Direct intervention by the Central Bank of Nigeria (CBN) may be a make-or-break deal in securing the future of Nigeria’s indigenous oil firms who are dealing with slumping prices, spiralling finance costs, and huge debt overhang that threatens the soundness of the nation’s banking industry and jobs in the oil sector.
The global oil market is currently in turmoil on the heels of dwindling demand for crude oil brought about by the coronavirus pandemic.
In Africa’s biggest oil-producing country, indigenous energy companies’ ability to service debts is extremely vital to Nigeria’s banking industry.
“The impact is a complete and utter disaster,” Kola Karim, chief executive officer of Shoreline Group, the third-biggest independent, said in an interview. “We’re underwater, without adding the cost of finance. If you add the cost of financing, we’re drowning.”
BusinessDay estimates that banks’ exposure to the oil and gas sector was equivalent to N3.4 trillion as at the end of 2019.
Oil companies accounted for about 30 percent of banking-sector loans recorded in the third quarter of 2019, and their borrowing took about 24 percent of all non-performing loans (NPLs).
Brent crude – similar to Nigeria’s Bonny Light – for June delivery is currently trading at near $20 per barrel, way below current production cost for most indigenous firms.
Considering Nigeria’s reliance on the oil and gas industry, industry and banking sources say one would expect that the Federal Government through the CBN would do everything to salvage the country’s independent crude producers, firms which between them pump about 10 percent of national output, failure of which risks inflicting severe pain on the local banks that finance them.
Unlike their international counterparts with huge balance sheet, the oil slump has become an existential threat for indigenous Nigerian oil and gas producers.
Most analysts and chief financial risk officers (CFOs) have asked the Federal Government to play similar role like their global counterparts who have rolled out measures to protect companies deemed critical to national security.
Others recommend that loan contracts should be re-worded to reflect the impact of force majeure or attacks while there should also be discussions on moratorium on principal repayments for a longer time period of say two to three years.
They add that CBN working with the Department of Petroleum Resources (DPR), the oil regulator, should allow some form of interest waiver and reduction to allow the firms recover as the oil market rebalances and global economies re-open.
“There is a need for a concise research report by the CBN in rally with the Bankers’ Committee in finding solutions to the issues of bad loans by indigenous upstream oil players without adversely affecting their operations and creating buffers for recovery as the global economy gradually opens up,” one senior CFO familiar with the matter told BusinessDay.
“There is also a need to include a possible fiscal policy position such as bail-outs or tax concessions to indigenous oil producers in order to aid recovery and help advance the government’s push for local content and a connection of the upstream oil sector with the local economy going forward,” the person said.
Other oil and gas analysts have recommended a moratorium on debt repayments to be worked out between banks and oil-producing companies in Nigeria in order to survive this critical period.
The CBN Governor Godwin Emefiele has unveiled post-COVID-19 policy priorities, targeting sectors that are able to generate mass employment and wealth creation, including light manufacturing, affordable housing, renewable energy and cutting-edge research.
The CBN has also set up a N50bn fund that SMEs can apply to for loans and advised banks to provide forbearance to customers. However, there has been no major intervention in the indigenous oil space by the apex bank.
Firms like Aiteo E & P Ltd, Seplat Petroleum Development Company and at least 50 small to mid-sized Nigerian producers pump between 1,000 and 100,000 barrels each day.
They have now been hit by a coronavirus-induced slump in demand which has led to a massive glut, leaving millions of Nigeria’s Bonny light crude unsold and prices as low as $10 per barrel.
Apart from dealing with higher production costs in the $30-$40 per barrel range, a majority of them are exposed to most of the country’s 22 licensed commercial banks through large loans.
Luqman Agboola, head of research at Sofidam Capital, can’t foresee global demand increasing significantly which implies “crude oil prices will remain low throughout this 2nd quarter putting Nigeria banks at risk to oil company’s exposure once again excerpt we see a miracle”.
“Some of these oil companies have invested a lot in building gas plant or modular refineries. With oil prices down, it would become difficult to service debts and meet contracted obligations except the government comes in,” Agboola said.
Nigeria’s largest listed oil and gas firm by market value, Seplat has already announced plans to lower its CAPEX by 20 percent while also hedging about 60 percent of 2020 production at a floor price of $45/bbl up to Q3 2020. Similarly, the fifth-biggest independent, Eroton Exploration & Production Co, has suspended a planned $1.5 billion, 50-well campaign to more than double output to 100,000 barrels a day by next year.
The oil price plunging along with the devaluation of the naira has indirect effects on the Nigerian banking industry and their clients, such as power producers and manufacturers, who may suffer due to a weaker naira which would impact their capacity to service loans.
“Government needs to come up, with the independents and the other oil producers, a financial rethink of the funding mechanics for the industry. If not we’ll see a total collapse, which in turn will drag down the banks,” said Karim of Shoreline Group.
One of Nigeria’s main tier-one banks has already issued a profit warning in the past three months in 2020.
A similar though much less serious scenario played out in 2016, when resurgence of militant attacks plummeted Nigeria’s oil production to a record low, a development that hammered the ability of many local operators to earn revenues and repay debts owed to banks and others.
Seplat and some other local firms suffered severely from the shutdown of the Trans Forcados Pipeline, the second-largest network in the Niger Delta transporting crude to the Forcados export terminal. Seplat’s output fell to 15,000 barrels per day from about 52,000 bpd after six months of no production from its asset.
Debt from these oil companies threatened the stability of the Nigerian financial system while the failure to have a clear economic policy came at a cost of economic growth which led to a negative in per capita income, more job loss and naira depreciation despite an exit from recession in 2016.
Early this month, Fitch Ratings said Nigerian banks’ credit profiles face severe risks from the oil price slump and operating environment disruption, while also noting that “asset quality deterioration linked to high exposures to the oil and gas sector is the biggest threat to ratings”.
The Fitch report expects an increase in restructured loan to 25-30 percent of the total loan portfolio by 2020-2021 as the banks extend tenors and cut interest rates to help the borrowers.
The New York-based agency noted that any closures of oil fields due to a collapse in global oil demand would exacerbate the current impact.
Last month, BusinessDay reported four major oil and gas projects with a combined capacity of 1.4 billion barrels of oil equivalent (boe) scattered around Nigeria may suffer delay in Final Investment Decision (FID) as a result of lower break-even oil price and the impact of the deadly coronavirus pandemic.
Fitch recently downgraded three Nigerian banks’ Long-Term Issuer Default Ratings (IDRs) to ‘B’ from ‘B+’ and placed all 10 Nigerian banks’ Viability Ratings and IDRs on Rating Watch Negative.
Meanwhile, the Nigerian National Petroleum Corporation (NNPC) has yet to agree with oil companies operating in the country over output allocations following an agreement to cut 22 percent of production to halt the current fall in prices.
Earlier this month, Nigeria joined OPEC+ to cut crude oil supply by up to 10 million barrels per day between May and June 2020, 8 million bpd between July and December 2020, and 6 million bpd from January 2021 to April 2022.
Timipre Sylva, NNPC GMD, in a release after the announcement said that based on reference production of Nigeria in October 2018 of 1.829 million bpd of dry crude oil, the country would now be producing 1.412 million bpd, 1.495 million bpd and 1.579 million bpd, respectively, for the corresponding periods in the agreement.
The trouble is deciding which company’s output to restrain in order to meet the supply cap placed on Nigeria’s output.
For oil producers, this presents a peculiar challenge. Their fields are modelled on price scenarios and production schedules which would be disrupted by the cuts and declining oil prices.
Nigeria’s offshore fields mainly managed by IOCs are scaling production because they require huge investments. Onshore fields, where the bulk of local oil producers play, are in deep crisis owing to declining prices because their finances are careening towards disaster.
NNPC has to make the call on which fields to cut production with dire consequences for everyone. This situation reflects the growing challenges to sell crude rather than prolific production by oil companies.
Brent crude traded at $20 per barrel on Monday, yet Nigeria has been offering its flagship Bonny light at a $5 discount but struggling to find buyers. Worse still, the NNPC said its limited domestic storage space is incapable of holding all the oil produced.
As a result of this situation, the NNPC has delayed publishing future oil export plans, some oil traders told Reuters.
Official selling prices (OSPs) for Nigerian oil, usually issued in the second or third week of each month, had still not been issued on Monday even though the global supply deal, agreed by the OPEC+ group of oil producers, is due to go into effect on May 1.
Unlike most commodities, oil produced today has already been priced weeks in advance and some futures contracts are sold months in advance.
The challenge for Nigeria and other oil producers is that the present supply cut deal went deeper than most and it comes at a time when there is fierce competition to sell oil in a saturated market, where demand has also cratered.
This could mean that some fields would have to be shut in. For producers, curbing production is not as easy as shutting off a tap, analysts say.
“Drilling programmes and activities to produce oil are not short-term activities and the significant cost is involved,” said Ayodele Oni, an energy lawyer at Lagos-based Bloomfield law firm.
When demand plummets and prices drop, it takes time for oil producers to start turning off existing wells.
“Shutting in production is a very painful decision for an operator to make,” Teodora Cowie, an analyst with Rystad Energy, said in a note. “Often the economics support running a well at a loss for a certain period of time rather than shutting down the project completely.”
