Indeed the global landscape is ailing with the sinister assault of a virus which seems to relish in incapacitating not just biological organisms but also crippling the very infrastructural foundation of nations, no matter how relatively inert it may be. With such intense frictions adversely disabling the very engine of economies from restarting, focus by most countries is more attuned with health enablement. Oiling clogged sectors and gassing up the ignition will take more than putting pen to paper. The energy to drive and propel the efforts of powering backing the bustling and fluid element reminiscent of our oil and gas industry is going to require a multi-dimensional approach to traverse the impact of the pandemic. The global oil and gas industry is experiencing one of the most grueling times as the COVID-19 pandemic endures almost indefinitely with no finish line in sight. True to form, the challenges within the sector is not only premised on a decline in global demand for energy commodities but to a larger and more significant extent concerns are more gripping when it comes to the future of the extractive industry.
Extractives held hostage by pandemic
Goldman Sachs in a research note published on 30th March, said global oil demand has fallen 25% in the wake of the Coronavirus. They added that “not only is this the largest economic shock of our lifetimes, but carbon-based industries, like oil, sit in the cross-hairs as they have historically served as the cornerstone of social interactions and globalization– the prevention of which are the main defense against the virus”. The reflex reaction will be developed countries should have much better prospects of getting past the phase and recovering more swiftly, but they are in a pretty dark spot, casting a rather long shadow on developing countries. In a World Bank report, the continent of Africa will face its first recession for the region in 25 years as growth declines from 2.4 % in 2019 to between -2.1% and -5.1% for 2020, with oil and gas industry.
The pandemic has hit the buzzer of cancellation and halted some major projects in the oil industry as oil companies are moving to slow the pace of production. Expansion of storage capacity is ongoing as attempts are being made to market crude oil with the best sales and purchase agreement. In spite of their exclusion from lockdown imposition, operations within the sector will become increasingly difficult due to workforce shortages influenced by employees being infected by the coronavirus. Deloitte has revised its 2020 GDP growth estimates for Ghana from just under 7% to less than 3% in light of the Covid-19 crisis, as the country’s economy faces disruptions from a variety of directions. The country is also expected to face significant losses in tax revenue.
The biggest hit is expected to come in the form of revenue shortfalls. Deloitte reports that the country has already faced a “fiscal impact” of more than 9.5 billion Cedi, due in part to revenue shortfalls, which includes nearly GHC600m that has been deployed specifically towards fighting Covid-19. The Deloitte report categorically states that, “the economy could suffer from significant decline in Government revenue and expenditure resulting in potential job losses.
This could, in turn, erode the economic gains achieved in recent years and significantly slow down Ghana’s economic development.
Plummeting oil receipts in Africa
Figures in books may indeed give telling tales of the actual situation on the African soil, but statistics only tell half of the story as the visceral emotion and comprehensive impact accompanying the pandemic in Africa’s oil and gas industry is one for a nightmarish thriller.
In a report, Africa’s biggest exporter, Nigeria sought $7bn in emergency fund as it forecasts recession. The country’s projection of 2.1m barrels a day of oil production has been reduced to 1.7m barrels. Nigeria relies heavily on crude receipts for more than half of government revenue and virtually all of its foreign exchange. Both Fitch and S&P have, however, downgraded Nigeria’s credit ratings in recent weeks on the oil slump, with Fitch adding ten Nigerian banks that were at severe risk because of their exposure to the oil sector. Sadly, “the oil price drop has forced government to remove the petrol subsidy, which had fixed fuel at N145 a little and absorbed billions of dollars in spending”.
Deloitte predicts that Ghana’s reliance on the oil and petroleum sector also factors in to the Covid-19 impact, in light of shortfalls across the board in petroleum receipts. If this scenario persists unmitigated, it would have adverse consequences for Ghana’s economy going forth.
One would never have expected countries such as Nigeria, Ghana, Angola, Algeria, Congo, Gabon, Equatorial Guinea and Libya whose budgets are greatly dependent on oil revenues to ever come so close to a significant decline in income. For instance, Nigeria’s 2020 budget was based on an oil price of USD57 per barrel and Angola USD 55 per barrel. Both countries derive approximately 90 percent of their export earnings from the sale of oil and as a consequent are susceptible to a collapse in oil price and send government to the review desk, renegotiate investments and finance projects. When push comes to shove and negative oil prices become a tendency, it will send oil exporting countries on a cliff-edge.
Impact on oil producing countries
In sub-Saharan Africa, the impact will be felt even stronger because the pandemic is being combined with a notable crash in oil prices, putting pressure on state budgets and testing the resilience of the continent's strongest energy companies.
The immediate effect of Covid-19 for the sector has been on the demand for crude oil, and on its prices. Most analysts and operators now agree that 2020 could see a negative demand growth for oil globally as industries shut down and countries around the world go on lock down. The effect on prices has been nothing short of devastating: they have reached their lowest levels since 1991.
According to Africa oil and power, oil and gas producing countries are expected to brace themselves as a much stronger blow of recession is about to hit them especially with the snowballing glide of the pandemic which has caused an incredible drop in energy demand for oil.
Africa’s largest producing oil country Nigeria, has paid the greatest price as the countries that import the majority of Africa’s commodity, including China, the US and Europe are having their economies being cut down to size. Demands have plummeted by 30 million barrels per day during the pandemic, as over 4 billion people were forced to stay home, with Nigeria and Angola seeing a 7% growth fall in export.
For Africa, this means an immediate pressure on state budgets and macro-economic stability. Apart from South Africa, the continent's biggest economies rely heavily on oil revenue to fuel state budget and public spending and ensure macro-economic stability. All sub-Saharan Africa's producers had budgeted. Owing to the outbreak of coronavirus in China, which is the main driver of oil, the Organization of Petroleum Exporting Countries’ (OPEC) outlook for the increase in oil demand this year has been considerably reduced. It said,
“evidently, the timing of the outbreak exacerbated the impact on transportation fuel demand in China, as it coincided with the Chinese Lunar New Year holidays, as millions of Chinese return home to celebrate with family members and friends, or travel abroad”.
Oil prices on the hangman’s noose
This pandemic is really undertaking a segregation posture with the ‘black gold’, by sequestering the haves and have-not (oil and gas) into a place of paucity particularly in Africa as its annual growth is predicted to drop to 1.8% from a previous estimate of 3.2%. Simultaneously, the continent’s oil-reliant economies could actually incur up to $65bn of income according to the International Institute for Environment and Development. Exports have been affected due to the falling prices introduced by the pandemic; the Institute said Nigeria and Angola reported about 70% of their April-loading cargoes of crude oil remained unsold in March, collectively losing revenues for close to 70% of their national budget. As a result of low oil demand, “the supply glut from exporting countries will increase the revenue margins for terminal and large crude oil vessel owners in Q2 2020,” according to the oil and gas research team at Acuity Knowledge Partners.
Credendo reports that, Oil accounted for about 20% of export revenues in Ghana in 2018. As the price of the Brent barrel tumbled down in the midst of the COVID, the lowest level since 2002 and nearly half of the projected oil price for 2020, export revenues from oil are expected to significantly decrease. A large decrease of Ghana’s current account receipts is therefore in the cards. Indeed, despite the 15% rise in the average gold price in the past months vis-à-vis 2019 (accounting for roughly 23% of export revenues in 2018), it is not expected to reverse the negative trend in export revenues. Hence, Ghana is likely to experience a wide current account deficit in 2020, significantly higher than the previous forecast of around -4% of GDP. On top of that, FDI and portfolio inflows, the two main sources of financing of the current account deficit, are likely to drop because of the large outflow of capital from emerging markets.
Brookings is of the view that while oil accounts for 90% of Nigeria’s exports, the decline in the demand for oil and oil prices will affect the volume and also value of net profit. The steep decline in oil prices advanced further by the pandemic has forced the government to cut planned expenditure. Amongst their policy recovery methods, the official exchange rate has been adjusted from 306 to 360 Naira. A large score of experts are actually predicting a fall in the prices of these once sought after commodities as the pandemic shows no indication of falling out on the human stock market.
For all it’s worth, the world must be a hundred years too early to collectively cope with the pandemic. The chairman of the African Energy Chamber NJ Ayuk said,
“we are seeing force majeure in Cameroon, in Senegal. Exxon Mobil is delaying gas project in Mozambique. In Uganda, some companies are delaying exploration. Frankly most projects are going to get delayed”.
Mr. Ayuk deepens the wounds on the industry by saying,
“2020 is going to be a tough year for everybody and everyone needs to buckle for the ride… You have twin issues of the price war and the coronavirus– you can’t make this up. Hollywood couldn’t have written this script. 2020 is done! So you have to look at 2021 and form the policy that will drive you forward”.
That notwithstanding, measures are being taken to address the crisis and ratify the depressing oil glut which has no outlet, but “you have to be in a strong position to go forward and really deal with a future that works for the industry”.
World Bank has also advised reforms for developing countries as the plunge in oil prices continues, in the form of energy-subsidy reforms. It is of the view that these reforms “can help free spending for urgent pandemic-related purposes, discourage wasteful energy consumption and reallocate spending to programs that better target the poor”. It will not be a lost cause after all, because all the murky ‘black gold’ needs are a few financial rub and some good ‘yes’ to regain its appealing sparkle on global trade.