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Oil prices below $40: What it means for Nigeria, local oil companies, banks - BUSINESSDAY

SEPTEMBER 16, 2020

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The price of Brent, the benchmark of Nigeria’s crude oil has fallen to $39 as bearish factors mount and sentiment shifts add another wrench in the recovery for oil prices still reeling from the pandemic-driven blow to consumption.

Brent futures dropped 4.1 percent to $38.95 a barrel as at 2 pm Nigerian Time, while US crude dropped by 1.10 percent, to $37.67.

One major factor behind the fall in oil price is the concerns over rising exports from the Organisation of Petroleum Exporting Countries (OPEC) and allies’ in third quarter of 2020, with the possibility of a total breakdown of the OPEC+ agreement.

Also, Libya has announced plan to reopen its oil ports as soon as this coming weekend. Groups affiliated with General Khalifa Haftar’s Libyan National Army blockaded the country’s oil terminals in January, suspending exports and effectively decimating production from over 1.2 million bpd to less than 100,000 bpd.

Another factor is the possibility of the market weighing down by concerns that oil demand recovery is slowing due to a resurgence of coronavirus infections globally. COVID-19 cases are rebounding in the UK and France, with the number of daily cases reported exceeding 3, 000 cases in the UK and 10,000 cases in France.

What it means for Nigeria

With oil prices at $39 and Nigeria’s crude oil output down to 1.4 million barrels per day, the Federal Government inevitably has a revenue problem.

Nigeria faces a greater challenge than many other countries from the pandemic as a result of being the largest economy in Africa, with a population of 200 million.

“Specifically, we expect the performance in the oil sector to remain downbeat, due to lower oil prices and reduced production levels in compliance with OPEC+ cuts,” analysts at CSL Stockbrokers said.

The government reported a 60 percent drop in revenues in the first half of the year while Foreign Inflows have also fallen to $1.29 billion compared to $5.8 billion.

Nigeria is in the midst of a foreign currency crisis that has led to multiple devaluations in March, July, and in August 2020. Pressure from the World Bank has also led to a unification of the exchange rate, which is now between N380 and N386/$1.

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.

The current low price of crude oil has significantly constrained the revenues of 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.

Aside this, most of the indigenous oil firms are highly leveraged and as a result some of them may not be able to meet debt service, with a significant risk of bankruptcy.

Bankruptcy will result in more job losses at a time Nigeria is grappling with record levels of unemployment.

In a virtual interview with BusinessDay, Roger Brown, new CEO of leading indigenous oil and Gas Company, Seplat Petroleum Development Company Plc said some other local producers have pushed for more consideration in the allocation of production quotas by the Federal Government to meet with Nigeria’s supply cap of 1.4million bpd.

“In terms of demands by indigenous operators, they do need a chance, they really need to be able to grow as a sector in the market otherwise, you have the dominance of major oil companies and then the government and that is not great in any oil mix,” Brown said.

What it means for banks

With an oil price of $39, 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.

In the first half of 2020, the Nigerian banking industry witnessed a 14 percent rise in Non- Performing Loans (NPLs) ending a two-year trend of continued decline in NPLs, since 2018.

According to the latest banking sector report released by the National Bureau of Statistics (NBS), non-performing loans in Nigerian banks increased to N1.212 trillion at the end of June 2020, from N1.059 trillion recorded in December 2019, indicating that NPLs across Nigerian banks rose by N152.4 billion or 14.38percent in six months.

At the end of H1 2020, Oil and Gas sector contributed the largest share to NPLs in Nigerian banks, recording a significant 22.2 percent increase in NPLs from N219.91 billion recorded at the end of Q4 2019 to N268.79 billion in Q2 2020.

Earlier in the year banks cut a deal with the CBN as they were granted regulatory forbearance in the restructuring of loans. Over 33 percent of industry loans are expected to be restructured as part of the deals signaling the spate of economic crunch that has hit the private sector.

Against the backdrop, pressure may start building on the banks, whose loan books have been hit by Nigeria’s shrinking economy, plunging currency, and foreign exchange shortages, following the slump in oil prices.

Projections by EFG Hermes, an international financial services company revealed that as a result of the current economic challenges, as well as what it calls ‘CBN’s erratic and unorthodox policies over the past five years’, banks are expected to write off around 12.3 percent of their loan books in constant currency terms between 2020 and 2022, the highest of all the previous NPL crisis faced by financial institutions within the nation.

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