COVID-19, market shocks and oil producers in Africa

Intro

Oil producers in Africa must grapple with market shocks and prepare for more volatility. In the last four weeks to the time of writing, Bonny Light has gone from USD15 to USD34 per barrel. But that’s still around half the price in December 2019 and the outlook is clouded by COVID-related unanswerable buzzwords like ‘vaccine’, ‘second wave’, ‘stimulus’ and ‘demand recovery’. With the state of the market, and the violence done to revenue forecasts, host countries like Nigeria and Ghana increasingly need to compete for capital by making regulations that incentivise investment, and fiscal and governance reforms become more important than before.

Main Findings

The oil price collapse and COVID-19 have had a destabilising effect on producers in fledgling markets like Ghana and larger ones like Nigeria.

Ghana’s oil industry, for instance, began 2020 on a relatively confident note. Oil prices were above USD50 a barrel, Norwegian firm Aker Energy had found more oil in its offshore Pecan field the previous year and Springfield Energy, an indigenous firm, had announced a significant oil find. The 2019 oil licensing round ended underwhelmingly, but the plan was to hold another round in 2020, and steadily drive production from around 190,000 barrels per day (bpd) to 420,000 bpd by 2023. By February this year, Aker Energy was preparing to procure floating, production, storage and offloading (FPSO) services and begin production before end of the year – notwithstanding some regulatory manoeuvring.

Meanwhile, Nigeria was working on its first licensing round since 2007 as it looked to raise its crude output by one million bpd by 2023. Parliament was also developing a new petroleum industry bill that stakeholders hoped would improve fiscal terms and make upstream development more attractive. Total’s new Egina field had already become productive in December adding 205,000bpd, and some others like Shell’s Bonga Southwest/Aparo project were being rekindled. The climate looked stable at least for oil investors in these two countries.

COVID-19 and the oil price collapse have now put that climate in disarray. Aker has put off its Pecan project indefinitely and cut all non-essential staff. Shoreline Energy CEO Kola Karim told a webinar last month that his firm and some other producers in Nigeria have been renegotiating with contractors to prune costs and keep facilities running. The crisis has also set back major exploration and production projects in Nigeria like Shell’s.

Nevertheless, Ghana is contending with the COVID-19/economic downturn without plans to impose significant new requirements or expectations on oil firms. This, despite disappointment from certain key decision makers about the ‘self-centred’ response of some actors in the sector to the crisis.

In contrast with Ghana, where hydrocarbons contribute around 10% of government revenue and a quarter of merchandise export earnings, Nigeria is heavily dependent on its petrodollars—about 60% of government revenue and about 90% of foreign exchange earnings. And this puts oil producers front and centre in the thinking of regulators. For example, responding to falling reserves amid weak dollar inflows, in March the Central Bank of Nigeria (CBN) ordered oil firms to sell foreign currencies to the CBN so it could centrally ration dollar supply to critical sectors.

Outlook

Oil is growing in importance to Ghana’s economy and the government. Within 10 years it has overtaken cocoa as an export to come in second behind gold. Notwithstanding government’s industrialisation strategy, pre-COVID, its medium-term forecast was premised on significantly expanded oil and gas output and associated revenues. And yet, while the government has won plaudits for the pace of its COVID policy announcements[1], on the treatment of the oil and gas sector it has been relatively silent. We expect this to change as Accra more fully exits its lockdown.

In Nigeria, oil firms will likely see some pressure from a government struggling to recover from a fiscal crisis that has cut 90% of its oil revenue projections. This is already happening in other sectors. Last month the Federal Inland Revenue Service urged supermarkets, banks and telecom firms to pay annual taxes before due time. We also note that the government was already struggling to fund its budget before now, and that last November the production sharing contracts law[2] was revised to extract more petrodollars from the oil sector. The revision raises royalties and allows the government to renegotiate production sharing contracts every eight years.

Nigeria’s federal system is structured such that most states are unable to generate enough internal revenue and so are perpetually reliant on monthly allocations from a strong central government. A sharp fall in oil revenue weakens the central government’s capacity to maintain this system and leaves the country susceptible to unrest, as in 2016 when oil prices dropped and militancy resurged in the Niger Delta as federal handouts to states dwindled. This presents a security risk to oil producers in Nigeria.

In the past few weeks, there has been swingeing cost cutting by operators in Nigeria and Ghana. Not just the service providers, who have been touched most ruthlessly, but upstream as well. The outlook for pending exploration/production projects depends on how soon stability returns in the global oil market. It also depends on proposed regulatory developments in these two countries.

With the state of the market, countries will increasingly have to compete for capital by making regulations that incentivise investment. Last year Mohammed Adam, Ghana’s deputy oil minister, said the government intended to amend legislation to let producers explore elsewhere in the same area without a new license. For Nigeria, fiscal and governance reforms become more important than before—and so does the elusive petroleum industry bill.

[1] Roll out is another matter

[2] Deep Offshore and Inland Basin Production Sharing Contracts Act