Over 90% of Nigeria’s foreign exchange earnings is derived from the Oil and Gas Sector, constituting the very essence of the nation’s economy – a development following the 1956 breakthrough discovery of oil (in commercial quantity) in Oloibiri, the present day Bayelsa state. The Appropriation Acts of the Nigerian government, from past to present evidence a monotonous economy; one dependent on oil exports.
By the estimation of The Appropriation Act of 2020 (a budget of sustainable growth and job creation), crude oil production volume is put at 2.18 million barrels per day with a $57 benchmark per barrel. This was or appeared to be a good deal as the price of Brent Crude was approximately $70 per barrel as at January 2020. But things would soon change as global events have recently taken an ugly turn, most remarkable of which is the emergence of the novel Coronavirus (Covid-19) and the resultant Saudi-Russia Oil War forcing oil prices to fall to a record low. Nigeria, with an economy dependent on oil exports therefore becomes one of the most hit countries.
COVID-19, the Saudi-Russia oil standoff and the Nigerian Economy
The Covid-19 pandemic has
over 200, 000 deaths globally as of 28th April, 2020. With the rapid spread of the virus, oil demand by
countries in Europe and Asia who are major buyers of oil has reduced drastically, resulting
in an unprecedented devastation
economies, especially those dependent on it.
The Organisation of
expected held its
Vienna, Austria on the 5th of March 2020 in high hopes
of cushioning the effects
of the decline in oil demand. The disagreement between Saudi-Arabia and
Russia, two of the world’s
oil producers, on production cuts however
would soon dash those hopes.
What would this disagreement mean? A level of demand largely disproportionate to the supply of oil. Economists would very quickly agree that prices will fall where supply is higher than demand. Global oil prices are therefore falling, in line with the principles of microeconomics. Economies, like Nigeria’s, dependent on oil revenue would therefore experience a downturn.
How is Nigeria responding to the impending economic crisis?
Due to the crash in oil revenue, the Federal Government of Nigeria on Wednesday, March 18, 2020 announced a slash in the 2020 Budget by N1.5 trillion, including the N457 billion the government spends on fuel importation (PMS under-recovery). The government took this step to avert the looming recession amidst the Covid-19 pandemic. More immediate measures taken by the country include the release of contingency funds to the Nigeria Centre for Disease Control and provision of economic stimulus package to cushion the impact of the disease on households and businesses hit by the downturn. The Central Bank of Nigeria has also directed Deposit Money Banks ‘to consider temporary and time-limited restructuring of the tenor and loan terms for businesses’ in some listed sectors.
While the government strives commendably to contain both the virus and the looming economic recession, it would appear there are more genies out of the bottle. These other issues would include: breach of terms of Production Sharing Contracts (PSCs) and Joint Operating Agreements (JOAs), shut down of economically unviable oil fields, financial indebtedness, exposure of guarantors and insolvency of operating companies, Suspension of projects that have not reached the Final Investment Decision (FID), inability to pay oil workers’ salaries and wages due to fall in companies’ revenue amongst others.
The World Health Organisation (WHO) has pointed out unequivocally that,
concerning the Covid-19 pandemic, there is no end in sight. Sadly, there is
also no known vaccine. Economies would therefore either take the bull by the
horn or remain in the doldrums. The Nigerian oil
and gas sector, oil operators and other stakeholders must take certain (legal) measures in order to ride out the storm. Some of these measures include:
- Contract Renegotiation/Price Reviews:
Huge disputes and legal claims are expected, following the outright cancellation or suspension of some contracts, depending on their terms in an effort to reflect the economic realities on ground and price of oil in the global market. It is therefore recommended that contract renegotiation and alternative dispute resolution mechanisms in the event of disagreements be employed.
- Debt Restructuring:
Companies in the oil and gas sector will obviously face a cash flow problem or a financial distress. Liquidating company debts during an oil price crash may adversely affect the company, and the result of this ranges from pay cut for senior executives to lay-off of staff and possibly insolvency. Debt restructuring agreements with creditors will afford these companies more time to source for funds.
- Force Majeure:
Force Majeure refers to an event beyond the control of the parties, which
frustrates or delays the performance of a contractual obligation. A study of
model Force Majeure clauses entered into by the Nigerian Oil and Gas sector
would reveal that a fall in global oil price does not qualify as a force
majeure event capable of relieving parties from liabilities for delay in
performance or non-performance of a contract. It is recommended that drafts of
Force Majeure clauses should include phrases which would accommodate fall in
prices resulting from a pandemic.
While analysts are yet uncertain about the full effects of the crises, we do know they are bad. The wild combination of oil price collapse and the coronavirus pandemic is not only sad. It is an invitation to aggravated poverty. Would the coronavirus pass? Yes, absolutely. But its devastating effects are what we may be left to grapple with. Nigeria is involved in a volatile market that it has very little control over. It is therefore expedient that the nation’s oil and gas sector takes active steps to cushion the effects of these crises. More than this, Nigeria needs to diversify its economy. Otherwise, we are at the mercy of a volatile revenue source.
Oke O. David