The coronavirus disease has ushered in a new economic order for 2020, in which survival is the focus for oil companies and operators in other sectors. Nations have cut budgets, as oil prices dip. In this interview with JOHN CHUKWU, the Chief Executive Officer of Seplat Petroleum Development Company, Austin Avuru, speaks on the impact of COVID-19 and falling oil prices on Nigeria’s economy
How is Nigeria’s oil and gas industry faring in the face of the pandemic?
The combination of the pandemic and the rapid decline in demand for crude oil globally are reflected in current oil prices. In real terms, we expect to end 2020 with an aggregate price half of our original budget. The immediate result is a revision of the 2020 budget and cuts of 30 to 40 percent. Therefore, the aggressive budget spending initially allocated to fuel development and facilities has been scaled back.
However, we are not scaling back a large amount of our spending on gas. We are also looking at our operating expenses and reducing them as much as possible. Overall, our target is get close to a neutral cash flow position in 2020. So, the main target of our budget restructuring is to be able to survive the 2020 Financial Year, with the hope that in 2021, prices will climb back to the $40 mark and we will manage to resume our planned investments. Meanwhile, in 2020, the key word is survival.
To what extent will the current situation affect supply chains in the oil and gas industry?
As lockdown rules are being lifted around the world, supply chains are gradually being restored. We encountered a few weeks of disruption in terms of vendors that were building some parts for us in Italy and China, but these are now back to normal. For those that are not, we are hopeful that it will be a matter of weeks before they are also able to resume operations.
The supply chain in oil and gas remains highly contingent on the global supply chain, with the United States, Europe and China providing services, equipment and materials for our work sites. Most of these activities are still ongoing. Even during the lockdown period, we managed to maintain the supply chain efficiency, and continued all drilling and production operations. With lockdowns now being lifted, this network is being reinforced in a way that will not affect our operations, going forward.
In what way is the oil and gas sector supporting national efforts to fight the pandemic?
There has been a joint industry effort coordinated by the Nigerian National Petroleum Corporation since the beginning of the outbreak, which raised around $30m. This has been directed to the procurement of materials and support services to fight the pandemic.
Which major changes should we expect in the oil and gas industry, moving forward?
I think one of the major changes will be the way we work. Many people believe that after the pandemic, it will be possible to run our businesses without coming to the office. However, we will still need people to physically go to work, as the core of our industry is in the field.
Our business is to produce crude and natural gas, and that is the bottom line. Everything we do is to ensure that, in the field, we are able to produce the volume of crude oil and natural gas we promised the markets. Therefore, field activities will continue in the traditional manner, and the coordination and management support will continue to take place from the office and from home. However, a number of tasks that were previously conducted in person, such as meetings and training sessions, will still need to be carried out remotely for the foreseeable future.
What measures can Nigeria take to minimise the impact of the pandemic on the economy in the medium to long term?
I think it has become imperative for the economy to broaden in scope. The over-reliance on oil receipts is no longer sustainable. The 2020 budget is now being restructured by the Federal Government, in line with the expected drop in oil receipts. The shortfall is expected to be around $17bn in 2020, which is significantly more than the $3.5bn that was recently borrowed from the International Monetary Fund. As a result, there is going to be a drastic reduction in government expenditure. A lot of the subsidies will also have to be cut back because the government will no longer be able to afford them.
Remittances, which have been quite a strong measure of foreign exchange, are also likely to take a hit. This means that both oil revenue and diaspora remittances will be affected, which are the two main sources of dollar earnings by the economy. In the long term, there will be emphasis on gas, especially domestic gas, that will go towards supporting industrialisation and electricity generation.