*Oil producing countries hard hit by pandemic *Nigeria slashes budget, revenue projection *Bonny Light price down to $15/barrel *Oil majors cut 20-30% capex
Lagos — It is bad times for oil producing countries, especially those who depend on crude oil for a bulk of their national revenue. Many producers, including Nigeria, had earlier in the year made ambitious calculations for huge earnings from crude oil sales. The outbreak of the coronavirus and its attendant effect on crude oil prices on the international market have, however, forced changes to those calculations.
Nigeria, in its 2020 budget, projected N8.41 trillion revenue for the year, a great portion of which was expected to come from crude oil exports. Crude oil production was projected at 2.18 million barrels per day while the oil price benchmark was pegged at $57 per barrel. Overall national budget for the year stood at N10.59 trillion.
The COVID-19 pandemic has since forced the Nigerian government to review these expectations. The government has cut the 2020 budget by over N320 billion and proposed a new budget of N10.27 trillion against the N10.59 trillion passed by the National Assembly and signed into law by President Muhammadu Buhari in December 2019.
The new budget proposal, which is now with the federal law makers awaiting approval, reduces the oil price benchmark from $57 per barrel to $30 per barrel, but the oil production volume remained 2.18 million barrels.
Revenue projection for the year was also slashed by N3.3 trillion from the initial N8.41 trillion to N5.08 trillion.
The oil revenue projection for the year was the most affected in the reduction, as N2.38 trillion was sliced from the initial amount of N2.63 trillion, bringing the new revenue projection as contained in the new budget proposal to N254.25 billion. Several other aspects of the Nigerian government’s budget were equally negatively affected.
The Nigerian Government also slashed N312 billion from capital projects in the 2020 budget. The revised budget showed that there was a 20 per cent cut on capital projects across ministries, departments and agencies to around N312,820,542,675.
These are a sign of the hard times arising from coronavirus-induced oil price slump.
Speaking on the hard times and the the review of the 2020 budget, the Minister of Finance, Budget and National Planning, Zainab Ahmed, said: “Mr President also approved that we should cut down on the size of the federally funded upstream projects of the petroleum sector. The reason being we want to be able to get more revenue, by less reductions from NNPC. The reduction of the crude oil price from the $57 per barrel that we budgeted to $30 means that we are going to get so much less revenue, almost 45% less than we planned and because of that we have to amend a lot of projections in the budget as well as in EMTEF to reflect our current realities”.
All these are coming at a time the price of Nigeria’s premium crude, the Bonny Light, has slid to $15 dollars a barrel while the country is struggling to find buyers for its crude. “It (Bonny Light) is doing badly…Last week, it went down to close to $15 per barrel,” Group Managing Director of the Nigerian National Petroleum Corporation, NNPC, Mele Kyari, said in response to a question on how Nigeria’s crude was doing on the international market.
Just like Nigeria, other countries, including the Organization of the Petroleum Exporting Countries, OPEC, members are hard hit and are reviewing spendings.
OPEC member Algeria slashed its public spending after the fall in oil prices triggered by the coronavirus pandemic, which has shattered sales forecasts for the current year.
The decision came after a cabinet meeting when the nation declared that the operational budget would be cut by 30 percent.
Also, Iraq has propose budget cuts to foreign oil firms following the oil price crash. The government sent a proposal to all international oil companies asking them to reduce the budgets of developing oilfields by 30 percent as the slump in oil prices has hit government revenues.
International firms operate in Iraq’s southern oilfields under service contracts, by which they are paid a fixed dollar fee for volumes produced. The government repays companies for the cost of building projects and approved oilfields development plans.
Iraqi officials said low oil prices have forced the oil ministry to review its plans on how to repay international oil companies, IOCs, their dues during the first six months of the year. The ministry is still waiting for an answer from the oil companies on this proposal.
Saudi Arabia’s national oil company Aramco said it planned to cut capital spending for 2020 to between $25 billion and $30 billion, compared with $32.8 billion in 2019.
Another OPEC member United Arab Emirate’s state-run Abu Dhabi National Oil Company, ADNOC, has notified contractors and suppliers that it will review existing deals to find ways to cut costs due to the steep slide in oil prices, according to Reuters.
“While our corporate strategy currently remains unchanged, we remain focused on delivering our important growth projects and are proactively identifying opportunities for cost optimisation across the ADNOC group.
“Our procurement function will, in the coming days, reach out to you to begin a comprehensive review of your existing engagement with ADNOC with the goal of identifying cost savings,” the ADNOC letter said. The letter was sent to many companies dealing with ADNOC, including firms involved in oil and technical services, engineering, project services and drilling.
Pressure on global economy
In other parts of the world, COVID-19 is hitting hard on the core of national economies. A leading data and analytics company GlobalData said ongoing projects across the oil and gas industry will likely be impacted by the weak demand and major drop in oil prices caused by the coronavirus pandemic. It stated this in its report: ‘Impact of COVID-19 on Emerging Economies’, where it analysed the effect of the COVID-19 outbreak on the oil and gas industry in emerging economies, with China as the focal point. As a result of the lockdowns in key provinces, industrial production in the country has slowed down.
Elsewhere, the unprecedented collapse in global oil markets is wreaking havoc in all corners of the North American crude industry, pushing shale drillers, deepwater-equipment haulers and oil-sand miners to desperate measures. A former high-flying shale operator and an offshore transport company filed for bankruptcy. A short time later, a Texas shale driller was reported to be in talks with restructuring advisers, while a Canadian crude producer warned it may shut an oil-sands mine.
The latest casualty is Whiting Petroleum Corp., a champion of what was once the premier U.S. shale field. The company has filed for bankruptcy. Saddled with $3.6 billion in debt, Whiting is the most illustrious of the shale explorers thus far humbled by the worst oil rout in history.
American crude has surrendered two-thirds of its value this year and just closed out its worst-ever quarterly performance. As many as 70% of the nation’s 6,000 oil explorers eventually may go under, according to Mizuho Securites USA LLC analyst Paul Sankey, as the twin blows of COVID-19 and oil price slump destroy producers like Whiting.
The big players
Multinational oil companies Royal Dutch Shell, ExxonMobil, Chevron and BP have all announced spendings cut, citing the oil price crash and the effects of COVID-19. The Royal Dutch Shell announced it will cut spending by $5 billion and has suspended its $25 billion share buyback plan.
The oil major said it would reduce capital expenditure to $20 billion or below from an earlier budget of about $25 billion and material reductions in working capital. It will also reduce operating costs by an additional $3 billion to $4 billion over the next 12 months.
“At the same time, we are taking decisive action to reinforce the financial strength and resilience of our business so that we are well-positioned for the eventual economic recovery,” Chief Executive Officer of Royal Dutch Shell, Ben van Beurden, said while announcing the company decisions.
ExxonMobil is reducing its 2020 capital spending by 30 percent and lowering cash operating expenses by 15 percent in response to low commodity prices resulting from oversupply and demand weakness from the COVID-19 pandemic.
Capital investments for 2020 are now expected to be about $23 billion, down from the previously announced $33 billion. The 15 percent decrease in cash operating expenses is driven by deliberate actions to increase efficiencies and reduce costs, and includes expected lower energy costs, Darren Woods, chairman and chief executive officer of the company, said.
“After a thorough evaluation of the impacts of the pandemic and market conditions, we have worked closely with business partners to plan and execute capital adjustments that preserve long-term value, maximise cost efficiency, and put us in the strongest position when market conditions improve,” said stated.
Chevron Corp said it was looking at ways to trim spending that could lead to lower near-term oil production. Another international company Gulf Keystone has also suspended some of its drilling activities in the northern Iraqi region.
Kosmos Energy said it would keep production low and reduce its 2020 capital budget by around 30% to $250 million. Santos Ltd, independent gas producer, said it is reviewing all its capital spending plans in the light of the collapse in oil prices and would stop all forms of employment.
North America oil and gas producers have slashed their capital spending by about 30% on average, according to data compiled by Reuters.
CNOOC, China’s major offshore oil and natural gas producer, plans to reduce this year’s production target and spending on projects to cope with what is regarded as the worst industry downturn in two decades. “Without a doubt we will reduce this year’s production levels and capital expenditure by a certain degree,” chief executive Xu Keqiang told reporters via teleconference after reporting a better than expected 16 per cent net profit increase for last year.
Keqiang did not disclose the scale of the cuts as he stated that the plan is still pending approval by the company’s board. But, he added that most of them will be in high production-cost overseas projects.
Amongst African nations, Angola has revised its national budget and suspended capital expenditure, Senegal’s first oil development is facing debt arrangement challenges while analysts predict Ghana will get half its projected revenue and Cameroon will see a three percent drop in economic growth.
According to the African Energy Chamber, AEC, African oil-producing and reliant countries have been among the most hard hit by the COVID-19 pandemic and declining oil price. In particular, Senegal, Nigeria and Angola continue to face new challenges each day amid the threat of economic fallout, it said.
“In this time, the Angolan economy will be best served by swift government action,” said NJ Ayuk, Executive Chairman of the African Energy Chamber. “With the finance minister already confirming that the country’s economy will shrink by 1.21 percent this year, signally a fifth year of recession, Angola needs a solid action plan that involves intense renegotiation strategies with domestic and foreign creditors, if it is to make it out on the other side,” he added.
As for Senegal, its first oil development, the $4.2 billion Sangomar deepwater offshore project has suffered immense pressure as project partner FAR Ltd fails to finalise debt arrangements. Citing current environment as a major contributor, FAR said: “The company’s ability to close the Sangomar Project debt arrangements that were ongoing during this time have been compromised such that the lead banks to the senior facility have now confirmed that they cannot complete the syndication in the current environment”.
It added that neither the junior nor mezzanine facilities that were being arranged will be able to be completed for the foreseeable future. Project operator, Woodside and partner Cairn, continue to explore other options to see through project development.
According to .African Energy Chamber, the fall in oil prices coupled with COVID-19 has also had heavy impacts on Ghana’s oil industry, which has been on a path of steady growth for over 10 years since Kosmos Energy’s oil discovery west of Cape Three Points in the country’s offshore.
Having set a benchmark of $58.66 oil price per barrel until the end of 2020, Ghana’s projected oil revenue is set to take a hit, with analysts already predicting the country will get half its projected revenue, AEC stated.
Oil production activity is also expected to see delays as Tullow Oil revises production targets and terminates the drilling contract with Maersk Drilling for the Maersk Venturer drillship offshore Ghana.
According to an analysis of the economic and financial impacts released by the Press Secretariat of the CEMAC Economic and Financial Reforms Programme, Cameroon will witness a three percent drop in growth in the light of the global crisis.
Operations in the oil sector stands to be affected with the country already seeing a turn, and especially with companies such as Tower Resources declaring force-majeure on its development in the Thali block in the country’s offshore. The company has also revealed that activity on the NJOM-3 offshore well may also be suspended.
Indeed, a latest Wood Mackenzie estimate said Africa’s upstream sector may see its capital spending reduce by around 33 per cent in 2020 due to oil price crash and the coronavirus pandemic.
“The majors, on which Africa depends, have announced sweeping cuts to capital expenditure of 20 per cent-30 per cent. Based on these disclosures and our assessment of key projects, we expect capex cuts in the region of 33 per cent for upstream Africa,” a member of the Wood Mackenzie’s Africa upstream team, Gail Anderson, said.