COVID-19: Impact Analysis on the Oil and Gas Industry Olugbenga Falode

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COVID-19: Impact Analysis on the Oil and Gas Industry

Olugbenga Falode

Department of Petroleum Engineering University of Ibadan

Email: falodelias@gmail.com

1. Introduction

1.1 Background

The Oil and Gas (O&G) industry has continued to be the mainstay of the Nigerian economy despite

Government’s best efforts at diversification into Agriculture and Mining. According to a recent

report, even though the sector is less than 10% of the country’s GDP, it contributes about 65%, of

Government revenue and 88% of Nigeria’s foreign exchange earnings (Ajayi (2019). 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, petroleum production and export has largely played a dominant

role in Nigeria's economy.

Nigeria is currently the largest oil producer in Africa and was the world's fourth-largest exporter

of LNG in 2015. According to 2018 estimates, 79.4% of the world's proven oil reserves are located

in OPEC Member Countries, with 36.97 billion barrels of that reserves in Nigeria, amounting to

3.1% of the OPEC total (BP, 2015, OPEC, 2019).

The 2020 Appropriation Act envisages a crude oil production volume of 2.18 million barrels per

day with a $57 benchmark per barrel. As at January 2020, the price of Brent Crude was

approximately $70 per barrel, however with the recent turn of events globally, especially the

emergence of the novel Coronavirus Disease (COVID-19) and the resultant Saudi-Russia Oil

Standoff, a chain-reaction of problems threatens the Nigerian Oil and Gas Sector (Ibebuike and

Amadi 2020).

The COVID-19 outbreak, which has been spreading rapidly, has come with a devastating global

impact. This Coronavirus pandemic has become a global threat, increasing from 179,165 infections

and 7,081 deaths in March 16, 2020, to 4,721,848 infections and 313,260 deaths as at May 16,

2020—barely two months (Worldometer, 2020). The bid to contain the spread of the Coronavirus

disease has led to lockdowns and travel restrictions across countries globally, with the oil and gas

industry being adversely affected.

As at December 31, 2019, Brent crude averaged $60 per barrel; members of the Organisation of

Petroleum Exporting Countries with allies (OPEC+) were on 2.1 million barrels per day (mbpd)

cut to help steady prices. The arrangement was in place until March 2020 when the first OPEC

meeting held. At the March 2020 meeting of OPEC+, the agenda was to extend the cut but there

was no deal. It led to price wars between Russia and Saudi Arabia and further impacted the crude

oil prices negatively as prices went as low as $20 per barrel. Both countries increased production

and this resulted in over-supply of crude oil in the international market with lower demand

("Impact of COVID-19," 2020). Because of the nature of their oil fields, Russia and Saudi Arabia

were able to produce oil at costs much lower than most other countries. In those other, higher-cost

countries, companies can’t afford to continue pumping without losing money on every barrel. At

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that point, a company will close the well temporarily. Among the hardest hit is U.S. shale oil. As

a consequence, the United States will likely have to give up share in the global market, to others’

gain. However, because lower crude price below $30 per barrel will affect Shale producers in the

United States, President Donald Trump intervened and suddenly crude prices jumped above $30

per barrel (("Impact of COVID-19," 2020). As at April 21, the Dated Brent benchmark, a global

reference for almost two-thirds of the world’s physical flows, plunged to an all-time low of $13.24

a barrel, the lowest since 1999, according to price reporting service S&P Global Platts while oil

production in 2020 year-to-date dropped significantly below 2.0 million barrels per day (Raimonde

and Waller, 2020).

Nigeria was hard hit by the low oil price. Because the 2020 Appropriation Act was based on certain

fiscal assumptions, government was compelled to revise the benchmark oil price for 2020 from

$57 to $30 per barrel and oil production to 1.7 million barrels per day given the emerging economic

realities. However, with the new agreement by OPEC, Nigeria joined OPEC+ to cut supply by 9.7

million barrels per day between May and June 2020, eight million barrels per day between July

and December 2020 and six million barrels per day from January 2021 to April 2022. Based on

Nigerian reference production of 1.829 million barrels per day of dry crude oil in October 2018,

Nigeria will now be producing 1.412 million barrels per day, 1.495 million barrels per day and

1.579 million barrels per day respectively for the corresponding periods in the agreement. This is

in addition to condensate production of between 360,000 and 460,000 bpd of which is exempt

from OPEC curtailment (Ibebuike and Amadi 2020).

Nigeria produces only high value, low sulphur content, light crude oils - Antan Blend, Bonny

Light, Bonny Medium, Brass Blend, Escravos Light, Forcados Blend, IMA, Odudu Blend,

Pennington Light, Qua-Iboe Light and Ukpokiti. Bonny Light, a high grade of Nigerian crude oil

with high API gravity and low sulfur content by world standards, is more often than not correlated

with the price of Brent and typically trades above Brent (Olisa, 2020). Bonny light fell below the

prices of Brent crude and US headline WTI crude. Available information shows that the Brent

crude shot up to $29.30 per barrel as at May 5, 2020. The American headline crude, West Texas

Intermediate (WTI) surged 8.30$ to sell at $24.67 per barrel. This makes it the fifth session in a

row that WTI has risen. The Nigerian headline crude, Bonny Light, also moved up slightly to sell

at $18.94 per barrel. The new crude oil prices way below the revised budget 2020 benchmark of

$30 per barrel will make a dent on government revenues and threaten the viability of upstream

projects.

1.2 COVID-19 Pandemic

1.2.1 Global context

The emergence of zoonotic infectious diseases, such as Ebola, Nipah, SARS and Coronavirus

disease 2019 is directly related to increased interaction between human and animal populations

resulting from changing patterns of wildlife populations and human intrusion into habitats.

The 2019 novel Coronavirus was first identified in China in December, 2019. The initial

occurrence was traced to residents with pneumonia who have been associated with sea food and

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live animals’ market in the city of Wuhan, China, which suggest that the mode of transmission of

Coronavirus was from animal to person. The virus has been named “SARS-CoV-2” and the disease

it causes has been named “Coronavirus disease 2019” (abbreviated “Covid-19”). The first known

patient of Coronavirus started experiencing symptoms in Wuhan, China on 1 December 2019. The

disease has since spread to many countries and has hit certain countries, including Italy, Spain and

the US, with particular severity. Some global statistics is reported in Figure 1.

1.2.2 Nigerian context

The coronavirus entered Nigeria through an infected Italian citizen who came in contact with a

Nigerian citizen who was subsequently infected with the coronavirus. The coronavirus then spread

to other citizens in Lagos and to other parts of the country. Reported cases of infections, recoveries

and deaths as at 10 May, 2020 are shown in table 1.

Table 1: COVID-19 cases - Nigeria

Date Confirmed

cases

Active cases Recoveries Deaths

May 16 5445 3959 1320 171

April 29 1728 1370 307 51

April 22 873 648 197 28

April 15 407 267 128 12

April 08 274 224 44 6

April 01 174 163 9 2

March 24 44 41 2 1

March 17 3 3 0 0

March 08 1 1 0 0

Figure 1: Distribution of COVID-19 cases across the world Source: Worldometer-www.worldometers.info

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Feb. 28 1 1 0 0

1.3 Objective of Study

This paper attempts to conduct an analysis of the impact of the novel COVID-19 outbreak on the

entire value chain of the oil and gas industry. Specifically, the study will investigate amongst

others: the impact of COVID-19 on the E&P and downstream activities, crude oil price,

government revenue and the economy.

2. Theoretical linkage between COVID-19 and Oil and Gas Sector

2.1 Current Theory Linking Oil and Gas Development to Infectious Disease Transmission

Oil and gas development and operations in developing countries often involve deforestation,

habitat fragmentation, human population movement, road building, water and air pollution, and

hydrological changes. Activities associated with such industrial development can have cascading

effects that exacerbate disease emergence (Patz et al. 2004). In general, land use and landscape

changes can contribute to habitat loss or fragmentation; this can increase contact between human

and wildlife host populations, thus creating increased opportunities for cross-species transmission

(Keesing et al. 2010). A current theory surmises that if pathogen host species are generalists and

the newly formed habitat is suitable, the potential for pathogen transmission to people increases

(Dearing and Dizney 2010).

When industries enter previously undeveloped or lightly developed areas, they often import a large

labor force. Local food production needs increase to feed the growing community, and this creates

pressure for agricultural and livestock expansion. Many types of agricultural crops are foods for

rodents, bats and non-human primates (Mills 2006; Mickleburgh et. al. 1992; Hockings and Humle

2009). Domestic animals also can serve as intermediate hosts for pathogens carried by wild

animals (Wilcox and Ellis 2006). Road development can provide access to previously inaccessible

areas, making wildlife hunting easier (Laurance et al. 2009).

Human population migration and resettlement associated with developing new transportation

routes involve road building and forest clearing and can be local or regional drivers of disease

emergence (Wilcox and Ellis 2006). Because industrial workers live in or interact with

surrounding communities, health issues that arise in local communities are a concern to industry.

Other people often follow to seek jobs or establish businesses to serve the area’s new worker

population. This project-induced migration can raise disease transmission rates if not adequately

planned. Strains on existing housing and infrastructure can lead to overcrowding, poor sanitary

conditions, improper waste storage, and insufficient potable water (IFC 2009a). These above-

described conditions create opportunities and increased risk of novel pathogen transmission to

humans and amplify the potential for disease transmission among human populations, as illustrated

in Figure 2 which shows the link between extractive industries and land use change leading to

infectious diseases.

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Figure 2: Cascading effects of on-shore oil development on increasing contact among people,

domestic animals, vectors and wildlife. (IFC, 2009a)

2.2 COVID-19: Potential Consequences on the Oil and Gas Supply Chain

The oil and gas sector has been badly hit by the pandemic, since the lockdown and travel

restrictions have led to a huge drop in oil demand and crash in crude oil prices globally. Even the

intervention of OPEC+ and top oil-producing countries through output cut has still not impacted

much on oil prices or stabilized the market. However, in order to explicate the impacts on the

industry, it is crucial to examine how the interdependency in the value chain amplify the impacts.

Oil and gas companies operate in dynamic and complex environments where they face constant

challenges, especially in terms of supply and demand. Now with oil prices at historic lows and

with COVID-19 supply chain disruptions exacerbated by COVID-19 pandemic (Raghothamarao,

2020), it has become imperative to evaluate how the effects of COVID-19 diffuse through the

supply value chain.

The efficient operation of the oil and gas industry requires the use of different chemicals and

equipment during exploration, drilling, production, transportation, processing and treatment

phases. The reliable supply of equipment/parts such as valves, turbines, compressors, chemicals

etc. can be significantly disrupted within the oil and gas value chain, causing delays and losses

unless governments declare official emergencies, meaning that force majeure clauses could free

suppliers and customers from their contractual commitments. Procurement and supply chain

strategies will be in the forefront of issues plaguing oil and gas companies, especially with the

current downward spiral of oil prices and COVID-19 (Raghothamarao, 2020).

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(a) Upstream Impact

The price war in the midst of the COVID-19 pandemic has made several major oil producers,

mostly in Saudi Arabia and Russia not to reduce their oil production output (Jacobs, 2020). This

has caused a major downstream supply chain impact on the availability of resources and workforce

to keep the production operations and related maintenance going amid the lockdowns and other

containment initiatives. Solutions such as IOT/AR-VR enabled Remote Diagnostics and

Monitoring and Preventive Maintenance using Advanced AI models could have been optimally

used in such a situation to reduce dependency on the physical presence of the workforce in the

production lines and to reduce the chances of a machine failure at a critical time (Sourav, 2020).

The rig usage, an important business barometer for the services industry, has witnessed a decline

lately leading to less utilization of oilfield equipment and services. The service industry is also

grappled with supply chain, workforce management and cost overrun challenges for EPC projects

across the value chain. Even major O&M/turnaround maintenance projects are being pushed back

as companies focus only on critical operational maintenance to manage Opex (Global Data Energy,

2020)

(b) Midstream

The major refineries continue to buy oil from the Exploration & Production companies as they

produce. However, due to the huge shortfall in demand in the downstream areas of the oil and gas

supply chain, the transport carriers such as transcontinental tankers, rail tank cars, tank trucks etc.

are getting queued up. Keeping track of the logistics, controlling the oil spillage and pilferage from

the containers are exacerbating the problem in this pandemic. There could be several solutions,

based on emerging technologies, which could be deployed for near-term and long-term benefits to

mitigate the situation. Remote container tracking and health monitoring can provide ready alerts

for oil spillage and pilferage, and a robust fleet management can control the already over-utilized

transportation modes (Sourav, 2020). Midstream and oil field service companies will need to

consider how a reduction in upstream activity may affect their operations and associated

accounting.

(c) Downstream

The downstream supply chain is probably the hardest hit due to the COVID-19 situation. With the

sudden shortfall of demand., but with production lines producing oil at the same rate as before, the

transition market space area from the midstream to downstream is creating the major bottleneck

in the entire supply chain. With COVID-19 lockdown lifted in due time, this segment will witness

a massive surge in demand almost instantaneously. This will require a very robust supply and

transportation planning capability to meet such demands even as the supply is overstocked.

Initiatives could be useful to mitigate the situation are to plan for maximizing the transport

utilization, smart demand-supply match, etc. Digital solutions can be designed to use advanced

machine learning models to isolate end customers based on the probable demand surge, e.g. even

with lifting of COVID-19 lockdown, the travel and hospitality sectors are likely to recover slowly

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and thereby would have less energy consumption. Such initiatives will lead to optimization of

transportation focusing only on high demand or high relevant priorities (Sourav, 2020).

3. Impact Analysis of COVID 19 on the Oil and Gas Industry

The outbreak and transmission of COVID-19 has significant implications for the oil and gas

industry, because it can lead to disruption in operations and risks in the supply chain, decreased

level of demand for crude oil, buyer scarcity, crude oil price crash, cost cutting measures, increased

pressure on the Naira and foreign reserves, closure of facilities and require costly, extensive and

lengthy fumigation., unhealthy workforce resulting into productivity losses, increased healthcare

costs, death of employee or community members which has potential of total system breakdown

and untimely end of a project., adverse effects on corporate image or reputation.

3.1 Impact of COVID-19 on the upstream oil and gas industry

Exploration, drilling and production activities are generally considered essential activities by

governments and have been mostly exempt from the lockdown measures. However, continued

operations will become increasingly difficult due to workforce shortages as employees are infected

by the coronavirus and the practical difficulties in many cases of social distancing. Service

companies involved in E&P activities are facing complications due to the pandemic. Rigs’

contracts are terminated, most projects are being deferred or cancelled and clients are demanding

discounts of up to 40% on existing running contracts (Offshore, 2020 April 13). Meanwhile the

lockdown and restrictions on movement are affecting crew changes, maintenance, spares, fuel

supply, and food supply to job locations. As Nigeria’s bonny light crude price continue to fall, oil

firms may consider shutting down production. According to an energy expert, the shutdown will

not be automatic, as there were two conditions under which the shutdown could occur., these are

voluntary shutdown if the extra low prices and high cost of production persist or government

sanctioned shutdown to comply with the pledges made to OPEC (Olisa, (2020, May 4)).

Giants such as Exxon, Sinopec, or Aramco, as well as the small Permian frackers, are scrambling

to make difficult decisions and adjustments to stay afloat. For Shell, for example, the price impact

on its cash flow from operations is estimated at US$6 billion per year for every US$10 per barrel

Brent price movement (Geiger (2020, April 1). So far, Brent has dropped $10 per barrel many

times over this year. It's easy to see why changes to the oil and gas industry are coming. One of

the significant changes oil and gas companies will make is to their labor force.

The International Labour Organisation (ILO) has projected that over 22.7 million jobs could be

lost globally as a result of the Covid-19 pandemic. For example, companies such as Shell and BP

have cut back the workforce at construction sites to prevent them from contracting the disease.

Aker Solutions has already laid off 650 employees in the UK and Norway, and a further notice has

been issued for potential temporary layoffs of up to 6,000 in Norway. Halliburton announced 3000

new layoffs in the month of April 2020 (Strachan (2020, April 28)).

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BNN Bloomberg has compiled the following list of announcements and statements from

companies that are laying off, furloughing and hiring employees (Zadikian (2020, May 14).

• Chevron has asked employees to defer travel, and sent employees at its London offices

home on 26 February after an employee displayed “flu-like symptoms”.

• U.S. based Murphy Oil Corp. will close its Calgary office in the coming months, affecting

110 employees in an effort to consolidate those functions into one office in Houston.

• Pembina Pipeline Corp. confirmed to BNN Bloomberg that some project support and other

roles have been eliminated in the face of weak oil prices and the effects of the pandemic.

• Domtar Corp. is idling a pair of plants in the United States, resulting in 446 layoffs.

• Transcontinental Inc. says it’s been forced to lay off 1,600 people after non-essential

shutdowns in Ontario and Quebec.

• Athabasca Oil Corp. cut 15 per cent of its corporate headcount as it suspends its

Hangingstone operations.

• Trican Well Service announced an undisclosed number of layoffs and expected job sharing

as part of its cost-cutting plan in the wake of a steep drop-in drilling activity.

• Oilfield services firm Shawcor Ltd has already let go of 7.5 per cent of its salaried

employees and wants to reduce its workforce by another 5 % to preserve its balance sheet

• Calfrac Well Services Ltd. is cutting about 70 per cent of its workforce to further reduce

costs as it grapples with falling demand

• Offshore services provider Maersk Drilling has confirmed the anticipated layoffs of 170

staff at its global onshore offices, including its headquarters in Denmark ("Maersk Drilling

confirms layoffs," 2020).

In Nigeria,

• Oil and gas firms have been instructed to reduce the workforce on offshore platforms as

part of the government’s measures to contain the spread of the Covid-19 coronavirus in the

country. The restrictions came after the Nigerian Ports Authority (NPA) announced six

workers on the Siem Marlin offshore rig, sitting offshore Lagos were diagnosed with

Covid-19 late March ("Covid-19: Nigerian Regulator," 2020).

• Staff rotation less than 28 days/28 days was temporarily suspended on offshore locations

(Department of Petroleum Resources, 2020).

• Lekoil, an AIM-listed indigenous company laid off almost 40% of his staff and upper

management in April because it had not been meeting its contractual obligations, especially

to its employees (Johnson (2020, April 28)).

• The Nigeria Union of Petroleum and Natural Gas Workers (NUPENG) has directed its

members, petroleum tanker drivers, petrol station workers, petroleum depot workers,

independent marketers’ employees, oil and gas suppliers, surface tankers, kerosene

peddlers, and liquefied petroleum gas retailers to stay at home as a measure to curtail the

growing cases of the deadly coronavirus disease (Nwagbara, 2020).

• International Oil Companies (IOCs) operating in Nigeria had given work-at-home orders

to their non-essential staff., a business continuity plans meant to anticipate any eventuality

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and was premised on 3PRs - Preparation, Prevention, Protection, and Recovery (Chima,

2020).

• A major Nigerian independent oil and gas firm, Seplat Petroleum Development Company

Plc, is already looking to cut costs by at least 30% to counter a crash in crude prices

("Nigeria Slashes Crude Selling Prices," 2010).

3.2 Operational disruption and supply chain risk

In Nigeria, COVID-19 has negatively impacted the oil and gas sector; even though the government

is trying to maintain business as usual, it is difficult to see the likelihood of continued,

uninterrupted operations. As part of the government’s plans to stem the spread of the Covid-19

outbreak in the country, oil and gas companies have been mandated by the industry regulator, the

Department of Petroleum Resources, to put in place some social distancing measures at project

sites. All operators and their contractors are to ensure strict compliance with relevant government

directives on social distancing, curfew, and lockdown. and limit the number of personnel at

project/construction sites and offshore platforms accordingly. Consequently, demobilisation of

personnel from these sites to the extent required to satisfy the above requirements is expected.

Operators will also need to consider:

(a) third-party contractors who work on-site and the alignment of COVID-19 policies; and the

prospect of sealing off wells as a result of the reduced number of personnel on drilling rigs falling

below the level required by health and safety regulations.

(b) As regards supply chain disruption, it will be required to identify who has supply chain risk, as

disruption among second-tier and third-tier suppliers could ultimately affect both service

companies and operators.

As the situation deteriorates, many industry participants are reaching for the force majeure (FM)

provisions in their key contracts to excuse failure to perform or to exit. The choice of the contract's

governing law will influence the availability of FM and similar reliefs including possible change

of law relief.

The DPR issued a Circular, DPR/1160/A/Vol.11/53, dated March 30, 2020, addressed to “all oil

and gas contractors / service providers” and requiring them to ensure that they comply with

governmental directives to limit the number of personnel on project/construction sites and observe

specific directives on social distancing, curfew, lockdown, etc. as may be applicable. In so doing,

the DPR classified the COVID-19 pandemic as constituting “Force Majeure” (Ighodhalo 2020),

and thereby stated that it was necessary “to ensure the safety and welfare of all personnel and to

contain the spread of COVID-19.” The DPR reported the present situation as a force majeure,

meaning operators will be granted extensions to their licenses due to lost drilling time.

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3.3 Impact of COVID-19 on offshore operations

As part of measures to curtail the impact of COVID-19 on offshore operations, there has been a

number of directives and regulations issued by regulatory agencies such as the Department of

Petroleum Resources (“DPR”) and the Nigerian Maritime Administration and Safety Agency

(“NIMASA”). These actions directly or indirectly affect the operations of marine vessels and

contractual arrangements in relation thereto.

Further to a Circular No. DPR/1160/A/Vol.11/49, dated March 23, 2020, the DPR directed oil &

gas companies to reduce their workforce on offshore platforms as part of the measures to curtail

the spread of COVID-19. In so doing, the DPR specifically directed that only staff who are engaged

in essential duties should be nominated and permitted to travel to offshore/remote locations while

non-essential staff currently at those locations should be withdrawn with immediate effect

(Ighodhalo 2020). Further, offshore staff are now required to work offshore for a minimum period

of twenty-eight (28) days and, as such, the rotation cycle of offshore personnel for less than twenty-

eight (28) days has been temporarily suspended. Government agencies which are required to

monitor offshore operations have also been directed to have only one (1) personnel per rotation

cycle.

The above steps taken by the DPR are understandable in view of current restrictions in various

work locations, limiting operations to only essential services. In relation to the operation of marine

vessels and offshore platforms such as Floating Production Storage and Offloading (“FPSO”) and

Floating Storage and Offloading (“FSO”) vessels, compliance with this directive should not be

difficult considering that the crew men who are typically deployed on these vessels and platforms

are typically only those who are strictly necessary for their operations. However, these directives

may adversely affect cadets and understudies assigned on vessels to gain requisite sea time and

experience for purposes of obtaining shipping certifications. In the event that operators are

constrained to release such persons on the grounds that they do not constitute “essential staff”, we

expect that such measures will be temporary and they will be reinstated when the effects of the

pandemic subside (Ighodhalo 2020).

3.4 Impact of COVID-19 on oil and gas EPC projects

The impact of Covid-19 pandemic is particularly visible on the demand for the services industry,

including the EPC. The ongoing or new projects across oil and gas value chain are likely to face

numerous challenges in terms of project execution, planning and risk management aspect from the

pandemic. Therefore, how the EPC industry is coping up Covid-19 to stay afloat is something to

pay attention. It is going to be very challenging for the industry to overcome this downturn in terms

of managing the workforce and cost escalations in ongoing and new projects.

• The Chinese CNODC (a JV of China National Petroleum Corporation CNPC

and Petrochina, was forced to stop the construction of the 2,000 kilometre pipeline for fear

of coronavirus spreading amongst the staff, barely a month after it received the required

construction permit from Niger’s government.

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3.5 Impact of COVID-19 on Expatriate Content of Upstream Workforce

Pre-COVID, “optimising” the balance between global and local largely meant making trade-offs

between short- and long-term costs, quality of product and service, and capacity to deliver the right

volume at the agreed time. One factor that has increasingly shaped thinking around this balancing

act is the longer-term view of the role multinational companies can play as socio-economic

development partners to their host countries. Forward-thinking companies are increasingly ready

to pay a risk premium to subsidize the development of local suppliers, with the expectation that

these local partners will eventually become competitive against their global peers. Likewise, using

local talent, although it requires greater upfront training and investment, usually makes long-term

commercial sense (Zachary 2020, April 12).

French major TOTAL has suspended the development of the Preowei field, a deepwater

hydrocarbon pool located north of the Egina field in Oil Mining Lease (OML) 130, off Nigeria.

The company has also suspended its planned Ocean Bottom Node (OBN) seismic survey on both

Preowei and Egina fields ("TOTAL Suspends Preowei Project," 2020).

3.6 Impact of COVID-19 on the downstream oil and gas industry

The downstream supply chain is probably the hardest hit due to the COVID-19 situation. Nigeria

is having difficulty in finding buyers for its cargoes as many April cargoes are yet to get buyers.

At least six tankers carrying about 4.5 million barrels of the country's crude have been floating off

Gibraltar – since as long ago as the end of March, according to tanker tracking data monitored by

Bloomberg. A seventh vessel is about to join them. In normal markets, those barrels would go

straight to oil refineries for processing into gasoline, jet fuel and other products (Clowes, 2020).

Nigeria has about 50 cargoes of crude oil that have not found landing... this implies that there are

no off takers for them for now due to drop in demand (("Coronavirus: 50 Nigerian Crude Oil

Cargoes," 2020). Traders said NNPC will have no option but to push down prices for its crudes to

clear the overhang. The quantity of unsold oil loading in March and April is somewhere between

50 million to 60 million barrels over this period, according to Platts estimates. The unsold cargoes

are estimated to be c.70% of Nigeria’s total oil exports (CSL Stockbrokers, 2020).

3.6.1 LNG business

Nigeria LNG is a world-class six-train LNG plant operational since 1999. The Final Investment

Decision to build Train 7 at the Nigeria LNG plant in Bonny Island for $10 billion was signed on

Friday, December 27, 2019. The company remains Africa’s leading exporter of LNG, accounting

for about 6 per cent of the global LNG exports. The LNG business will be affected in a number of

ways, with several challenges but some opportunities are also likely to be created. The first issue

to impact the LNG market is the fall in crude oil prices. The fall in crude prices will trigger a fall

in term LNG contract prices – but due to the time lag built into many contracts this might not work

through to invoices until mid-year. Lower prices will finally get through to markets. The average

price of LNG imported into Japan in December 2019 was US$9.24/MMBtu. By mid-2020, the

average landed price could be half that. Lower prices are likely to stimulate demand as Asian

markets emerge from the current coronavirus crisis. Europe can no longer act as an “LNG sink”

and we are already seeing cargoes destined for Europe being redirected to Asia. According to

NNPC, the fall in demand is also affecting the gas and LNG markets, in which Nigeria is also a

key exporter. Over 12 LNG cargoes are also stranded "with no hope of being purchased because

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there is an abrupt collapse in demand associated with the outbreak of coronavirus (Gupte et al.,

2020).

The Train 7 project will ramp up NLNG’s production capacity by 35% from 22 million MTPA to

around 30 million MTPA. The project is anticipated to create about 12,000 new jobs and an

additional 40,000 indirect jobs. However, the construction of the Train 7 at the Nigeria LNG

Terminal would be delayed until Q3 2020 due to the COVID-19 pandemic (Nwagbara, 2020)

3.6.2 Domestic Market

Nigeria's economy local demand for petroleum products and Liquefied Petroleum Gas (LPG) has

drastically reduced locally with the onset of the lock down introduced by the Federal government

in some states. As at February, 2020, Nigeria is said to consume 38.2 million litres of Premium

Motor Spirit (PMS) per day (Eboh, 2020). It is expected that this consumption rate will have

reduced through month of march due to the lockdown measure introduced by the Federal

Government in some states such as Ogun, Lagos and the Federal Capital Territory (FCT) and also

locally by some state governments. This is expected to affect the volume of petroleum products

imported such as PMS, DPK and others for local consumption. Thus, by implication lowering

demand of petroleum products from the major world's refinery (predominantly in USA) where

Nigeria get the supply of petroleum products from. This equally implies that there will be lesser

demand for crude oil by the aforementioned refineries, thus creating an excess supply of crude oil

in the international market as witnessed today. With travel restriction and the total or partial closure

of the tourism sector, there is a drastic reduction in the consumption of aviation fuel and other

petroleum product used in these sectors of the economy.

Recently, Nigeria cut its domestic pump price for gasoline for the second time in a month to Naira

123.50/liter (33 cents/liter) — still one of the lowest prices globally — from Naira 145/liter early

March despite the sharp fall in demand due to lockdown. The regulator Petroleum Products Pricing

Regulatory Agency, which sets domestic pump prices, has said that prices would be reviewed

monthly and adjusted depending on fundamentals in the international market.

3.7 Impact of COVID-19 on Crude Oil Price, Government Revenue and Economy

Oil prices are always changing due to a variety of factors, including the change of seasons,

natural disasters, geopolitical conflicts and changes in leadership. The oil market began 2020

with overabundant supplies throughout the world, as well as falling prices due to a Russia-

Saudi Arabia price war over crude oil. This situation has worsened for investors as a result of

the global coronavirus pandemic. According to a January 2020 EIA report, the average price of

Brent crude oil in 2019 was $64 per barrel compared to $71 per barrel in 2018. The average price

of WTI crude oil was $57 per barrel in 2019 compared to $64 in 2018. The price of oil decreased

substantially in 2020 due to the 2020 coronavirus pandemic and the 2020 Russia–Saudi Arabia oil

price war (EIA, 2020). On 20 April, WTI Crude futures contracts dropped below $0 for the first

time in history, and the following day Brent Crude fell below $20 per barrel.

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In Nigeria, the country’s headline crude, Bonny light, was earlier sold for a discounted price of

less than $10 per barrel, but is a little over $18 per barrel, while the Brent crude just rebounded to

about $25 per barrel (Olisah, 2020).

The Federal Government had in the 2020 budget proposal revised downward the revenue

projection for the 2020 fiscal period by N3.3tn from the initial approved amount of N8.41tn to

N5.08tn due to the negative impact of the coronavirus pandemic. Based on the revenue parameters

upon which the revised proposal was made, the Federal Government had reduced downwards the

oil price benchmark from $57 per barrel to $30 per barrel, then it revised that down to $20.

Nigeria is at a disadvantage because its cost of production is relatively high — around $15-$30

dollars per barrel — because of corruption, widespread thefts and increased security costs. After

months of dwindling demand and fluctuations in crude oil prices, the price of Bonny Light oil as

at May 14, 2020 stand at 24.59$ a barrel, compared with 18.38$ the previous month (Ejoh, 2020).

Nigeria depends on crude sales for half of government revenues and 88% of foreign exchange

earnings., this necessitated government to mandate slashing the cost of production to around $5/b,

for the country's crude must remain competitive in the global market.

Oil revenues will decline by $26.5 billion this year, down from $54.5 billion in 2019, according to

the IMF. The rout has been so severe that, having resisted borrowing from the International

Monetary Fund for many years, Nigeria has secured its first ever loan – $3.4 billion – from the

Washington-based organization to help plug some of the holes that appeared in the country's 2020

spending plan. It's also asked to borrow a further $3.5 billion from other development institutions,

including the World Bank. As of late April, the IMF was predicting Nigeria's economy would

shrink by 3.4% this year. Previously, it was anticipating 2% growth. (Olisah (2020, May 4)

Furthermore, with the coronavirus outbreak in Nigeria growing worse on a daily basis, we expect

economic activities to grind close to a halt in coming weeks which consequently impacts tax

revenue collection. We note the FIRS recorded a tax collection shortfall of N282.1bn in January.

3.7.1 Production Cost Cutting Strategies

• Use the Nigerian content framework to enlist the support of local vendors- While the

government supports and encourages the patronage of local contractors, local vendors must

have an obligation to deliver premium services and support the strategy of using local content

to drive down the cost of crude oil production, increase the contribution of the oil sector to the

country’s Gross Domestic Product (GDP) and guarantee the security of oil production.

• Reducing Unit Technical Cost Through Improved Crude Handling Contract Management

The following tools can be deployed as a practical step to reduce Crude handling cost, which

covers the cost of crude transportation and terminaling, and constitute significant chunk of

operating cost for most E&P companies in Nigeria.

➢ Introduction of optimal Reserved Production Capacity (RPC) Selection Model.,

➢ Increased Vigilance in Crude Handling Contracts Administration

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➢ Modifications to the interpretation and application of the provisions of clause 18.3 of the

various CHAs

➢ Ensure a change in CHA Invoicing/Billing Pattern

➢ Continuous Improvement and Incorporation of Best Practices

• Increased-RPC-Review-Window (IRRW) could poster greater collaboration between facility-

users and facility-owners and help achieve reduce crude handling tariff rates in a fairly win-

win scenario.

3.8 Impact of COVID-19 on Indigenous Oil and Gas Producers

Nigeria’s local oil players are having it rough based on falling crude oil prices, with recent prices

lower than local production. These oil companies produce a fifth of the total crude supply by the

Africa’s largest oil producer. They produce around 400,000 barrels per day out of the 2 million

barrels per day that Nigeria produces. The local oil firms are fighting hard to survive as Brent

Crude remains on the $20 range, which means Nigeria’s crude is being sold at a loss, coupled with

the fact that oil demand has plummeted to the lowest level in more than a generation (Adesina,

2020). The biggest problem local upstream operators face today is the apparent mismatch between

their loan exposure and the significantly dwindled revenues due to the pandemic. A chief executive

of one of the indigenous companies who spoke on the condition of anonymity said banks need to

be more sensitive to the plight of their customers and that moratorium on principal alone would

not be sufficient as the operators simply cannot pay the interests for now (Ojo, 2020).

Many of these companies had engaged in high-profile debt during the good times and currently

account for 90% of the N3 trillion or $8 billion of all debts owed by companies producing oil in

Nigeria, mostly at high-interest rates to local banks. “These companies also suffer from very high

average cost of production and unlike oil majors operating in the country whose average cost of

producing is about $22 a barrel, the indigenous operators need between $35 to $40 a barrel to

survive.” A couple of those indigenous companies and major stakeholders in the sector are

deploying unprecedented and sometimes aggressive strategies to survive the global oil price rout

(Johnson, 2020). Top leaders at many local oil firms in Nigeria revealed to Bloomberg recently

that some local oil companies are drowning in debt at the present price of crude oil, while others

have suspended oil production (Adesina, 2020).

In the meantime, oil-producing firms in the country have applied some measures in order to

mitigate the impact of the shocks. These include staff reduction, downward review of contracts

with oil service firms, working at reducing production cost, and so on.

3.9 Impact of COVID-19 on Oil & Gas-Based Chemical Industry

Oil and natural gas are major cost inputs for the chemical industry. The effects of COVID-19 will

be uneven across the chemical industry. Companies like Ecolab that have large oil-field chemical

businesses will feel the pain from a standstill in drilling activity. And lower oil prices will be a

challenge to natural gas–based petrochemical and fertilizer makers. Industrial gas firms are selling

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more oxygen to hospitals, and companies like DuPont have products that go into personal

protective equipment (Tullo, 2020).

4. Outlook of the sector post-COVID-19

The outlook of the oil and gas industry post-COVID 19 appears to be catching up with us as the

days goes. From expert prediction and the spread on infection, the novel COVID-19 might not be

ending soon. The industry will be confronted with a lot of challenges and the oil and gas sector is

adapting and reinventing to combat the diseases might just have come to stay.

Apart from the hovering economic recession in Nigeria resulting from the fall in oil price

occasioned by COVID-19, several other issues will abound.

(a) Projected Returns on Investment (ROI) of parties in PSCs and JOAs will be affected and

this may lead to a breach/default of terms.

(b) Servicing contracts and/or sub-contracts may have to be cancelled, suspended or at best

renegotiated depending on the terms of the Contracts leading to several legal issues

between the contracting Parties.

(c) Previously economically viable oil fields may become unviable in the prevailing

circumstances and needs to be shut down: Such shut down in operations would have legal

repercussions for contracts already entered into with respect to the licenses/Leases.

(d) Disability of the Operating Companies to liquidate their indebtedness as well as expose

guarantors to demand for liquidation of the debts guaranteed by them.

(e) Suspension of projects that have not reached the FID e.g. Shell’s $9.7billion Bonga South-

West/Aparo, ExxonMobil’s $6.2billion Bosi and $8.2billion Owowo West estimated to

produce 143,274bpd, 126,784bpd and 138,301bpd respectively.

(f) Disability of charterers to pay the agreed hire rates to the owners of the FPSOs/Support

Vessels, thereby resulting in series of legal disputes.

(g) Labour and employment claims at the National Industrial Court of Nigeria arising from

downsizing, layoffs etc coming from the oil and gas and allied sectors.

(h) Besides, COVID-19 pandemic may have exposed the current reality to Nigeria’s policy

makers on the need to block leakages. The COVID-19 pandemic is a grim reminder for the

diversification of the Nigerian economy from its current reliance on crude oil revenues.

(i) The short-term outlook for the industry is for the Federal Government to roll out measures

to protect oil and gas operators, contractors, service providers and their workforce.

(j) The Emergency Economic Stimulus Bill 2020 provides for fiscal relief for taxpayers in key

sectors of the economy by incentivizing employers to retain staff who may otherwise

become unemployed as a consequence of the prevailing economic realities caused by

COVID-19.

(k) The low demand for oil as a result of the COVID-19 pandemic could also translate into an

opportunity for enactment of the PGIB and the amendment of the NOSDRA Act given the

reduced stakes of vested interests.

5. Summary, Conclusion and recommendations

This section provides a summary of findings, conclusions and recommendations for policy options.

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5.1 Summary

The oil and gas sector in Nigeria play a very important role in its economy with about 10% of its

GDP. However, oil and gas revenues still account for 65% of government revenues and contribute

88% of Nigeria’s foreign exchange earnings. This paper is an attempt to critically evaluate the

impact of COVID-19 outbreak on the oil and gas industry in Nigerian economy.

As a result of the COVID-19 pandemic, many countries that purchase crude oil from Nigeria, such

as India, Spain, France, Italy, Canada, have been impacted by COVID-19, which has taken a

negative toil on their economies and decreased their level of demand for crude oil. The obvious

effect of the decline in crude oil demand is that there is a supply glut – excess supply of crude oil

in the market with few or no buyers. Nigeria has had difficulties in finding buyers for its crude oil

and liquified natural gas (LNG) cargoes. As a result of its inability to dispose of these cargoes,

NNPC discounted the official selling prices for Bonny Light and Qua Iboe by US$5 per barrel to

clear a glut of unsold April-loading cargoes.

The continuous drop in the price of crude oil in the international market has already taken a toll on

the nation’s crude revenue and this has put increasing pressure on the Naira and foreign reserves

as the crude oil sales receipts decline and the country’s macro-economic outlook worsens.

Nigeria’s budget for 2020, which was set at an oil benchmark of US$57 per barrel, has now been

reviewed against the background of the impact of the Coronavirus pandemic to US$20 per barrel.

Oil companies in Nigeria are embarking on cost cutting measures, including scaling down on or

cancelling and suspending projects and reducing their workforce in response to measures

introduced by the Nigerian government, which recently directed oil operators, contractors and

service providers to limit the number of personnel at project and construction sites. No doubt these

measures will impact production in Nigeria.

The downstream sector is also impacted. The continuous decline in the price of crude oil in the

international market has necessitated the downward review of the pump price of premium motor

spirit twice., from N145 to N125 per litre effective 19 March 2020 and reduction to N123 per litre

effective 1 April 2020.

5.2 Conclusion

The novel COVID-19 is a highly infectious disease that spread from both humans to human and

infected objects to humans. The impact of this disease across various sectors, particularly the oil

and gas sector continue to evolve with far reaching consequences, particularly for marine vessel

operators who service the oil and gas industry in Nigeria. It is therefore important that operators

stay abreast of the latest local and international developments and obtain appropriate advice on

how to mitigate the myriad of issues which will continue to arise in the coming months.

The changes currently happening in the industry have not just come to stay as oil and gas outfits

battle the scourge of COVID-19, but has set the tune on how the industry is preparing itself for the

next wave of outbreak that might emerge if eventually the current COVID-19 ends sooner than

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expected. Various recommendations have been made in this study, as the oil and gas industry

continue to stick to and improve on these new ways to doing business.

5.3 Recommendations

Oil operators, oil companies and stakeholders in the Nigerian oil and gas sector must take certain

legal measures in order to weather the storm in the midst of the oil price plummet. Some of the

major ways oil and gas sector participants can do this are:

(a) Contract Renegotiation/Price Reviews: Smart contract renegotiation and Alternative

Dispute Resolution mechanisms in the event of disagreements would go a long way to

cushion the effects of the oil price fall on oil and gas operating and servicing companies

alike.

(b) Debt Restructuring: Companies should seek legal advice and entering into debt

restructuring agreements with their creditors will avail themselves more time to source for

funds from other investments and pools.

(c) Safety and wellbeing of staff should be a priority., improvement in work culture

(d) Remote working will become strategic

(e) An evaluation of zoonotic disease risk factors must be incorporated in Environmental,

Social, and Health Impact Assessment protocols

(f) Adopt best management practices to mitigate the risks of zoonotic disease emergence and

improve worker and community health.

(g) Corporate supply chain and procurement departments must reengineer their supply chains

for the new world order in which we now must do business.

(h) Develop tools to help governments and oil industries identify ways to evaluate potential

exposure points where risks of transmission exist and mitigation measures.

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