By Our Correspondent with agency reports
The Coronavirus pandemic has caused oil demand to drop so rapidly that some nations have run out of storage facilities for produced crude.
This has caused oil prices to further collapse to levels that make it impossible for some Nigerian independents to make money.
At these prices, WESTERN POST learnt that most of these companies may need to either file for bankruptcy or consider other strategic options.
Many of these companies in Nigeria had engaged in high-profile debts during the good times and currently account for 90% of the 3 trillion naira or $8 billion of all debts owed by companies producing oil in the country, 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 these companies are deploying unprecedented and sometimes aggressive strategies to survive the global oil price rout.
For instance, Eroton Exploration & Production Company, the fifth-biggest independent oil producer in the country, said while it was still able to service its debts, it had suspended a planned $1.5 billion, 50-well campaign to more than double output to 100,000 barrels a day by next year.
Lekoil, an AIM-listed indigenous company,’s situation appears more critical since it has several factors working against it.
The company’s high G&A makes it dependent on high price for crude oil and it has made the decision to use its cash flow to cover its G&A, and not on CAPEX expansion.
The company has also made efforts to reduce its G&A by laying off almost 40% of its employees and upper management in April 2020.
However, this effort may be inadequate since the company has not been meeting its contractual obligations. It may also not be able to pay the salaries of its employees from April 2020, a first in the Oil and Gas industry.
The staff of the company are currently weighing their options, but these options are limited because of the prevailing oil price environment.
In saner climes, the company would have filed for bankruptcy protection instead of owing employees’ salaries. However, sources say it may have depended on the lack of Nigerian institutional capacity to take undue advantage of the weak.
Sources also confirmed that banks have refused to fund the Ogo project, its high-profile gas reserves, offshore asset due to the reputational damage suffered by the company in January from the Qatar Investment Fund fraud.
Industry sources also claimed that the company would not be able to raise the extra funds required for the Otakikpo field project expansion and the project is already delayed till 2022 until oil price gets better.
The loss of appetite from the banks in funding Lekoil’s initiatives is mainly due to the corporate credibility and weak corporate governance concerns of the QIA transactions and the recent acrimonious departure of two of its credible, high-profile board of directors.
However, this nightmare scenario could present lucrative buying opportunities for the industry’s bigger players. That’s because struggling oil companies, either in bankruptcy or before it, will be forced to sell off prime assets at fire sale prices, says one expert.
For instance, with the recent unfortunate events surrounding Lekoil (i.e. QIA), its share price has been depressed and this makes it a target for takeover by other oil companies like Savannah, Aiteo or Eroton.
There will be a lot of companies that will not survive this low-price and dismal-demand environment. The indigenous operators need to come up with more disciplined and balanced capital programmes and focus more on profitability.
The companies that would survive will be the leanest left standing and the Nigerian Oil and Gas industry space will not be the same once prices recover, analysts said.