The coronavirus pandemic has caused oil demand to drop so rapidly that the world has run out of storage for produced crude.
This has caused oil prices to collapse to levels that make it impossible for some Nigerian independents to make money.
At these prices, most of these companies may need to either file for bankruptcy or consider other strategic opportunities.
Many of these companies had engaged in high-profile debt 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 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 these indies are deploying unprecedented and sometimes aggressive strategies to survive the global oil price rout.
For instance, Eroton Exploration & Production Company, the fifth-biggest independent producer in the country, said that, while it was still able to service its debts, the firm 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 is more critical since it has several factors working against it.
The company’s high G&A makes the company dependent on high price for crude oil and the Company has made the decision to use its cash flow to cover its G&A and not on CAPEX expansion.
The Company has also made effort to reduce its G&A by laying off almost 40% of his staffs and upper management in April 2020.
However, this effort may not be adequate enough since the Company have not been meeting its contractual obligations and the company may 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 considering other options, but with these options are limited to these oil price environment.
In saner climes, the Company should have filed for bankruptcy protection instead of owing employees’ salaries but the Company may have depended on the lack of Nigerian institutional capacity to take undue advantage of the weak.
The source 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 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.
For instance, with the recent unfortunate events surrounding Lekoil (i.e. QIA) its share price has been depressed and 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 survive will be the leanest left standing and the Nigerian Oil and Gas industry space will not be the same once prices recover.