COVID-19, THE SAUDI-RUSSIA OIL WAR AND THE NIGERIAN OIL ECONOMY

Introduction

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  affected  210  countries  with  over  3  million  cases  and  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   of   economies,   especially   those   dependent   on   it.   The Organisation   of   Petroleum   Exporting   Countries   (OPEC)   as   expected   held   its   178th Extraordinary  Meeting  in  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  biggest  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.

Recommendation

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:

  1. 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.

Conclusion

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