There is a growing consensus that oil prices will hover around $40 per barrel for the foreseeable future, here’s what it means for Africa’s biggest oil-producing country from the federal and state governments to indigenous oil companies and banks.
What it means for oil producers
Nigerian crude producers are having a rough time with $40 crude oil prices, as they have started counting their losses.
Firms like Aiteo E & P Ltd, Seplat Petroleum Development Company and at least 50 small to mid-sized Nigerian producers pumping between 1,000 and 100,000 barrels are fighting hard to survive, due to Nigeria’s high production cost of $30, coupled with the fact that oil demand has plummeted to the lowest level in more than a generation.
Some leaders at many local oil firms in Nigeria revealed to BusinessDay recently that some local oil companies are drowning in debt at the present price of crude oil, while others have suspended oil production.
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“Three or Four rigs have been let go which implies at least 200 people working on each oil rigs have their jobs at risk,” Austin Avuru, CEO of Seplat said at last BusinessDay digital dialogues with the theme ‘A National Conversation: Mapping Nigeria’s Response to COVID-19’.
Nigeria’s fifth-biggest indigenous oil firm, 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 impact is a complete and utter disaster,” Kola Karim, CEO (Chief Executive Officer) Nigeria’s third-largest independent oil firm, Shoreline Group, told Bloomberg in an interview.
What it means for banks
In Nigeria, indigenous energy companies’ ability to service debts are extremely vital to the banking industry.
It is obvious that some of the most over-leveraged oil companies in Nigeria will not survive a prolonged oil price of $40 due to bad debts while other conservatively managed oil companies have started restructuring their debts with their lenders if the current level of crude oil price is maintained for many weeks.
The financial health of energy companies based in Nigeria and their resolve to service their debts are extremely vital to the banking industry of Nigeria.
Charles Akinbobola, energy analyst at Lagos based energy firm Sofidam Capital said there will be an extension of moratorium periods and loan repayments and a significant drop in new debt to oil companies as Nigerian banks seek to proactively prevent a 2015 oil crisis déjà vu.
“This would surely lead to a fall in the Interest and Non-Interest Income banks have projected to earn from oil companies,” Akinbobola said.
Oil companies accounted for about 30percent of all banking-sector loans recorded in the third quarter of 2019, and their borrowing took about 24percent of all non-performing loans in Nigeria.
Kelvin Atafiri, CEO of Cavazanni Human Capital Limited, an investment firm exposed to the oil and gas sector said banks would focus on negotiating with local oil companies to restructure their loans in line with current realities of $40.
“It is expected that all banks will migrate a significant portion of oil companies’ exposure due within the next 12 months from Stage 1 to Stage 2 which would be based on the IFRS 9 requirement on expected credit loss,” Atafiri said.
Nigerian banks are already trying to restructure some loans. The CBN said Monday that lenders are restructuring 41% of loans after the central bank placed a moratorium on interest charges and principal debt repayments to cushion the blow of lower oil prices and fallout from the coronavirus.
Loans worth 7.8 trillion naira ($20 billion) to 35,640 customers are being reorganized out of 18.9 trillion naira in credit across the industry, Central Bank of Nigeria Governor Godwin Emefiele said on Monday. Twenty-two of the nation’s lenders are involved in the transactions, he said.
“If the CBN did not ask the banks to grant these forbearance to their customers, the loans will go bad immediately by our prudential ratios,” Emefiele said. He was speaking after the monetary policy committee decided to hold the benchmark interest rate at 12.5%.
The central bank would be more comfortable if 65% of loans were being restructured, he said.
A lockdown to contain the Covid-19 outbreak, a drop in oil prices and rampant dollar shortages have dealt a blow to the economy of Africa’s largest crude producer, hindering the ability of borrowers to repay their debt.
What it means for state government
There are indications that hard times await Nigerians, especially civil servants working with state governments, as states may owe salaries in coming months.
Recall in December 2014, six months after oil prices began to decline (oil prices had fallen by about 46.5percent at the time) at least 12 state governments were unable to pay workers’ salaries and many needed bailouts to continue to fund their budgets.
Fast forward to June 2020, many states are already at their wits’ end on how to manage their meagre earnings from FAAC, given that they have to contend with extra-budgetary spending on the containment of Covid-19 spread.
Most states depend primarily on monthly receipts from the Federal Accounts Allocation Committee (FAAC) to fund their budgets. However, there are a few exceptions like Lagos and Rivers State.
Unfortunately, monthly FAAC disbursements, which mainly originate from oil receipts to the Federal Government, are an unreliable source of income given its dependence on oil prices.
While the double devaluation of Nigeria’s exchange rate and 50 percent increase in VAT rate to 7.5 percent has temporarily helped boost the FAAC account, however, most analysts claim the move is not sustainable.
On Monday, Nigeria’s Accountant-General Ahmed Idris announced FAAC shared a total of N651.184 billion as of June 2020 to the Federal, States and Local Governments Councils and relevant agencies in the country.
The communiqué indicated the Federal Government received N266.131 billion, the State Governments received N185.774 billion, and the Local Government Councils received N138.974 billion for the month of June.
The global benchmark, Brent, has stabilised around $40 a barrel in the last five weeks after recovering from a 21-year low of below $16 in April after OPEC and its allies members agreed to extend historic production cuts of nearly 10 million bpd through the end of July in an effort to restore supply and demand imbalances and boost energy prices.
