-By Victor Eromosele
Resilient Amid Downturns
Oil and gas industry is characterized by fluctuating prices. Result is that every few years prices can plunge to very low levels for many months: Downturn History indicates that the forces driving the change have moved from purely geo-political issues to surprise pandemics. Frequency of downturns in recent times and speed of recovery make both factors almost unpredictable. The good news though, is that somehow the global industry has remained resilient despite the enduring pains inflicted on many players.
Learn from History
Oil prices never stay flat. Financial crisis and OPEC+ spat amid covid-19 (pandemic) are relatively recent phenomena. US Shale boom was a bolt of the blue. Downturns are relatively short-lived. The brave survives.
Black Monday March 9 2020
March 9, 2020: That day Brent oil price crashed from the sixties to thirties: Most unprecedented demand shock. Immediate cause: OPEC+ Spat i.e. Russia
Saudi Arabia price war amid a pandemic, Saudi and Russia are the world’s second and third largest oil producers, (just behind the US). Domino effect: history made as WTI futures went negative reaching minus $37/bbl.
Flying to Nowhere
By April 2020, 16,000 planes were grounded for months worldwide and of course, tens of millions of cars parked during serial lockdowns.
Depressing Times: Price for Addiction
Broken supply chain translated to 2020 trade deficit for Nigeria – first in four years. Oil as a proportion of GDP in Q4 2020 shrank to under 6 per cent.
Compared to 2019, OPEC countries’ oil exports revenues down by 46 per cent, according to US EIA. Negative GDP growth in Q2 and Q3 2020 signalled recession, barely over with a growth-neutral Q4. The addiction must end and Nigeria must read the writing on the wall.
Watching the Pandemic
Nigeria’s Covid-19 cases represent those based on relatively limited test. Nearly 2,000 died in one year, for the US, 2020 was “deadliest year in history.” Investors will be looking at the progress made in safely doing business in a country amid a pandemic: e.g. vaccination stats. Expatriates movements are impacted by pandemic restrictions: vital that authorities manage this uncertainty.
Insecurity Exacerbates Uncertainty
Investors and lenders would charge a risk premium to do business with a country perceived to have serious security issues. Published terrorism index and frequent headlines provide no comfort. According to the Institute of Economics & Peace, in the five years to 2015 Nigeria’s terrorism Index went up by 48 per cent. Insecurity creates a double jeopardy: human and financial.
Tales of Resilience: Riding out Storms
2009: Nigeria LNG – paid dividend of $1.7bn from low turnover of $4.5bn: down 49 per cent. Thanks to cost[1]containment.
2016: Chevron – turned Q1 2016 loss of N725m to Q1 2017 profit of $2.7bn. Pumped CAPEX on 3 Australia LNG projects.
2020: Service providers Amazon – had Q1 2020 turnover of $75bn, up 26 per cent on previous quarter (plane fleet: 82).
Deals still get done
In year 2020 and 2021, despite the lull in M&A, debt financing and asset sales – down 41 per cent on 2018 and 59 per cent on 2018 some deals still got done.
London HIS Markit puts 2020 deals at 82, a far cry from 138 recorded the previous year.
Examples:
June 2020: AKK Gas Pipeline Project $2.2bn of 2.6bn support from China ECA, Sinosure and Chinese banks.
September 2020: NLNG Train 7 expansion $3bn Debt backed by ECAs and international banks (largely). In May, during lockdown, NLNG got its T7 EPC contracts signed with the SCD consortium
Jan 2021: TNOG OML 17 – $1,1bn backed by AfreximBank ($250m) and other Nigerian commercial banks.
Feb 2021: ANOH Gas Project raised debt of $260m $680m
The rest of the Forum will provide insight on how Energy deals can still get done, whether they relate to marginal fields or power.
This keynote on Resilient Industry amid Uncertainty was given at the Centre for Petroleum Information (CPI), Energy Finance Forum (Webinar Edition) by Victor Eromosele
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