As Nigeria continue to grapple with the global economic contraption, occasioned by Covid 19 pandemic, Ms. Ronke Onadeko principal consultant drnl consult limited in this interview has outlined the myriads of challenges that will befall the domestic economy, as well as profile some solution to jump start the economy post Covid 19. FRIDAY EKEOBA who attended the webinar lecture organised by the Facility for Oil Sector Transformation (FOSTER) in partnership with the Finance Correspondents Association of Nigeria (FICAN) in Lagos, brings excerpt.
Q1. From a currency perspective as it relates to the economy; IMF says a global recession is inevitable. We have seen a steady weakening of the Naira against the dollar and the Brent is at its all-time low, what does these mean for us?
In the first instance Nigeria’s main revenue comes from crude oil and that has taken a massive hit. At the same time the value of the naira has depreciated as expected- it will bring about a huge change and the future looks quite bleak. The state governments will be getting very little and the same goes for the local governments. Let’s not forget the government is the largest employer of labor and biggest spender in the Nigerian economy.
The economy is bound to contract. We look forward to retrenchments, early retirements, factory production will shrink, there will likely be job loses, the economy will contract and a recession is almost inevitable
This means the federal government at the center of our finance in technically broke and will not be able to fund the 2020 budget. The next step to keep the economy going is to borrow- we have to borrow to spend and hopefully, if the borrowed funds are deplored into productive ventures it will stimulate early recovery from the recession. The loans have come with some asks by lenders- no more subsidies on fuel, electricity or even forex!
Q2. How does the recent drop in petrol prices in Nigeria relate with the global drop in oil prices?
Crude and PMS prices move in tandem but we have not benefited much from this. The dollar element of the landed price of PMS has short changed Nigeria in this season. PMS is very cheap but the cost of funds to trade and import PMS is very expensive. The disadvantage we have is that we need scarce and expensive forex to pay for the petrol, to ship the petrol, insure the cargo and freight and even pay for dues to NPA etc, some may even have borrowed to trade in dollars and so will be paying interests and fees in dollars.
When crude prices go up, the bi-products from its refining go up and vice versa. Subsidy on PMS was removed as a result of the international global price reduction- the government luckily rode on the back of this to announce that subsidy has been removed forever
What may happen when the price of oil increases internationally?
Based on the devalued Naira, the pump price may go up again even beyond where it was at 145 Naira per litre. In order not to revert to subsidies, we would need to have an endorsed, law-backed statement from government for the abolishment of subsidy and under recovery in any form and under any guise and in addition the disbanding of PEF
The announcement by the NNPC for the removal of subsidy (under recovery) came as a surprise for many reasons. Usually, it is the role of the Ministry of Petroleum Resources and some of its agencies to make such announcement. The other voices we should have heard are those of the PPMC, DPR, PPPRA, Ministry of Finance, CBN and of course the Presidency should have been #1 to lend their voices to it and endorse the declaration after NNPC spoke.
Q3. What are the implications of the 2020 budget revision on the common man? Are inflation & recession fears valid?
In my opinion, there is no budget right now. We benchmarked the 2020 budget on $57/bbl and then revised it to $30 now with crude trading around 10$/bbl, we really have no means of funding the budget except from loans. Loans are not easy to get now as the whole world is distressed by the effect of the pandemic on economies. Lending institutions will pose tighter rules and unfortunately Nigeria’s international financial credit rating has dropped significantly.
Producing a barrel of crude oil at 22$ and selling under $10 is not a way forward-it is throwing good money away.
If we have no money to fund our budget, we should revisit our national strategy of spending our way out of a recession. We urgently do not have the cash and we have already dipped into our ECA and SWF accounts.
Recommendation: Nigeria can actively adjust spend while borrowing by blocking avenues for revenue leakage – no more subsidies for fuel, power, forex or fuel logistics; reduce the cost of governance – maybe try a unicameral legislature, shrink the civil service to reduce costs, liberalize the downstream sector once and for all in an irreversible way; place the gas policy & plans on the front burner, pass the PIB so we can at least attract foreign investments.
A major plus overall is to unify the foreign exchange rate, no more parallel market- this will make access to the US Dollars an equal opportunity matter, no more subsidy of forex- this will allow the naira float.
Q4. Nigeria has recent loans especially those from China that are tied to ongoing infrastructural projects. How will we manage this going forward?
A re-scheduling of our debt is imminent and that’s a good place to start. Nigeria can request for the loan repayment to be deferred to when it can afford it and at the same time seek for better terms.
Q5: More dire straits than most citizens are aware of, our single biggest buyer of crude, bought none from us in Q1 – China. Does Nigeria have immediate alternatives to fall back on, pending an actual diversification of the economy?
Gas is our Plan B. Gas for power, gas for petrochemicals, gas as a raw material for fertilizer, gas to power industry, gas for home use and transportation. In the interim, we can sweat out other assets though their yields are not the best option-pipelines can be concessioned, the refineries can be sold or privatized, etc.
The country should also ensure that whatever forex we pull-in, some are reserved for fuel importation, gas development and the last priority should be the NASS.
Global Demand for Oil is low though it has improved lately to about 30m/bpd. OPEC’s deeper cut has very little improvement value- the cuts came too little too late and the staggered reduction makes the effect less powerful than if a large cut had happened earlier.
Global production has contracted, so crude purchase will be low; airlines are grounded world over so no one is buying aviation fuels etc. We have to understand that the world as we knew it no longer exists.
Q6: The current government promised to harness the gas sub-sector. Is this the time to switch attention to the potentials of the gas sub-sector? Is it a time to sell Marginal oil fields? What is the best thing to do now?
As I said earlier, gas is our plan B. We have an abundance of gas resources and the utilisation and optimisation of gas is easier to launch into once we can get gas infrastructure in place (it is however not cheap). Marginal fields can’t be attractive to any industry stakeholder/investor at the moment. Investors are expectedly reluctant to invest their cash in country that has failed to pass the PIB.
The way to go:
a. Block the revenue leakages, some MDA can be done without
b. Full deregulation of the petroleum downstream sector via the liberalisation route
c. Activate the gas plan
d. Pass the PIB
e. Outright sale, commercialization or privatization of the oil and gas assets
Q7: Breezing back to the yoke of crude oil at the moment…On the average, how much in demurrage cost is Nigeria incurring daily, with crude oil cargo on the high seas without a buyer? How long can Nigeria hold out for?
There are unfortunately no alternative uses for crude oil. A vessel could cost about $300,000 per day, with over 70 cargoes and some haven’t found homes for over 30 days. You can imagine the losses, but this is currently a global crisis and not peculiar to Nigeria alone.
Nigeria may have to shut down production as hard as that is to admit- the world doesn’t have buyers; storage is used up and prices are still on the downward slide.
Shell is the only IOC that plans to drill in 2020- for now, all others are on hold. Support companies that provide services in production, exploration and logistics are downsizing, folding up or exiting the Nigeria market-the picture doesn’t look rosy at all.
That’s a lot of money we cannot afford to be losing at this time. Is there a way out?
Our refineries must find buyers by force. We have to off load them, its priority. If we did what we did to Eleme petrochemical when it was sold to Indorama we will be singing to the bank now.
Nigeria also needs to open her markets to competition across the oil and gas value chain- let investors find our space attractive, let them take out their profits when they make it. Nigeria will be better-off than if we self-protect.
If we get our house cleaned up quickly and right, we may be able to attract some global investments and funds if our part of the world is the least hit by the pandemic (fingers crossed).
Q8: The two things I will do in the Oil and Gas sector to avert the covid-19 influenced economic challenges?
Assent to the PIB, shrink NASS, liberalize the downstream sector, commercialize or privatise all state-owned enterprises. The government should only regulate not get involved in commercial activities.
Q9: How are you preparing for the eventual post-covid 19 economic crisis; and what will be your top 3 advice for Nigerians?
Cash is key. I’ll look at exploiting some existing gaps to add additional streams of income with the hope that a team of knowledgeable people will come on board to help the government plan a less painful transition.
Government, corporates and individuals should:
a. Spend less
b. Look for other income streams
c. Avoid purchases that are dollar-related (switch from Kellogg’s corn flakes to Akamu)
d. Buy made in Nigeria
e. Pass the PI(G)B in its entirety
f. Sell, commercialize or privatize oil and gas assets.
Q10. Nigeria spent N10trillion on subsidizing fuel. This is far more than what is spent on education, health facilities, and research.
Can you imagine how much we could have saved over the years and today we have nothing to show from all the years of subsidy. Our SWF and ECA funds would have been our go-to source for funding to tide us over this period but because we have depleted those sources, we are having to go cap in hand to beg for funds to help us while we ride through the storms of this looming recession.
Q11. What unique role can artificial intelligence play in the development and deepening of the downstream sector and the role adoption of technology?
With the liberalisation and deregulation of the sector there will be fierce competition
Q12. Bringing Crude Production Cost down, what are the tools to achieve this?
I can’t say there are tools, the line items for crude cost have been distorted by a few things security, expensive contractors, middle men costs, cost of funds for high rik fields – onshore and shallow onshore because of kidnappings etc, some projects are not cost viable, high insurance costs are high based on country risk, additional cost of putting in place infrastructure also makes prices high for example having multiple evacuation of crude routes in case a pipeline is vandalised and you have to result to barging that is more expensive and time consuming.
The government has promised to work on bringing down the cost to about $10. The current range is between $9 and $22 depending on the terrain. On PSCs, the range is between 10$ and $30
Q13. How do we get infrastructure development and deployment into the sector?
There has to be a wholistic national plan we are following whereby our national assets are identified and infrastructure such as roads, rail, power and security are developed and built around areas, these underlying factors will not only attract projects and finance to these areas it will also enhance homogeneity in development across the asset area and ease the business cost tremendously.
Q14. Local financial sector and their liquidity- what role can they paly to help indigenous players realise their dreams to participate in the sector.
Oil and gas projects are usually long term and so using available short term funds to support long term businesses is a mismatch of funds and has many advantages, its costlier and poses exit problems especially if any of the indices change, we have to attract long term finance into the sector from international banks, venture capitalist, development funds both multilateral and bilateral institutions by collaborations, risk sharing, syndicated loans where funds are polled together and risks shared.
Q15. The Nigerian local content fund- can it change the narrative?
My opinion is perhaps aggressive here, the fund should not only support local participation with affordable loans and good long term tenures but a greater portion of such funds should be towards identifying and cultivation smaller and new businesses with younger talent that will play side by side in a stipulated number years with no props. There has to be a cut off period where the recipients are weaned off and the structure collapses. We should be working towards a level playing field in the medium term.
Q16. Dangote Refinery when it finally comes on stream, how would the company’s production impact on possible investment in the sector since it is expected to have the capacity to produce enough for local consumption and even export. Will there be room for expansion or attraction for new investors in the sector due to the huge cost of building such project?
Dangote may come on stream on or about the 2nd quarter of 2021. It will bring a dynamic change to the downstream sector:
i. There will be increased refining capacity,
ii. The cost of transporting crude out and importation of products will bring a relief on some line items in the pricing cost at the pump-however, we should understand that he has spent dollars putting this refinery in place and has to service his debt in dollars and also buy the crude oil in dollars from the government.
I only see a positive side to the entry of the Dangote dynamics. Its entry into the market will be able to do good to prices as he will be making money from refining bi-products that will go into the petrochemical plant.
If other downstream players that want to develop in the area of refining capacity come into the space they can play in a niche areas to operate. For example, if a refinery is situated in a shallow costal area and focuses on diesel production for local industry there is no way a Dangote including logistics will be able to compete.
The consumption needs of the sub-regions are so high that no number of new entrants will cause a glut in the market. Different models and different client-base will keep the sector lively and competitive.
Q17. Why is it taking the government so long to deregulate the oil sector?
This is an unknown factor, there are almost only advantages to this but for some reason the government is scared of letting go of one of their geese that lay golden eggs. There have been claims that the government considers PMS supply a strategic issue that has to be controlled and managed by government, if that is the case strong regulators can achieve same. There must be more to it than meets the eye. We are on a journey down that road, we will attain it either voluntarily or otherwise.
Q18. What is the impact of the petroleum income tax on the oil and gas sector? political will is a quick and easy pointer.
The downstream sector has been used as a cash cow for politics for many years and the inefficiencies have been exploited- deregulation will block this source of leakage. It could be disadvantageous to the political class.
Q19. Are we likely to see a spike in NPLs from the oil sector, and is it possible to blame the government’s inconsistent policies for the bad business in the oil sector? Again, how do we expect foreign capital investment when our policies keep changing?
Non-performing loans will be on the increase largely from the contraction of the economy, reduced production levels, shutting down of fields, low profit margins and in some cases losses. Many companies invested in oil fields when barrel prices were above $100/bbl and now is as low as $15/bbl. The industry will see a lot of challenges but they will improve and efficiencies will also improve in the long term.
Q20. What will happen to petrol equalization fund under full deregulation so that every part of the country will have petrol at the same price?
PEF will have to be removed if truly we are deregulated. Market forces of demand and supply will play larger roles in determining where fuel ends up at and the efficiencies will determine the overall prices. My view is that prices will differ by location but not in a significant way.
Q21. With the banks reaching their obligor limit, how do they avoid returning to the post-2008 global crisis with Nigerian banks and financial system heavily impacted.
The banks are more robust than they were in 2008 and there are other thriving sectors that will be leaned into to provide some cushion. Also, there are so many stimulus packages available to help ailing sectors. The combination of these may alleviate the pressure. If the PIB is passed, this may also attract significant FDI into the sector as well as collaborations and mergers etc to fund the sector.
Q22. You did mention that that Nigeria depends largely on revenue from oil to fund its budget. Now, the country is broke and the cut in budget is insignificant. Do you really think the FG is committed to growing this economy as debt will mount?
Mind you, a big chunk of the budget is spent to finance recurrent expenditures. When you borrow monies at times such as these, the lenders will scrutinize your spending and moderate you. Continuous checks on economic indices will guide and force economic growth policies to be put in place.
Q23. What informs your optimism about the PIB passage this time around, given the secrecy and cult-like operation of the NNPC over the years, unlike Petrobras and Saudi Aramco? We know that the NNPC would not want to list on the NSE because of the lack of openness. Will the PIB unmask the masquerade?
We are all hopeful that the PIB will be passed in the shorter term especially as our mono-income economy has been exposed in the covid-19 pandemic. The country is desperate to reduce its expenditure, to postulate as a more transparent borrower and is in dire need of investment into the economy for developing the gas sector and infrastructure. So, it is almost a case where we are forced to pass the PIB as quickly as possible. There is however a need for advocacy and pressure to ensure the government does this urgently.
Q24. What are the quickest 3 things the government needs to do to avert another economy recession?
a. Pass the PIB
b. Use gas for power, gas for industry, gas for fuel and gas as an input and feedstock into petrochemical plants.
Q25. Listing funding options for the expansion of the sector and how quick can investors access such.
a. Local commercial banks
b. Capital markets
c. Venture capital
d. International banks
e. Bilateral and multilateral agencies
f. Leveraging off export credit agencies
g. Last but not the least are funds that will come in from mergers, acquisitions, collaborations etc
These will take time and will be dependent on government policies being in place and having strong regulators
Q26. You mentioned that a way to solve the Nigerian currency dilemma is to have a product that will have competitive advantage. In your opinion, what product do we have that has that advantage?
Gas in the subregion and through sub-saharan Africa may well do this. Gas is key going forward for Nigeria.
Q27. You, talked about policy changes that will enhance the Nigerian oil/gas sector and make Nigeria first destination for funds in Africa. Will the expected foreign funds not also be impacted by volatility in exchange rates, same rising inflation trend and country risk?
It is important that international project finance match tenures i.e. using long term funds for long term projects etc, match currencies i.e. if you need dollars to fund a project your return on the projects should be dollar denominated if not in its entirety as least a good portion so the business is not at risk of currency volatility and exchange rate risks when it’s time to pay back and also there is the importance of having robust models and world class teams to match the project.
Q28. In your lecture, you stated that the oil and gas sector makes no room for monopoly, hence turnover volume drives the bottom-line. But in the face of the competition law coming to force in the country, is Nigeria not seeing a form of monopoly in refining, where only one private Refinery (Dangote Refinery) has received all support from government to refine, taking into account some earlier projects like Orient, at the same time, it could be seen that due to the operations of Dangote Refinery, other government owned refineries have been grounded?
The government refineries and the Dangote refineries are not in any way the effect of each other. If you recollect, Dangote’s first choice was to buy off the refineries and transform them. Having failed at that, he ventured on a solo journey. Both can work side by side. There is enough demand in country and on the continent with much more needed.
Q29. What is the estimated value of expected petroleum products value chain business in Nigeria?
I unfortunately can’t even make a guess at this. It easily could be the biggest value sector in Nigeria because of our gas reserves and the range of uses for gas in Nigeria, the sub region, the continent and abroad also. Gathering and transportation of gas is not complicated, its appeal is high because it is clean and the demand is ever increasing.
Q30. What is the position of Nigeria’s oil industry post Covid-19, taking into account the AFCFTA and the new initiatives by the African Energy Chambers (AEC) to open up the continent’s energy sector to the global market?
The modalities of making this work is well on the way; because of the covid 19 epidemic, the roll out time has been postponed. We need to put many things in place before we begin to benefit from this. Determine what we have as a competitive advantage, build the regulations and policy around same, make sure our gas pricing is right, make sure the infrastructure to deliver is viable and last but most important is the legal aspects-how do we develop contracts that will drive these and the recourse to law when such contracts fall through or one party doesn’t fulfil its obligation across borders? Our legal systems on the continent vary and languages vary, travel access is still difficult, movement of funds from one country to another still has to go through dollar conversions etc … we need to put some thought to this.
Q31. How will new initiatives by some global investors to only invest in renewable energy affect the new policy direction that you stated will drive expected growth of the oil sector as well as the PIB?
I unfortunately can’t speak much to the renewables but as popular as they seem now and they are gaining ground we still have decades of fossil fuels, coal etc to exploit before we catch up with the west.