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

COVID-19: Impact Analysis on the Oil and Gas Industry Olugbenga Falode Department of Engineering University of Ibadan Email: [email protected]

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 ’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 per barrel. As at January 2020, the price of 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 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 $29.30 per barrel as at May 5, 2020. The American headline crude, (WTI) surged 8.30$ 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.

Figure1.2.2 1:Nigerian Distribution context of COVID-19 cases across the world Source: Worldometer-www.worldometers.info 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 Active cases Recoveries Deaths cases 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

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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)

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, , 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. 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 8 | P a g e CPEEL’s Covid-19 Discussion Papers Series

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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. 10 | P a g e CPEEL’s Covid-19 Discussion Papers Series

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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 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 11 | P a g e CPEEL’s Covid-19 Discussion Papers Series

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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 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 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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