A changing landscape in Nigeria

What adjustments did the government make to its annual performance plans in light of the Covid-19 pandemic?
The benchmark price for crude oil in the government’s 2020 budget was originally anticipated at USD 57 per barrel. However, the ongoing global pandemic and falling oil demand prompted the government in March to amend its budget to assume an oil price of USD 20 per barrel. The 2020 oil production level was projected at 2.4 million bopd and in June it was also revised downwards to 1.7 million bopd.
The government also predicted that the country’s gross domestic product would contract by about 3.5% this year, which of course meant that we were definitely going into a recession. The government deficit for the year was projected to be around NGN 4.6 trillion [USD 12 billion] but it was later revised to about NGN 5.365 trillion [USD 14 billion]. This is understandable because the country must spend to jumpstart the economy out of the recession.
Those were the variables as of June 2020, but a lot of things have changed since then. Interestingly, the benchmark oil price was revised upward slightly from USD 20 to USD 25 per barrel on the back of the fact that we have seen a gradual economic recovery since the lockdown ended. Some of the local industries have started to open up and factories are returning to production.
The projected oil production level was also moved up from 1. 7 million bopd to 1.94 million bopd. This is to signal the government’s hope that in the course of the year we should be able to ramp up activities and find buyers for our crude.

What has been the impact of the economic and financial crisis on the country’s upstream sector?
Having the government’s anticipated crude benchmark price fall from USD 57 to USD 25 per barrel puts a strain on the country’s ability to generate revenue as it leads to a significant drop in revenues derived from the oil sector. This means that the government will not be able to fund its cash obligations to the joint venture partners, the IOCs. We have to be prepared to experience a drastic fall in exploration and production activities in the sector as a whole.
I have always said that government should have no business in oil exploration and production. One of the solutions the government should look at is exiting the oil exploration and production business and the JV model, selling its stakes to the private sector and focusing purely on regulation and policy making, as well as collecting royalties and taxes.
It has also been proposed that the current unincorporated joint venture arrangements (UJVs) with the IOCs could be converted to incorporated joint venture agreements (IJVs), where the NLNG model would be used to run those businesses and the cash call requests would no longer be there. We have seen how this works in other jurisdictions.
In the ‘80s and ‘90s, when we had this kind of crisis in the oil business, the government engaged the IOCs to discuss how to maintain the minimum level of activity in the oil sector. They then entered into a memorandum of understanding with the IOCs which entailed granting them a minimum margin for each dollar spent on exploration and production activities. So the IOCs were encouraged to keep spending and exploring for oil and that led to the results. Even though the oil price was below USD 10 per barrel then, the oil companies were still spending on exploration and production activity because there was a guaranteed margin per barrel of oil produced or per barrel of oil exploited.
We are facing a similar scenario now where instead of rolling out changes to the tax codes the government should also focus on having productive roundtables with the IOCs to agree on how best we can sustain exploration activity going forward.

What are the prospects for marketing Nigerian crude in the months to come?
Looking at the demographics of our oil markets, Asia has always played a crucial role in buying our crude. India, for instance, has always been the largest export destination for Nigerian crude. However, with India’s oil imports hitting a 10-year low this past summer, our government needs to explore new export markets.
We all know that in the last couple of months there has been a glut in the oil supply because demand was not there. But as the lockdown eases in each of these economies, there will be increased activities. Still, the government needs to look at other markets, particularly other South Asian markets where we can market our oil with a much more competitive pricing scheme.

When can we expect the country’s downstream sector to achieve full deregulation?
We saw the government reduce its pump price of premium motor spirit (PMS) from NGN 145 [USD 0.38] per litre to about NGN 125 [USD 0.33] per litre, which was a move welcomed by the industry and considered a signalling of the deregulation of the downstream sector. PMS is currently topping the chart on the volume of refined petroleum products imported into the country.
However, if you ask the stakeholders in the downstream sector, they will tell you that the real solution is not in price modulation, which the government is trying to do, but in the complete deregulation of the downstream sector.
The government and NNPC should focus on policy making, regulation and the collection of taxes and royalties and let the private sector deal with the importation of PMS so it gets to every nook and corner of the country. In other words, they should leave the price of PMS to the forces of supply and demand. I have seen how this has benefitted the economy in the past, and it is clear the task should be left to the private sector.

How do you view the government’s plans to give up controlling stakes in its refineries?
The government is looking at implementing a different model compared to what has been used in the past. They intend to attract international players into the refining sector through a bidding process.
If the government really walks the talk and goes by this plan, the four refineries can be outsourced to an independent third party who will then run the operation and maintenance for a specific number of years at a pre-arranged fee paid by the government. During that time, the government will have enough time to determine what exactly to do with the refineries – whether to use the NLNG model or sell it off completely. If this model of operating the refineries comes to life, then refining can become a very profitable business sector in the country.

How can the services industry survive the downturn?
The services industry is largely dominated by the private sector with very little government investment. The real issue is that because of the downfall in the oil price that has led to the IOCs and the oil producers renegotiating their contracts and asking for rate cuts, the services industry has been forced to enter into survival mode.
Indigenous service players are already looking at the option of mergers and acquisitions to remain profitable because most of them are heavily indebted to the banks. Loans were taken when the oil price was USD 60-70 per barrel and it’s on the economics of those prices that the loans were taken. However, because of the fall in oil price, it is difficult to service those loans now with the exorbitant interest rates.
One way out for these players is to explore merging with one another, consider cost-cutting measures and look at their supply chain models to ensure that they get the best out of their suppliers. However, for the subsidiaries of the international companies that operate in that sector, I think they might need to leverage the cashflow position of their parent company – which might still have some cash surplus in other jurisdictions that have recovered a bit faster than Nigeria – and use that to address their own cash shortage or operational challenges in Nigeria in the short run, and a complete review of their business and operating model in the long run.