December, 2020
It is said every scar tells a tale. The novel coronavirus pandemic will undoubtedly leave lasting scars on the Nigerian oil and gas industry. Scars that will tell tales of struggle and survival, scars that will tell tales of transformation and adaptability and most importantly, scars that will tell tales of opportunities, both those taken and those left untaken.
The impact of the pandemic was heightened by a price war initiated by major oil influencers – Russia and Saudi Arabia, which combined with the pandemic to drive oil prices to a 20-year low. Although our projection for the average oil price for the year is $42/barrel, which came at the price of production cuts, it pales in comparison with last year’s $65.85/barrel.
Without a doubt, every player is expected to feel the negative impact of the pandemic, albeit some more than others. The industry that was otherwise poised for growth would see a huge contraction this year and potentially, a number of bankruptcies, as we have seen in many other countries. The role of banks, as a major provider of finance to this industry cannot be overemphasized. A survey conducted by Moneda in Q2 2020 revealed that 46% of oil and gas contractors depend solely on Nigerian banks for funding. As a result of lessons learned from the 2008 financial crisis, we project that banks would not be hit as hard as initially feared. However, we foresee a drastic change in the risk appetite towards the oil and gas industry and this would instigate a ripple effect extending across the horizon of other players. As a matter of fact, the interplay among all players ensures that a change in habit in one is felt by at least one other, necessitating an in-depth research on all players. The loss in revenue for the producers, projected to be as high as 45.85% YOY, would cause a change in spending habit which would affect many contractors. A change in fiscal, monetary and operational policies by the government would affect all three other players. All these are explored in this report.
On the average, it will indeed be a very rough year for the Nigerian oil and gas industry, but we believe with the stabilization of prices by the OPEC+ production cuts, recovery is not farfetched. There would definitely be casualties and with the pressure being exerted by other players, the contractors might have nowhere to bleed off this overpressure and could
eventually cave in. As a result, this is the only player whose conversation may involve bankruptcies as it has already begun to occur in other countries.
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