Anglo-Dutch oil giant Shell and American oil supermajor ExxonMobil have both released disappointing financial results for the fourth quarter of 2019, sounding warnings for crude-dependent countries like Nigeria to look beyond oil.
Shell recorded a profit of $2.9bn in the last three months of 2019, down from $5.7bn in the final quarter of 2018. For the year as a whole, profits fell 23 percent to $16.5bn.
ExxonMobil saw its earnings fall 5 percent to $5.6 billion in the last three months of 2019, from $6 billion in the last three months of 2018. Cumulatively, earnings fell 31 percent from $20.8bn in 2018 to $14.3bn in 2019.
Another oil major, Chevron, posted a $6.6 billion loss in the fourth quarter due to $10.4 billion worth of write-offs related to the company’s shale gas production sites in Appalachia, among others. 2019′s total earnings slid 80 percent to $2.924 billion compared with $14.824 billion in 2018.
Shell blamed weaker oil and gas markets for the dismal performance which has delayed its share buyback scheme after its profits halved in the final quarter of the year.
“All macroeconomic indicators are working against us, it is essential to have a resilient balance sheet to manage the kind of volatility we are seeing at the moment,” Ben van Beurden, Shell CEO, said in a call with journalists.
Analysts say this has serious implications for oil-dependent countries including Nigeria.
“A drop of their [oil majors’] income is generally a reflection of what would happen to the income of oil-dependent countries,” Ayodele Oni, energy lawyer and partner at Bloomfield law firm, said.
Oni argued that if these oil companies with very efficient systems suffer significant erosion of their profits, then governments who rely on oil income and with less efficient systems would likely suffer more.
Declining oil demand especially from China has soured oil markets and the outbreak of the Coronavirus further threatens to upend the market.
The oil cartel, Organisation of Petroleum Exporting Countries (OPEC), is facing tough questions on what it is going to do in response to Brent falling back below $60 per barrel.
It has responded in the past by cutting supply from members and may impose further cuts yet, even as the supply side is not free from challenges as producers like Libya have seen around 1 million barrels per day in production lost to internal conflict.
The Nigerian government has often willed to diversify the economy away from oil but in practice the country’s economy still remains heavily dependent on crude sales.
Projected further decline of oil prices and deterioration of oil markets will further test this resolve.
Nigeria’s N10.59 trillion 2020 budget is benchmarked on a daily oil production rate at 2.18 million per barrel, with assumed oil price of $55 per barrel.
President Muhammadu Buhari in his budget speech said the sum of N8.155 trillion is estimated as the total Federal Government revenue in 2020 and comprises oil revenue of N2.64 trillion, non-oil tax revenues of N1.81 trillion and other revenues of N3.7 trillion.
The government has passed a finance law to leverage taxation to grow government revenue but economists say the fundamentals are not strong to support the fiscal system.
The economic outlook in Nigeria does not appear promising, said Andrew Nevin, partner & chief economist, PwC Nigeria. Growth has trailed a recovery path since the recession in 2017 and projected at 2.5 percent in 2020. Inflation is expected to keep soaring and stay about the single-digit target of the Central Bank in 2020 until the border closure is reversed.
The fiscal deficit-to-GDP ratio is projected to rise from 2.8 percent in 2018 to about 4.3 percent by the end of 2020. Oil prices are expected at below $60 per barrel and the current account balance-to-GDP ratio will decline marginally to 1.7 percent by 2022.