The Federal Republic of Nigeria, on the 27th of February, was thrown into agitation when the first case of coronavirus disease was recorded in Lagos, Nigeria. This novel disease at first did not have any effect on the Nigerian economy, but as the spread rapidly increases, the state governments and federal government employed various measures to control the spread of the disease. Unfortunately, this pandemic disease increased and finally led to the federal government declaring a total lockdown of major cities in the country on the 30th of March and had since then been extended every two weeks up till this moment. This stringent measure by the federal government to protect the lives of its citizen, however, did not augur well with its economy. This paper thereby seeks to elucidate the effect of the pandemic disease of coronavirus on the area of oil and gas within the Nigerian economy.
The Covid-19 Pandemic Disease
The term “COVID-19” is an acronym for the coronavirus disease in 2019. The disease which broke out in Wuhan, China is an infectious disease caused by severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2). This disease, after its outraging cases of persons who have contracted this virus and in the worst cases lost their lives to it around the globe, has been declared a “pandemic” disease by the World Health Organization. This disease spreads primarily through droplets of saliva or discharge from the nose when an infected person sneezes and thereby makes it very susceptible to easy contact by other non-infected persons.
The Nigerian Oil and Gas Sector
The term “oil and gas” simply refers to petroleum, crude oil, and raw natural gas extracted from the ground by conventional means or method. However, in general parlance, it is referred to as the petroleum industry which spans across the process of exploration, extraction, refining, transporting, and marketing of petroleum or natural gas products.
The Federal Republic of Nigeria is one of Africa’s largest oil producer and has been a member of the Organization of Petroleum Exporting Countries since 1971.
Nigeria’s economy heavily depends on the oil sector which amounts to an average of 40% of the country’s revenue. Nigeria’s crude oil is substantially derived from the Niger Delta region of the country and classified mostly as light and sweet which means the oil is free of sulphur and similar to petroleum extracted from the North Sea (Bonny Light). Nigeria thereby happens to be the largest producer of sweet oil in OPEC and exports its crude oil predominantly to the United States and other countries such as India, Brazil, Spain, France, and the Netherlands. The extraction of Nigeria crude oil is done by the private and foreign companies such as Shell, Mobil, Chevron, Texaco and Agip with strategic export terminals at different locations in Nigeria but heavily regulated by the Oil Pipelines Act, Petroleum (Drilling and Production) Regulations Act and the Petroleum Act 2011.
It must, however, be noted that apart from these export companies of crude oil, Nigeria also refines its crude oil for herself with a refining capacity of 445,000 barrels per day through its four local refineries such as Warri Refinery and Petrochemical Plant, New Port Harcourt Refinery and Old Port Harcourt Refinery, and a defunct Kaduna Refinery. However, due to the high demand and consumption of petroleum in Nigeria and the low allotment of barrels to the downstream, the country still relies heavily on multinational oil companies’ refineries overseas for petroleum which unarguably stands at a relative detriment of the country supply by its cost and availability.
The Covid-19 Pandemic and the Nigerian Oil and Gas Sector
The breakout of the pandemic disease affected the economy of major countries in the world and one of the major areas of the affected economy is Oil and Gas. During the late period of the previous year before the outbreak, Nigeria while preparing its budget had pegged the benchmark for the sale of its crude oil at 57 US dollars per barrel by the 2020 Appropriation Act with a production of 2.8 millions of barrels per day and had thus formulated its budget around this price.
Before the emergence of the pandemic disease, the oil and gas sector was economically stable and in fact, the BrentCrude was approximately 70 US dollars per barrel which were well above the country’s benchmark for crude oil. However, after the outbreak of the pandemic disease in the world, major countries, some of which were the buyer of Nigeria’s crude oil introduced measures to prevent the virus which inadvertently affected the demand of crude oil as oil and other industrial companies had to shut down their activities. This situation, however, did not only affect Nigeria but also other oil-producing countries and thus led to the 178th Extraordinary Meeting of OPEC in Vienna on the 5th of March. The major reason for this meeting was to find a solution to the seemingly low demand for crude oil by cutting down the production volumes of each state and maintain an equilibrium price of crude oil.
Unfortunately, Saudi Arabia, a major oil-producing country of OPEC and Russia, a non-member but an ally of the OPEC could not agree on the production cuts to be adopted and thus made the meeting unsuccessful. The effect of this non-agreement on production cuts led to an increase in the supply of oil with an invariably decrease in demand which made the price of oil rapidly fall as buyers were at ease to negotiate a lesser price from different oil companies who were willing to sell their excess crude oil before others. As on the 25th of April, the Brent Crude which was formally at 70 US dollars in January had drastically fallen to an approximate of 21 US dollars per barrel globally.
In Nigeria, the effect of the pandemic disease did not only affect the governments but also stakeholders and guarantors who had invested in crude oil, the revenue of oil companies and inability to liquidate debts, insurance companies which lost considerable money to companies who have insured themselves against pandemic diseases, workers and staffs of oil companies who lost their job contacts and major contracts which range from construction of refineries such as Dangote Multinational Refinery and others, Production Sharing Contracts (PSC), Joint Operating Agreements (JOA) on oil production, etc. were terminated as the clause of Force Majure was being invoked in the contracts. Thus, the country had been put on the brink of recession as the lockdown measures by the government still subsists and thereby continually leads to a declining state of the oil and gas sector. Also, at the center of this crisis is the government which suffered an enormous setback as more unexpected expenditure was being expended on the treatment and control of the pandemic disease with no equivalent revenue from the oil and gas sector. In fact, on the 18th of March, 2020, the government had to slash the 2020 Budget by N1.5 trillion to recuperate and avoid the country from receding into crisis.
Conclusion and Recommendations
It is without any iota of doubt that if the country’s measure of lockdown still subsists, the oil and gas sector including major areas of the economy will go into shambles. Therefore, in a bid to resolve this crisis and recuperate the oil and gas sector from shambles, the author suggests the following three counter-measures;
1. Amending the lockdown policy: It is suggested that the rigid lockdown measure by the government should be amended to allow the operation of businesses in this sector within 8 am – 6 pm. This should be accompanied by a compulsory wearing of masks and gloves which should be mandatorily provided by the companies for its workers.
2. Settlement of dispute between Saudi Arabia and Russia: It has been established that the disagreement of production cuts between these two countries led to the depreciation of oil prices. Therefore, the United Nations should interfere and all countries should exercise their diplomatic relations to settle the dispute on production cuts.
3. Grant of temporary loan by the Central Bank of Nigeria (CBN): One of the biggest problems faced by businesses in the oil and gas sector is that most businesses have lost a lot of revenue and had been unable to liquidate their debts. The CBN should, therefore, grant temporary loans to these businesses in a bid to help them recover and ease the running of these companies while the economy stabilizes itself and the price of crude oil is favorably balanced.
In conclusion, if these measures are successfully adopted, oil companies would resume its activities, disputes on contracts would be resolved, loss of jobs would be avoided, the price of crude oil will plummet and revenue of oil companies and the government would be stabilized and the oil and gas economy would gradually recover from the brink of crises as the government also eradicate the pandemic disease.
By: Badmus Sulaimon Ayodele, An undergraduate student of law, Lagos State University, Lagos, Nigeria.