When driving in Texas, a major oil-producing state in the United States, if you look at the bumpers of the oversized trucks, you might see a sticker that reads, “Lord, give me one more oil boom and I promise, I won’t mess it up.”
The message accurately captures what Nigeria’s Federal Government must be praying for right now.
An overreliance of oil in the middle of a global pandemic means the country’s economy will contract by 3.4% while the 2020 budget, like other nations, will be revised downward.
Perilous times indeed, but it stands to reason that the only industry currently capable of such an impact, might also be the only one capable of alleviating the situation- 'Oil'.
Who deserves a bailout?
In 2008, during the Great Recession, the United States government made the controversial decision to spend $80 billion rescuing its car industry.
If the US hadn’t made that decision, 3 million jobs would have been lost and the recession would have been deeper. Instead, the car industry made an outsized contribution to economic recovery, including the sustenance of the city of Detroit- the centre of the US automobile industry.
Amid this COVID-19 crisis, it has made the equally tricky decision to prop up the airline industry with $25bn. The Treasury Secretary, Steven Mnuchin, insisted the bailout would “help preserve the strategic importance of the airline industry.”
To put it in context, the airline sector in the US is responsible for over 10 million jobs and generates $1.7 trillion in economic activity.
During global downturns, industries will often make a case for government help, and in a few situations, the government will appear Deux ex. Machina (unexpectedly to save the day).
All bailouts are different, but they all have in tow the question “is this industry deserving?”
While we seek to diversify our economy, we need to ensure that the oil and gas industry, which accounts for around 90% of export revenue, is not handicapped at this pandemic-induced juncture.
Based on the significance of that contribution, it could be the only industry capable of pulling Nigeria out of this crisis. At least in the short term.
Not E&Ps but service companies
In upstream oil and gas, you can divide the companies into two buckets. There are the Exploration & Production companies (E&Ps) who search the world for oil reserves.
We also have the service companies who drill the well and maintain production over time. Service companies activities include drilling, logging, cementing, casing, perforating, fracturing, and maintenance.
When the price of crude starts to rise again, the rising tide will lift the boats of E&Ps; the likes of Seplat, Mobil Producing Nigeria, etc. They will be able to sell their crude at a higher price.
The rising tide will, however, not lift the boats of many Oil & Gas Service contractors like Oando Energy Services, Tecon Oilfield Services, etc. if they do not survive to see it.
Many of the service companies have barely recovered from the 2014 recession, where they were forced to drop their service prices, retrench staff, and eke out enough to pay their dollar-denominated loans.
Amid today’s crisis, they have been dealt another blow. This one could be fatal. Most service companies may be insolvent before the price of crude rises. Their clients, E&Ps, will then not be able to ramp up production after the global uncertainties around oil ease. These service businesses are highly capital intensive, requiring up to $100 million to start up. You can’t pick that kind of money off the streets.
What is at stake?
There are economic and reputational consequences of failing to assist oil service companies.
In April 2020, Nigeria joined OPEC+ to cut crude oil supply by up to 10 million barrels per day between May 2020 to April 2022. Nigeria will now be producing 1.41 million BPD to 1.58 million BPD throughout the duration of the agreement. If oil and gas service companies become insolvent as a result of being unable to meet their liabilities, how will these barrels of oil be produced?
Nigerian Banks are also loaded with debt to the oil & gas sector. Oil and gas companies accounted for nearly 30% of all banking-sector loans in the third quarter of 2019, and their borrowing accounts for 24% of all non-performing loans.
It is unclear how much of those loans have been given to oil and gas service companies specifically, but what is clear is that, if those companies can no longer service their facilities, the banks will be badly hit.
We are already seeing bankruptcy filings among oil and gas servicing companies in the United States. On Monday, April 27th, Diamond Offshore, owner and operator of 15 rigs, filed for bankruptcy.
We can expect the same to happen for similar players in Nigeria’s oil and gas. Between November and December 2019, Nigeria’s rig count dropped by three. Now, as the likes of Mobil Producing Nigeria (an E&P) announce spending cuts, and the price of crude stays unstable, we can only imagine that number (rigs) dips further.
Beyond economics, the Federal government is in grave danger of appearing inconsistent and uncommitted.
Through the Nigerian Oil and Gas Industry Content Development (NOGICD) Act in 2010, it championed the development of Nigerian capacity in the oil and gas sector. We saw a number of professionals who have worked for the most prominent international oil companies, return as entrepreneurs.
The initiative was largely successful. But now, it seems the Federal Government is a fair-weather sponsor. After a decade of success it flipped to agriculture, today it appears to have turned attention to manufacturing.
The attempts for diversifying away from oil are great in the long run. For now, though, it has little choice but to continue supporting its indigenous oil servicing companies.
What might a bailout look like?
It is abundantly clear that the Nigerian government has no money. The situation is so bad that the country requested a loan from the IMF for the first time.
Still, it is possible to support oil and gas service companies using non-cash or limited-cash interventions.
Oil and gas service companies are plagued with aged receivables. These are amounts of money owed to them by clients, for the work they have already done. Some service companies have receivables of up to $20 million.
To stay alive, they need to preserve the cash they have in their account. This can be done by limiting the amount they spend on things, like servicing their loans, paying government-mandated fees, taxes, etc.
A government-backed letter of credit for outstanding money owed could alleviate the situation. There are more extreme options such as banning the instigation of insolvency proceedings, or a lender enforcement action.
For these companies, no shortage of creativity can be applied when thinking of ways to execute a bailout.
No one would expect these interventions to come without strings. In the last year, as the price of oil has continued to fall, it has become clear that there is excess capacity in the oilfield service sector. For example, too many drilling rigs.
A condition of government intervention could be consolidation to better manage this spare capacity and pricing. Most service companies are limited liability companies, so consolidation will have to be initiated by the owners, but they can certainly be encouraged.
Nigeria needs to prepare for a non-oil future, but until then, neither agriculture nor even the beloved renewables sector can generate the kind of income needed to get us out of this crisis. Only oil can save us.
Follow this editor on Twitter @YvetteDimiri.