The Covid-19 Pandemic and the Nigerian Oil & Gas Sector

Introduction

The coronavirus pandemic (COVID-19), has a ravaging effect on the world economy particularly the energy markets: coal, gas and renewables, but its impact on oil markets is particularly severe. This can be seen from the supply glut currently witnessed in the market and the persistent fall in crude oil prices. Volatility has always been a challenging element of the oil and gas market but has rarely been more extreme than it is today. COVID-19 led disruptions to demand, combined with its dramatic impact on financial markets, have led to rapid price swings.

The Oil and Gas Sector largely constitutes the fundamentals of the Nigerian economy, accounting for over 90 per cent of the country’s foreign exchange earnings. Since the discovery of oil in commercial quantity by Shell-BP in Oloibiri in the present day Bayelsa State of Nigeria as far back as 1956, the economy of the country has largely remained monotonous and dependent on oil exports. In other words, the monoculture economy that we run is one that is largely dependent on revenue earned from the oil sector.

In Nigeria, oil sector affects the economy greatly. Hence ,this work assesses the pandemic effect on the sector.

The Effects & Impacts of COVID-19

a. Global Oil & Gas Sector

The United States of America is the largest economy in the world and the biggest consumer of oil finds herself at the top of the table of most COVID-19 infected patients. China, the 2nd largest oil consumer seems to be on the path of recovery. Intense and rapid spread of COVID-19 forced leading European oil consumers like Germany, Spain, Italy and UK to go for lockdown. It is observed that 84 percent of the COVID infections and 94 percent of human causalities through COVID-19 happen to be in top 22 oil consuming nations. With combined GDP of $68 trillion these 22 countries contribute 79 percent of the global GDP. This means restricted economic activities in these countries will lead to economic slowdown followed by severe global recession.

China consumes 13.5 million barrels per day (bpd) of crude oil according to 2018 estimate, 62% is obtained through imports. The lockdown in China resulted in declining consumption of petroleum products and the workforce, a consequence of lockdown, has also disrupted port activity in China.

b. Nigerian Oil & Gas Sector

Nigeria’s revenue is 80 percent oil receipts. The 2020 budget was benchmarked on the crude oil price of $57 per barrel. The on-going disruption caused by the Covid-19 pandemic has reduced crude oil price below $29 per barrel. This reduction is further exacerbated by the oil production rift between Saudi Arabia and Russia, these countries have for years led efforts to balance World Oil Prices, through the OPEC, and arrangements between OPEC members and non-OPEC oil producers.

Nigeria, among others, have cause to be concerned, as the global spread of coronavirus, and the continuous fall in the price of crude oil in the international market would take a heavy toll on the nation’s economy as oil and gas account for over 90 per cent of Nigeria’s foreign exchange earnings and more than 60 per cent of the country’s earnings.

More so, Nigeria relies on crude receipts for more than half of government revenues and virtually all its foreign exchange. Nigeria is in ‘crisis’ as oil receipts plummet. This is due to the pandemic. The previous time oil prices plummeted, in 2015, the country sank into a recession. Unfortunately, the banking sector is at ‘severe risk’ for its exposure to the oil and gas sector.

c. What then is the post pandemic effect on the sector?

According to a recent poll conducted, two-third (67%) of the respondents opined that the impact will last for six months to more than a year following the pandemic. While 36% believe the volatility will stay for more than a year following the pandemic, 31% believe that it’ll last for more than six months. One-third (33%) of the respondents believe that the oil prices won’t be volatile for more than six months following the COVID-19 pandemic. The analysis is based on 358 responses received between 26 March and 09 April.

Conclusion

Coronavirus affects the oil market in two ways. First, travel restrictions due to containment efforts limit the use of jet fuel, and supply chains slow and industrial activity declines as companies send workers home meaning less oil and oil-based products are being used and produced. This has very direct effects on oil consumption and informs near-term calculations of real oil demand. Second, the stock market reaction to the effect of the coronavirus on the global economy builds a projection of global oil demand over the long-term. As broader market sentiment about the health of the global economy declines, so do projections about the future oil demand curve, prompting flight away from oil and energy stocks and further drawing down prices.