The Impact Of The Current Times On The Nigerian Oil And Gas Sector
Introduction
The outbreak of the Covid-19 pandemic is no longer news to anybody. The outbreak of the disease took the whole world by storm and the pandemic has been as rapid in its spread as it has been lethal in its effects.
As of the time of writing this piece, the Covid-19 pandemic has claimed nothing short of 430,000 lives globally, with some of the world’s superpowers being the most ravaged by the pandemic. However, perhaps, a glimmer of hope and optimism is the fact that over 4.1 million people have recovered from the disease globally. The outbreak poses a global threat and by implication, the World Health Organization, on the 30th of January, 2020, declared the outbreak a Public Health Emergency of International concern.
The Effects of Covid-19 On The Nigerian Oil And Gas Sector
The Oil and Gas sector majorly constitutes the fundamentals of the Nigerian economy and as a matter of fact, it has been described as the bride of the Nigerian economy. It accounts for over 90% of the country’s foreign exchange earnings. Furthermore, the Oil and gas sector accounts for about 10% of the gross domestic product (GDP) in Nigeria. Since Oil was discovered in commercial quantity in Oloibiriin present-day Bayelsa State, the Nigerian economy has largely been dependent on oil exports.
It is pertinent to note that the rapid spread of the virus has led to the drastic reduction in oil demand by European and Asian countries who are the major buyers of oil. The decline in oil demand is estimated to surpass the loss of nearly one million barrels per day during the 2007-08 recession. It is also more disheartening that this decline in oil demand as a result of the pandemic, which has been estimated to be about 30%, has come at a time when two key players in the global oil industry (Russia and the OPEC cartel) are at loggerheads on the decision on cutting of output as both countries have increased production and this has resulted in the over-supply of crude oil with lower demand.
Both countries have however agreed to cut production by 10% but this does not still immediately lift sentiments as Brent crude fell by more than 3% to $32 per barrel after the OPEC-Russia meeting ended. This new cuts now set Nigeria’s daily oil production to an average of 1.4 million barrels per day which is 300,000 barrels less than the 1.7 million barrels in the adjusted 2020 budget. Africa’s biggest oil producer; Nigeria, has seen better days.
Moreover, Nigeria’s Department of Petroleum Resources (DPR) has instructed oil and gas firms to reduce the workforce on offshore platforms. The measure is part of the Federal government’s plans to curb the spread of the virus in the country. The restriction came as a result of the diagnosis of six workers on the Siem Marlin Offshore rig with COVID-19. The DPR Director, Mr Sarki Auwalu announced that offshore travel would henceforth require a permit.
These drastic decisions taken to contain the spread of the virus would affect many of the sector’s key processes. Offshore workers now have to balance maintaining social distancing while living and working in confined spaces. Travel bans and restrictions on movement also limit the ability of oil companies to travel and conduct meetings. The uncertainty that accompanies the pandemic does not help matters either.
Because oil accounts for about 90% of Nigeria’s exports, the decline in the demand for oil and oil prices will severely affect the volume and value of net exports. By implication, the Nigerian government has cut planned expenditure. The minister of Finance, on the 18th of March, announced a 1.5 trillion naira slash in non-essential capital spending. Before the Covid-19 pandemic, Nigeria was still struggling with the effects of the 2016 economic recession which was a fall out of global oil price crash.
In the 2020 budget which President Muhammadu Buhari signed in December 2019, oil production was pegged at 2.18 million barrels per day, with a price benchmark of $57 per barrel. Unfortunately, the emergence of the Covid-19 pandemic has called for drastic and immediate review in the earlier revenue expectations and fiscal projections. About two weeks ago, the Federal Government announced a reduction in the 2020 budget by over ₦300 billion from an initial ₦10.59 trillion to ₦ 10.27 trillion. This new budget proposal has been sent to the National assembly for approval which is necessitated by the devastating effect of the Covid-19 pandemic and falling oil prices.
As a matter of fact, in a newspaper report dated March 16, 2020, it was reported that due to the oil crash, Nigeria may lose up to $ 8.6 billion in the next six months as a recession is imminent.
It is pertinent to note that the new budget proposal reduces the oil benchmark from $57 per barrel to $30 per barrel while the oil production volume was reduced from 2.18 million barrels to 1.70 million barrels, as per news reports.
As a result of the decline in oil prices caused by the Covid-19 pandemic, labour issues arising from the inability to pay the salaries and wages of oil workers due to the fall in companies’ revenue will abound. Industrial and employment claims at the National Industrial Court arising from a layoff of workers, etc. from the oil and gas and allied sectors are predicted to skyrocket if the price of oil remains the way it is.
Lastly, there would be a breach of terms of production sharing contracts (PSCs) and Joint Operating Agreements (JOAs). The Covid-19 pandemic which has contributed immensely to the swift decline in oil prices globally would unarguably affect the projected Returns on Investment on the parties to the above-stated contracts. The pandemic has led to a drastic fall in the price per barrel and as a result, most parties to such PSCs and JOAs are likely to default in their obligations.
The Way Forward
Financial experts have advised the Federal government to restructure its finances and also eliminate overlapping ministries in various departments. Furthermore, the federal government could also liberalize the downstream oil and gas sector completely to mitigate the effect of the pandemic on the nation’s economy. Fully liberalize it in the sense that it should be deregulated to attract private sector investment.
As a forward measure, the government should begin to think of other ways to generate revenue asides from oil because oil prices have become very volatile and erratic. The government has concentrated on oil for so long a time and it needs to shift its gaze to something else, something new.
Because disputes and legal implications might arise between contracting parties during this period, parties to contracts could adopt smart contract renegotiation strategies or alternative dispute resolution mechanisms given these disputes to cushion the effect of the fall in oil prices caused by the pandemic.
Debt restructuring is another measure that can be adopted by oil companies. The inability of oil companies to liquidate debts as a result of the plummeting oil prices can have serious effects on such companies, such as corporate insolvency. These companies should seek legal advice and enter into debt restructuring agreements with their creditors as this will create more time for such companies to source for funds.
Subsequent implementation of Force Majeure clauses in oil and gas contracts. Force Majeure refers to an event which is beyond the control of parties which frustrates or delays the performance of contractual obligations. This is already in place to an extent as most standard oil and gas contracts such as PSC usually contain a force majeure clause. It should be implemented more regularly.
Conclusion
The Nigerian Oil and Gas sector is currently in a fragile and erratic state as its foundation is in threat of massive decline. This has become apparent given the effects of the pandemic which have been stated earlier. Oil and Gas companies and service providers are implored to seek legal advice on appropriate legal measures to take to handle disputes that may arise from contracts. Further, the federal government should restructure its finances and liberalize the downstream sector. If the measures put forward in this write up are adhered to, then it would be safe to say that better days are forthcoming.
Shadare Oluwasemilore is a 500L student of the Faculty of Law, University of Lagos with a keen interest in alternative dispute resolution (ADR), energy law, risk management among others. He is an avid writer and researcher and is a recipient of a couple of essay competition awards and has a number of published articles.
Hi Semilore. This is very nice and insightful as to how you linked the current economic situation to a legal aspect. It actually answers some of my numerous questions as regard this topic. Thank you.
The pleasure is mine, Mr. Tomiwa.