Adewale Sanyaolu
With crude oil consumption expected to decline by about 9 million barrels per day (mbpd) to 90.6 million barrels per day (mbpd) in 2020 due to the outbreak of coronavirus, operators in oil and gas industry, especially service firms may be in for tougher days ahead.
The gloomy picture is contained in the 2020 Oil and Gas Servicing Industry report recently released by Augusto&Co.
The report noted further that the contraction in oil consumption, will further suppress opportunities for a recovery of oil field activities in the near-term.
It maintained that it expects a huge number of job losses, while some oil field servicing companies may eventually go bankrupt.
The report believes that a strategic option for market recovery might be consolidation, given the lack of strong fundamentals for a stable oil market. In addition to bolstering performance, a consolidation may help regain some level of bargaining power from E&P operators.
Unfortunately, the COVID-19 outbreak worsened conditions in the oil market. The pandemic led to the closure of air and land borders while a large number of economies also enforced a partial lockdown which affected demand for crude.’’
The report argued that despite the easing of some of these restrictions in the second half of 2020, economic activities have yet to fully recover because several key projects in Nigeria, including the Obiafu-Obrikom-Oben pipeline project and Shell’s Bonga North field development, have been suspended due to lull in the crude oil market.
The Augusto& Co report added that delays in sanctioning of these projects will impact Nigeria’s oil and gas servicing industry’s near to medium-term performance considering the substantial contracting opportunities these projects provide.
The report noted that owing to prevailing difficulties in the operating terrain, a number of operators in Nigeria including international and indigenous companies have slashed contractor rates by up to 50 per cent while capital budgets have been reviewed downwards by an average of 20 per cent.
The report disclosed that barring any new opportunities for improvement in a dire global economic situation, cash flows are expected to remain very weak while legacy debt obligations coupled with a likely spike in the impairment of newly acquired debt could lead to a massive deterioration in the financial condition of oil and gas servicing companies.
However, marginal, naira denominated debt obligations will expand owing to the devaluation, which creates a worse-off situation while potential for growth is also likely to remain muted, owing to unfavourable oil prices.
The report also pointed out that the regulatory and policy environment for the petroleum sector is not as supportive with several promising exploration and incremental projects been stalled partly due to the unfavourable regulatory stance. This situation, according to the report is expected to be worse-off considering the adversities created by the COVID-19 pandemic.
‘‘Agusto & Co expects the crude oil market is likely to remain depressed for the rest of 2020 considering that with no antidote to the virus, the wheel of many economies is likely to remain slow and thus consumption of crude oil will also remain weak in the near term.’’