its profits in history – all a fallout of a pathogen that paralysed the world.

The spread of COVID-19 has shaved 30 percent of global oil demand and prices have fallen to 20-year lows. This situation led to a price war among key producers, Russia and Saudi Arabia and oil-dependent economies like Nigeria saw how vulnerable their economies, as half of the government revenue, were wiped off.

Upstream sector

Nigeria’s upstream sector has long been troubled by uncompetitive production costs, insecurity, poor fiscal terms, and a prolonged contracting cycle. The lockdowns announced, which led to the removal of the critical non-essential staff, made things worse.

It did not even seem pragmatic to produce massive quantities of crude oil, as Nigerian cargoes struggled to find buyers. But for operators, restarting a shut-in well presents a unique challenge.

Local oil firms who financed assets through debt could no longer generate revenue. Some banks restructured loans, which were nearly N5 trillion in the second quarter of 2020, allowing obligors breathing space to generate cash flows, while other banks issued moratoriums on loan repayments.

Nigeria had to cut its oil production benchmark volume twice in its 2020 budget revisions to help oil producers’ efforts to shore up prices.

Oil servicing firms struggled

Since exploration has mostly been halted due to poor demand, drilling contracts was deferred or cancelled. Nigeria’s rig count fell from 23 in February 2020 to six rigs in July.

The gradual easing of lockdown restrictions, resumption of international flight operations, the opening of factories propped up oil prices, and consequently oil field servicing firms gradually returned to work but not everyone had their jobs.

Deregulation reality for downstream sector

The lockdowns cut demand for refined petroleum products by half and impacted investments into the sector. Total plc, 11 plc, MRS, Ardova, and Conoil major downstream players suffered worse revenue declines ever.

The Federal Government on March 19, 2020, announced full deregulation of the downstream sector opting out of subsidy payment that gulped a whopping N10 trillion in the last 10 years. This reality was forced on the government due to low oil sales, rising government debt and high running costs.

Impact on power sector

According to a PriceWaterhouseCoopers (PwC) study, the impact of COVID-19 was most felt by electricity distribution companies (Discos) in terms of the inability of customers to pay their bills and the resultant reduction in revenue collections.

For instance, the lockdown led to shutting down of all but essential commercial activities across the country. Consequently, the electricity demand from industrial and commercial customers reduced significantly while the residential market increased expectedly.

“This has led to a distortion in the cost subsidy quality of the tariff and reduces the cash flows to operators,” PwC said.

DisCos have a lower tariff for residential customers, sometimes even below the average cost of supply, as compared to that for commercial and industrial consumers.

The above development means the lower tariff-paying consumers are cross-subsidised by commercial and industrial consumers, which led to a noticeable revenue loss for DisCos due to the reduction in demand from commercial and industrial customers.

“The reduction of demand affects the ability of the tariff to effectively cross-subsidise the lower-tariff paying consumers.” Nigerian Electricity Regulatory Commission (NERC) eventually approved a tariff increase in April, but it could not take effect until November 2020 when it adopted the service-based tariff.

Moving forward

The coronavirus has exposed the threats in the energy sector but corrective actions and policies are yet to keep pace.

Nigeria is not moving fast enough to enact a progressive Petroleum Industry Bill, remove gas pricing barriers to investments locally, and concession failing assets like refineries to investors.

The pandemic has forced the government to adopt a more market approach, which has attracted badly needed financing like the World Bank loans. Its aggressive posture to reform the power sector should be backed by competent people and processes.

By 2050, the country’s population is estimated to reach 400 million but an uncertain future awaits all.