Even though paying less for gas may be beneficial, the market impact goes beyond just decreased consumer pricing. The global economy is affected in a rippling manner by changes in oil prices. One of the biggest casualties is the oil industry itself. The stakeholders’ profit margins go down significantly as they sell their products for less money, resulting in job losses, output decrease or possibly bankruptcy. It encompasses both the oil companies and the countries whose economies heavily rely on oil exports.

In response to the failure of two prestigious American banks, Silicon Valley Bank and Signature Bank, oil prices fell in the first quarter of 2023. Investors are in a difficult position too. The fear about the impact of this banking sector crisis spreading to the wider financial sector caused hefty projections for oil demand to be quashed. Analysts are now cautioning that the oil market will be “locked in a surplus for most of the first half of the year” because of persistent “contagion” risks brought on by the turmoil in the banking sector.

The US inflation rate, since 2022, reached its highest level in 40 years as a result of the sanctions placed on Moscow amid the Ukraine war. To combat this, the Federal Reserve increased interest rates to their highest level since 2007. Although the inflation has come down below 4%, there are talks around further rate increases, even though some have projected that the banking crisis would likely end shortly and that the oil price would rebound too. The impact of the interest rate rises is also difficult to forecast and may continue to draw attention to specific financial market segments as well as vulnerabilities brought on by excessive debt and stretched asset valuations.

Low oil prices may be tough for nations that export it, but the phenomenon will be manageable, according to a WEF analysis, because “with price changes, there is a shift in profiting between oil-producing and oil-consuming countries.”

To mitigate the effects on their economies, oil exporting nations will go for options like reducing government spending, boosting taxes, ending subsidies, and implementing measures to tighten the financial system like hiking interest rates.

In addition, the US CPI has significantly grown, placing stress on the economy at a time when the Federal Reserve is already grappling with inflation among banking issues. If the Federal Reserve lowers interest and inflation rates, the oil market may recover. However, it appears that the market is currently either bracing for a future recession or that one or more funds are being forced to raise cash and reduce risk on their books as a result of worries about liquidity in the wake of bank collapses.

Tracing the ‘hope’

Large investors like Warren Buffet, who boosted his investment in the oil business Occidental Petroleum. are drawn to lower oil prices. Buffett’s company Berkshire Hathaway now owns a 22.2% stake in the corporation as a result of the most recent acquisitions. It has purchased more than 200 million shares worth $12.2 billion. The Chinese market will likely be the source of demand in 2023.

China is the world’s largest consumer of oil, therefore an increase in Chinese demand might help oil prices. The International Energy Agency (IEA) predicted a two million barrel daily rise in oil demand by 2023. The IEA Executive Director asserted that “With the Chinese economy now recovering, it will have major implications for oil and gas market balances.” The OECD has also increased its projection for world economic growth by 0.2% points, from 2.2% in November to 2.6% this year and 2.9% in 2024.

China’s recovery

Despite the upward revision of growth projections, the OECD issued a warning that the recovery is still fragile and that the risks are still disproportionately to the downside. According to customs statistics, China’s crude oil imports dropped 18.8% to the lowest daily rate since January in July 2023 as major exporters reduced their international exports and domestic reserves kept growing.

The largest oil importer in the world imported 10.29 million barrels per day (bpd) of crude in July, according to figures from the General Administration of Customs.

The second-highest import volume on record was reached in June at 12.67 million bpd.

However, despite China’s economy being severely impacted by widespread COVID outbreaks and massive lockdowns a year earlier, oil imports were 17% greater than the 8.79 million bpd brought in at that time.

Some 325.8 million metric tons of crude were imported during the first seven months of the year, an increase of 12.4% from the same time in 2022.

“The (month-on-month) decline was led by lower imports from the big-3 crude exporters, namely the U.S., Saudi Arabia, and Russia, which have cut exports amid reduced production targets and/or higher domestic demand,” said Emma Li, a China crude oil analyst at Vortexa in Singapore.

Li pointed out that at the end of July, China’s onshore crude oil inventories were over 1.02 billion barrels, and that the steady increase in those stockpiles would enable Chinese refiners to reduce their imports in the months to come.

Despite the overall decrease in imports, data from consultancy Zhuochuang showed that state-owned refineries increased their processing rates in July to an average of 78%–82%, up 2-3% points from June.

The need for summer travel had been predicted to increase gasoline usage.

According to data from the Longzhong consultancy, domestic diesel inventories increased by around 2% while domestic gasoline inventories decreased by about 3% between mid-June and mid-July as sluggish export volumes and a downturn in the real estate industry continued to dampen demand.

Chinese oil product exports increased in July as a result of better fuel profit margins in Asia, which also supported higher processing rates.

Exports of refined petroleum increased in July 2023 from 4.51 million metric tons the month before by 55.8% to 5.31 million metric tons.

Some 10.31 million metric tons of natural gas were imported into China in July, an increase of 18.5% from 8.7 million a year earlier when importers reduced spot purchases due to high liquefied natural gas prices around the world.

In conclusion, the oil market is currently facing a complex web of factors that are influencing its dynamics.

The impact of the price fluctuations extends beyond the pump. Many oil businesses, especially those heavily reliant on higher oil prices, are grappling with reduced profits, potential job losses, decreased output, and even the threat of bankruptcy. The banking crisis and uncertainty in the financial sector have further exacerbated the situation, leading to cautious projections for oil demand and market surplus.

The broader economy is also feeling the effects, with the US Federal Reserve raising interest rates to counterbalance inflation. This move, however, brings its own set of uncertainties and potential repercussions, including impacts on specific financial segments and vulnerabilities arising from debt and asset valuations.

Amid the challenges, there are glimmers of hope. Key investors like Warren Buffet see opportunity in lower oil prices, and the recovery of the Chinese economy, as the world’s largest oil consumer, holds promise for increased oil demand. The International Energy Agency’s projection of a rise in oil demand by 2023, driven by China’s recovery, suggests a potential positive shift in the market.

However, caution remains. The recovery is still fragile, as evidenced by China’s cautious oil import trends and the ongoing risks associated with the pandemic. The world economy’s growth projections have been revised upwards, yet the OECD emphasises that the downside risks remain significant.

In this intricate landscape, the oil market’s future trajectory remains uncertain. It will likely depend on a delicate balance between geopolitical events, economic recovery, investor sentiment, and government policies. While challenges persist, the interplay of various factors also presents opportunities for adaptation, innovation, and growth across industries and economies.

Despite all the encouraging indicators, there is still a lot of uncertainty over the future of the oil industry, the recovery of China, the implications of the ongoing Ukraine conflict, and the geopolitical environment as a whole. It’s a waiting game, at least for the moment.

The post Navigating the ‘oil’ uncertainty appeared first on International Finance.

Due to a mild winter, countries were able to use less gas from reserves that had been accumulated in preparation for a reduction in supply from Russia, which was Europe’s primary source prior to the war.

Dutch TTF gas surged to a record €345 (USD 368) per megawatt hour in March. In August it rose as high as €342. However, prices have been declining ever since reaching €73, a 50% decrease, which is the lowest cost since before the war on February 21.

Russian energy behemoth Gazprom reported a 55% decrease in gas exports to the European Union and Switzerland last year.

Europe used to be Gazprom’s primary export market, but sanctions enacted in response to Russia’s offensive in Ukraine in 2022 have significantly curtailed supplies.

Gas storage tanks were refilled by European countries, and campaigns were launched to encourage consumers to save on energy during the winter.

European storage levels are at 83%, which decreased the immediate need to purchase additional gas. In an effort to lessen its disproportionate reliance on Russian supplies, the European Union has frantically searched for new natural gas sources.

A mechanism to cap natural gas prices has also been agreed upon by European Union countries, although economists predict it will have a little overall impact on lowering costs for people and companies.

Experts have cautioned that a cold spell could cause gas prices to increase once more.

Vladimir Putin, the president of Russia, might also stir up further turmoil in the markets.

“He could send less gas, but he could also send more to certain destinations in the hope of dividing European countries,” said Thierry Bros, an energy market analyst who teaches at the Sciences Po school in Paris.

Europe will struggle to fill up stocks this summer if it does not receive 30 billion cubic meters of Russian gas, Thierry Bros said.

“Prices risk rising again,” he said.

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According to the poll, the Organisation of the Petroleum Exporting Countries produced 29 million barrels per day in December, an increase of 120,000 BPD over the previous month. As a result, OPEC’s output reached its highest point in September 2020.

The recovery in Nigeria’s output, which has been fighting for months against crude theft and instability in its oil-producing region, was the main driver of December’s increase.

According to the poll’s sources, many crude streams in Nigeria made more oil in December, and some businesses said that security had gotten better.

OPEC+ increased production for most of 2022 as demand increased. However, the business reduced its production plans for November by the most since the early stages of the COVID-19 pandemic in 2020 due to falling oil prices.

In its November decision, OPEC+ agreed to cut its output goal by 2 million BPD, of which 1.27 million BPD was expected to come from the ten OPEC countries.

A goal just like that was established for the month of December. According to the findings of the study, compliance with the agreement dropped slightly from 163% in November to 161% of pledged reductions in December as a direct result of the increase in Nigeria’s output.

Because a large number of producers, like Nigeria and Angola, are unable to pump at the agreed-upon rates, production is continuing to fall short of the levels that are wanted.

According to the findings of the study, the ten OPEC countries that were required to lower output pumped 780,000 BPD less than the group’s target for the month of December. There was a deficiency of 800,000 BPD in the month of November.

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Windfall tax is levied on an unexpectedly large profit, specifically one which is regarded as excessive or obtained unfairly.

According to an investment adviser, Pirc has asked shareholders to vote against the chief executive’s pay packet at a general meeting which is scheduled to take place around May 30. The shareholders have also been asked to call it ‘excessive’.

In 2021, the Dutchman earned £6.3 million, up from £5.2 million the year before. The company then gave him an increase of 3.5% in his salary. This went from £1.42 million, he still has the opportunity to land £12.1 million in cash and shares by hitting company targets.

According to Pirc, the CEO’s remuneration was in the top 25% of a peer comparison group, which raised concerns about the excessiveness of their pay.

Van Beurden, who moved to London in 2022 from The Hague, has seen the value of his firm stock rise from £14 million to £23 million as investors flocked to oil and gas equities during the energy crisis.

There are reports that bumper profits and pay at oil companies have sparked calls which have been led by the Labour party for a windfall tax on the North Sea oil and gas operators in order to reduce household energy bills.

Since taking the role in 2014, Van Beurden has earned more than £70 million in salaries and incentives. In 2018, he faced a shareholder revolt over his £8 million compensation package.

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This has made some experts ask the question if this crisis could be the push the world needs to move away from oil. One asked: “Could the coronavirus crisis be the beginning of the end for the oil industry?” Another: “Will the coronavirus kill the oil industry and help save the climate?” In 2020, the annual greenhouse gas emissions declined by 4-7 percent due to the world coming to a standstill and some of the world’s most polluted cities enjoyed clear skies. The idea that a pandemic could help ave the planet misses crucial points. Firstly, damaging the world economy s not the way to deal with climate change. When it comes to oil, we still need to find a suitable replacement. in terms of its availability and fitness for purpose. Although the supply is finite, oil is plentiful and the technology to extract it continues to improve, making it ever-more economic to produce and use. The same is also largely true for natural gas.

Having said all of that, climate change is very real and we are seeing its more clearly than ever. Fossil fuel usage has roughly doubled since 1980, however, in the present day, coal consumption is falling in many parts of the world. Oil and gas usage, on the other hand, is still growing. Data shows that despite alternative energy sources such as renewables have become cheaper comparatively, the share of fossil fuels in the world’s energy mix still remains high compared to a decade ago. According to a report by REN21, fossil fuels’ share in the global energy mix was 80.2 percent in 2019, compared to 80.3 percent in 2009. The report further revealed that renewable energy share in the energy mix has grown to 11.2 percent in 2019 from 8.7 percent in 2009.

In 2019, we witnessed 15 extreme weather events, primarily as a result of climate change and caused more than $1 billion in damage each. . Four of these events each caused more than $10 billion in damage. The large-scale use of fossil fuels tops the list of factors contributing to climate change. But the concentrated energy that they provide has proven hard to replace. Why?

Impact of Covid-19 on fossil fuels
The effect of the Covid-19 pandemic can still be felt and seen all over the world. Natural gas prices in Europe have soared by over 400 percent since the beginning of 2021. Electricity prices have also increased by over 250 percent during the same period. Meanwhile, in the US natural gas price has more than doubled. Natural gas is mostly used for electricity and to generate heat in the UK during the winter season. Furthermore, the price of coal in the US has soared by nearly 400 percent this year to reach $270 per ton. The crisis is as we understand is considerably worse in Europe. Electricity prices in the continent have soared significantly as well. Natural gas prices have surged as well to $30/mm Btu.

This is resulting in inflation which means prices for energy-intensive metals are also increasing. For example, prices of metals such as nickel, steel, silicon have increased due to the energy crisis. Besides metals, prices of fertilizers have ramped past 2008 record highs to nearly $1,000 a ton. It is noteworthy that the prices were around the $300 to $450/ton mark in the last couple of years. The price for copper too has increased to a record high of $4.50 per pound. Copper is an important metal and raw material for the solar or wind energy industry, which emphasis is growing day by day as and is seen as an important factor to tackle climate change.

In Britain, renewable power production this year was much lower than normal as a result of a windless summer. The region meets around 24 percent of its energy needs through the wind. However, due to low production this year, it means the UK has to rely on coal. Over the years, Britain has transitioned away from coal as an electricity source. Prime Minister Boris Johnson said that the UK remains committed to wind power generation. He went on to say that he wants the UK to become the ‘Saudi Arabia of wind power’ with offshore wind farms generating enough electricity to power every home in the UK in the next 10 years.

However, the landscape is pretty different in the present time. Soaring electricity prices is a matter of growing concern for politicians across Europe. The crunch in the gas market is forcing countries to revert to coal. This goes against Europe’s fight against climate change and the fact that the UK hosted the 2021 United Nations Climate Change Conference, more commonly referred to as COP26 at the SEC Centre in Glasgow.

In Asia, thermal coal prices also keep hitting record highs. In short, there isn’t enough coal to meet demand. Economies in the region are slowly resuming activities and are in the process of an economic revival, be it China, Malaysia or India. It has led to greater demand and is one of the primary causes of an emerging electricity crisis in China. Coal stockpiles are running low in India too, however, the government claimed there are enough stockpiles to keep the wheels running.

Climate change & fossil fuels
During the beginning of winter in 2021, the northern hemisphere witnessed a series of very cold and extreme weather events. If the same trend is seen happening next year, the northern hemisphere witnessed a series of very cold and extreme weather events. In order to deal with climate change, we must start by understanding the fossil fuel system, how energy is produced and used. While there is no denying that fossil fuel companies are immensely powerful, in the United States and around the world, their lobbying prowess is not the key reason that their fuels dominate the global energy system. Similarly, the transition to an all-renewable energy state is not a simple task to say the least. As we have seen during the 2020 Presidential elections, the politics of blame is quite popular. For years now, fossil fuel companies have denied the problem to policymakers reluctant to enact the policies needed to force real change. It has been easier for everyone to stick with the status quo.

Since we are standing at a critical juncture of climate change, what we need is technology and strong policy to move in a new direction. Throughout history, humanity’s energy use has moved toward more concentrated, convenient, and flexible forms of energy. By understanding the advantages of current energy sources and the history of past transitions, it can help us understand how to move toward low-carbon energy sources. With a greater understanding of the climate challenge, we are making huge strides in developing the technology we need to move toward a low-carbon future. Still, understanding how we got here and why the modern world was built on fossil fuels is crucial to understanding where we go from here.

Bio-based energy system
Prior to the technological revolution, solar energy met all our needs. This balance between human energy use and sunlight sounds like a utopia, but as the human population grew and became more urban, the bio-based energy system brought problems. This is when fossil fuels opened new doors and options. First coal, then oil and natural gas allowed rapid growth in industrial processes, agriculture, and transportation. The world today is unrecognizable from that of the early 19th century before fossil fuels came into wide use. Along with this, human health and welfare have improved immensely, and the global population has increased from 1 billion in 1800 to almost 8 billion today. The fossil fuel energy system is the lifeblood of the modern economy. Fossil fuels powered the industrial revolution, pulled millions out of poverty, and shaped the modern world.

Greatest challenge to humanity
While fossil fuels helped us advance our technologies and society, the world slowly understood the huge disadvantages it comes with. Currently, we understand the devastating effects of Co2 has had on Earth. As a result of the release of these gases, along with the massive deforestation, burning fossil fuels is warming our planet faster than anything we have seen in the geological record. One of the greatest challenges facing humanity today is slowing this warming before it changes our world beyond recognition.

With eight billion of us present on the planet, the impact of Co2 is being clearly witnessed. But going back to the old ways and relying on biomass for our energy needs is clearly not a solution. But, we still have to find a solution to get back to reliance on real-time solar flows and perhaps nuclear energy to meet our needs. While there are a lot more of us now, compared to a century earlier, we are also a part of a vastly larger and more integrated global economy, and using much more energy. But we also have technologies today that are much more efficient than photosynthesis at transforming solar flows to useful energy.

Alternatively, wind turbines and solar photovoltaic (PV) cells convert solar energy flows into electricity, in a process much more efficient than burning biomass, the pre-industrial way of capturing solar energy. With rising demand, the cost for wind and solar PV have been dropping rapidly and they are now mainstream cost-effective technologies. Some existing forms of generating electricity, mainly nuclear and hydroelectricity, also don’t result in CO2 emissions. Bringing these together presents us with an opportunity to decarbonise or eliminate CO2 emissions from the electricity sector. Electricity generation is an important source of emissions, responsible for 27 percent of U.S. greenhouse gas emissions in 2018.

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Since it is a highly diversified field that deals with complex operations, processes, and infrastructure, it looks like the oil and natural gas industry is the desired leader when it comes to industry transformation. Coming to demand, as far as oil is concerned, the primary supply will keep coming from the transportation industry. Going by the global market trends, there is growth noticed in offshore platforms in the deep sea. The remote platforms of the oil and gas industry, harsh sea conditions, strong and unpredictable winds, water, extreme temperatures, and distance from the shore are some of the challenges that will definitely be addressed with a stronger communication system.

There are a lot of oil and gas platforms that depend on the connection with satellite links. Not only are these expensive, but it is also difficult to implement them in such remote and harsh locations. Each surrounding vessel requires a link that needs to establish a connection between the vessel and the offshore platform and the estimated cost to do so could cross $200,000 annually, which is not a small sum. Additionally, it only provides voice communications within a restricted range of a few miles, and that too, not in real-time. If communication tech is developed, the options for offshore communications will evolve too. 5G is one of the leading technologies that is bound to make significant changes to oil and gas companies by providing lightning speed and low latency communication between drilling sites, vessels, and offshore platforms.

How 5G can change the oil and gas industry?
As the sector grows annually, it has been noticed that the need for efficiency and agility in oil exploration and production is ever-increasing, which, in turn, is driving the need for digital initiatives. Due to the pandemic, the oil industry has found itself in a precarious position by seeing lesser demands and lowered prices. However, at the same time, the pandemic has also created a great opportunity for the sector to modernise their infrastructure and build more efficient operations.

And this is where 5G can swoop in and change the game. According to Frost and Sullivan, 5G is a critical component for the digital transformation of the industry. For instance, the oil and gas industry has struggled historically with seismic data collection, and doing it the right way took a lot of time and manual labour. With 5G in place, these problems will have an easy solution.

For example, Huawei recently helped one of its oil and gas clients install a 5G network that provided high bandwidth, better connectivity, and low latency, which helped them streamline their data collection process. As a result, the oil and gas company was able to avail of lightning-fast seismic data retrieval and was able to reduce manual labor to collect the data.

While the 5G network is unbelievably fast, it does a lot more than that. The network can be used as a stepping stone for any oil and gas company tech infrastructure, including cloud computing, big data analytics, robot and drone inspection, and augmented and virtual reality. Additionally, it can also be used for Industrial Internet of Things (IIoT) and artificial intelligence use cases. Evidently, 5G has an amazing untapped potential that could completely revolutionise the oil and gas sector, thereby enabling industry players to optimise their performance and get in position until the demand gets back its natural stature.

5G has the potential to remotely manage unmanned oil production platforms
Given the already much-hyped benefits of the network, the management of unmanned production platforms is a fairly realistic possibility. But this cannot be achieved with 4G/LTE networks. It is absolutely imperative for the oil and gas sector to have reliable, secure, and resilient networks that provide a seamless network for easy connectivity which is essential for their daily operations. The latest projects are developed on highly efficient computing platforms which require high bandwidth to deliver sensitive information to the control center.

Ever since the inception of these projects, network developers have tried evolving in order to deliver cost-effective technologies without compromising on network performance and reliability. Multiprotocol Label Switching (MPLS), along with Virtual Private Network (VPNs) have been successfully fulfilling these requirements by converging applications.

Additionally, LAN-based Ethernet, WiFi, and LTE technologies are now being used to their full potential and are providing a starting point for increasing demand and transformative automation using 5G networks. With the help of 5G network, enterprises’ private and exclusive networks can now be configured in a much more efficient manner to meet the performance requirements. Additionally, the network slicing feature of 5G alone is expected to further strengthen the network performance requirements along with data privacy, real-time control, massive connectivity, and high bandwidth needs.

The 5G technology has gone live at a time when the oil and gas industry is going through some major transformations. Looking from an automation perspective, many industrial processes are already automated, and the oil and gas industry continues to strive for better efficiency and production speed by leveraging existing and new-age communication networks like 5G.

5G doesn’t define the industrial process, instead, it acts as an enabler of new use cases and operating models. To begin with, 5G networks offer immense opportunity to replicate the confusing and wired system of various controllers, switches, sensors, and actuators. With a wider 5G adoption, there will be several opportunities to integrate it as an integral part of the evolution of industrial automation as production lines, machines, and processes are improved and redesigned. One of the immediate opportunities to leverage is the use of 5G that will replace the traditional LAN connections. While it can be argued that LTE and WiFi are capable of doing the same, it doesn’t support layer 1-2 performance which is absolutely essential for high bandwidth-intensive applications. Therefore, 5G can be used to meet these critical requirements.

Additionally, it has been observed that there has been an increased interest in oil and gas companies in IIoT, and this comes with its own set of complexities. The IIoT companies require extreme mobile broadband, ultra-reliable low latency, massive IoT systems. Now the devices in oil and gas enterprises, i.e. sensors, automated guided vehicles, untethered AR / VR, security cameras, robotic controls generate a very different set of requirements throughput, mobility, latency, density, availability, and power. LTE and WiFi can meet some of these requirements, but there are some that fall under the category of URLLC (ultra-reliable low latency communication) and they can be only addressed with the help of a 5G network.

The 5G network comes with an entire range of uses in the oil and gas industry, and we are still discovering its potential in terms of use cases. Having said that, oil and gas industries could definitely benefit from what is being done by their peers in the global market and use it to replicate those wherever possible.

Implementing 5G in the industry
Another important factor to keep in mind here is how efficiently telecom industries can deliver public 5G services at remote locations. The network also provides provisions for organisations such as oil and gas companies or oil field service companies where they help them set up private 5G to help them solve their network and connectivity challenges faced by the remote assets. These companies also have the option to sell their 5G network services to other organisations.

Tech and telecommunications company Infrastructure Networks (INET) recently announced that they have completed a major expansion of Infrastructure Networks, which has led to the additional capacity of their private networks. It also helped them double their geographical coverage and to make their network ready for 5G. At present, it covers 130,000 miles across four major energy basins like Permian/Delaware in West Texas and Southeast New Mexico; Eagle Ford in South Texas; Scoop/Stack in Oklahoma; and Bakken in North Dakota.

The company also partnered with Nokia to expand and upgrade by taking the help of Nokia’s airscale RAN (radio access network). INET’s LTE network is well-positioned to meet the critical needs of the industrial sector that includes drilling, production, and midstream operations.

Additionally, the company also has partners that specialise in advanced analytics providers, thereby letting them to scale their innovative technology much faster. Operators, drillers and oilfield service companies can now get in tune with automation, artificial intelligence analytics and machine learning.

Providing video surveillance and analytics with 5G
Everyone with the slightest idea of how the oil and gas industry works will know that security is of utmost importance. Wireless video surveillance is one of the most effective ways to ensure the area and the drilling platform are safe and secure. Market experts estimate that the global video surveillance market will cross $60 billion by the end of 2025. With the help of wireless broadband, mounting cameras on drones, land vehicles, and in places that are difficult to reach through fixed cables are being made possible. These cameras can be used to deliver footage that can drive critical awareness and decision-making for a wide range of situations.

For example, drone-mounted cameras can help address seismic changes, fires, and natural disasters more accurately. Additionally, with its help, terminal operators could inspect container ships to make sure it’s safe even before they reach the port. Video analytics can also act as an important contributor to enhance the quality, security, and efficiency by letting the users know about intrusion detection, automatic fault detection, and control of robots. Similarly, it can also be used for search and rescue operations and to survey remote areas without the need for human interference. It is common knowledge that wireless video surveillance takes up a lot of bandwidth capacity, and the oil and natural gas enterprises would definitely need the help of 5G to deploy high-resolution and high-density cameras. The companies would also need 5G to combine 4K cameras with video analytics and support precise operations.

5G challenges for the oil and gas industry
While implementing 5G, the first barrier that might be faced will be the cost expectation and perceptions with the technology.
The next challenge would be the 5G rollout and availability. Since 5G is not available everywhere and it is even less available outside of urban areas, where many oil and gas companies operate. 5G is still emerging in different parts of the world in different times. There are a number of different spectrum frequencies with different licensing and usage schemes that will be eventually addressed by all chipsets, but the industry is not there yet. This, in turn, creates a challenging atmosphere for global oil and gas operators who would need to think about different chipsets for their drills and other equipment in various parts of the world.

Then there is also the ever-looming threat of security. If 5G is implemented in the oil and gas industry, the number of devices will be increasing from 10 to 100 times per person, which will lead to more vulnerabilities. And lastly, when it comes to local gas stations, they are often independently owned and have their own technology solutions that will need to seamlessly blend together.

5G has the potential to drive digitalisation
Keeping aside a few cases, the application of 5G in this sector has primarily been a hit and miss. While the oil and gas industry has experimented with some of the use cases, but only a handful of the operators have managed to bring the network to a scale where it meets the limits of existing connectivity. However, we expect things to change as 5G has the potential to drive digitalisation of the oil and gas industry.

Throughout the years, the oil and gas industry has continued to transform itself amid extensive challenges. Apart from the smooth execution of operations, there is also a massive opportunity for the sector to transform its communication and application in order to enjoy the full benefits of the 5G network. Experts say that oil and gas enterprises should expand their network to new oil fields. Having said that, it is important for the oil and gas sector to innovate at a faster pace and implement this technology in new and existing oil fields.

While the introduction of 5G communication brings a whole new prospect for business within the oil and gas sector, it is important to keep in mind that the process to adopt this technology shouldn’t be rushed. As experts have suggested, businesses should assess all the benefits and the risks when they decide to integrate 5G communications in their projects. This can be done by consulting closely with the company’s IT team or they can also choose to bring in external IT experts and security professionals to ensure the safest adoption of 5G technologies within their own operations.

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The trading unit of Chinese oil a gas major Sinopec, Unipec has acquired four North Sea crude shipments this week. The Kingdom, which is considered the world’s largest oil exporter has planned to slash output of 1 million barrels per day through March at the time when several traders were expecting a surge in supply.

Furthermore, the Kingdom hiked official selling prices (OSPs) for crude oil sell in the Asian sub-continent. The Kingdom’s flagship product, Arab light grade will be the highest since August last year.

Tamas Varga, an analyst at brokerage PVM Oil Associates, told the media, “It is down to the Saudi cut and the consequent rise in their February OSP to Asia.”

Asian oil refiners may have already acquired four or five cargoes of CPC Blend crude for February. The refiners have secured seven shipments of the grade from the Russian terminal located in the Black Sea. Global oil traders are expecting a stringent supply following the Kingdom’s output slash. The majority of the Kingdom’s crude oil is sold to Asian refiners.

The kingdoms’ oil output cut has not only sent shockwaves across the global oil segment but came as a surprise to other 22 alliance peers. The Kingdom’s government believes that the cuts were vital to bolster global oil market rebalancing.

The global oil market is walloped by the pandemic and expect to rebound this year.

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According to the International Energy Agency, Brazil is important to the global oil industry and will be responsible for the production of nearly 50 percent of the world’s offshore oil in 2040, which points to nearly 5.2 million barrels per day. The country produces a huge amount of oil through drilling near its coasts and certainly its aggressive efforts to stand out in the global oil industry has been realised. Its production of oil is mainly offshore of about 94 percent and is embarking on new developments to lure investors and keep the momentum steady. The national oil company alone accounts for 93 percent of the country’s oil and gas production—which is impressive—in part, underpinning its leading position in the exploration and production of offshore oil. The other part that is responsible for uplifting the Brazilian oil production is the pre-salt reserves.

Geological evolution of pre-salt reserves
The pre-salt finds were made a few decades ago and it is still the most important exploration play, highly sought after by all major oil companies in the world. The evolution of pre-salt layers is that they are found in deep-waters between 1,900 metres and 2,400 metres in Southeast Offshore of Brazil. Their work in Brazilian oil is quite simple: The deep Cretaceous salts trap oil in rocks off the country’s coast and that is what makes them so special. The geological structure was created around 160 millions years ago when the supercontinent Gondwana began to naturally split. Essentially, the pre-salt reserves are characterised by ‘giant and supergiant fields’ that have superior quality carbonate reservoirs deposited between the Barremian and the Aptian.

The production zones in pre-salt wells are known to have high porosity and permeability, increasing their oil production to very high levels, reaching around 60,000 barrels of oil per day. These wells, on average, produce 17,000 barrels of oil per day which is 10 times higher than the average production of post-salt. These characteristics have made the Brazilian pre-salt reserves a major oil producer, currently producing more than 1.5 million barrels of oil per day. In conversion, this represents more than 50 percent of the national oil production.

Pre-salt play builds a strong evidence
The importance of pre-salt reserves cannot be said enough, forming strong evidence for why Brazil is leading the global offshore production. Last year, a report published states that Lula, Sapinhoa and Baleias Cluster are primary contributors of the oil production in pre-salt wells. In the next five years, Buzios, Mero, Sururu, Berbigao, Itapu and Atapu fields will dramatically increase the country’s oil production to 5 million barrels per day, securing its position to be among the top five oil producers in the world. Along with the existing discoveries, there are other fields that have been acquired during the Brazilian Petroleum Agency’s bidding rounds in the last two years. These acquired fields have geological potential for huge oil discoveries in Campos and Santos basins. It is anticipated that Brazil could be producing around 8 million to 9 million barrels of oil per day by 2035, by taking into account the potential of these blocks coupled with its strategic position as one of the largest oil suppliers in the world.

The pre-salt oil reserves look to make the Brazilian oil industry more lucrative, on a scale that could even transform the economy. Analysts say the estimates for the total pre-salt oil now stands at 50 billion barrels per day. Although they are little less than what is produced in the North Sea, these are only conservative estimates. It is reported that optimists are expecting a different estimation as much as three times higher.

Petrobras’ new discoveries boost production levels
Petrobras, a Brazil oil company, has made a high-quality oil discovery in an exploration well at the Buzios field in the subsalt frontier. The new find was reported last December pointing to an affirmation that it ‘reinforces the substalt potential of the Buzios field’. This is likely to pronounce the importance of Brazil’s offshore deposit among many industry officials. Petrobras accounts for 60 percent of Brazil’s pre-salt oil production and is ramping up its activities through investments in pre-salt assets. The development of the Burios field, for example, is part of Petrobras’ 2021-25 investment plan which comprises actions such as installation of four new floating production, storage and offloading vessels and drilling 100 wells at Buzios Field in the $55 billion spending programme, according to a S&P report. The company said that the find was made in the 9-BUZ-48D-RJS well drilled in 1,850 metres off the coast of Rio de Janeiro. Even well formation tests were carried out at a depth of 5,540 metres confirming the presence of high-quality oil.

Petrobras made a similar discovery in the southeast side of the Buzios Field last May. This happened when the ‘9-BUZ-39DA-RJS well hit a 208-metre thick column of oil’, according to the S&P report. It is reported that the well was drilled in water at a depth of 2,018 metres, and then the well plumbing was carried out to a total depth of about 5,400 metres. After the Tupi and Sapinhoa fields, Buzios is the latest subsalt field to come into full development, which pumped its first oil in 2018. Buzios is the second largest producer of oil in Brazil, pumping 564,474 barrels per day last October, the National Petroleum Agency reports.

It makes sense that Buzios ranks second so early on because it is also the most productive subsalt field. This can be stated with confidence over the fact that a single well at Buzios set an impressive oil and gas output record of nearly 69,600 barrels per day of oil equivalent last October. Another supporting fact is that Brazil’s top 11 wells by output are all located in Buzios, according to the National Petroleum Agency. Currently, Buzios features four floating production storage and offloading (FPSOs) and the company is planning to install the fifth at the field in 2022. Even a sixth FPSO was planned for 2024, followed by two FPSOs in 2025, as part of the company’s investment plan.

China’s insatiable demand for Brazilian crude
Last September, Petrobras recorded crude oil exports of around 87 percent bound for China. This is a clear indication that Brazil’s offshore boom will continue despite the latter’s slowing oil imports. According to Petrobras Chief Executive Roberto Castello Branco, China still has potential to acquire export crude oil produced by Brazil. In fact, Brazil’s medium grade Lula and Buzios crude oil pumped from Tupi and Buzios have become popular and are selling at a ‘premium to Brent’ in China. China’s insatiable demand for crude oil is surprising. It is reported that China oil imports for the first 10 months of 2020 grew by 11 percent year-on-year to an equivalent of 11 million barrels per day.

Essentially, there are two reasons why the sweet medium grade crude oil is in great demand. First: The low sulfur content for the Lula and Buzios crude oil varieties is 0.27 percent and 0.31 percent. Second: Pre-salt fields in Brazil have low breakeven costs, meaning that they can be highly profitable despite current hardships in the operating environment where Brent is sold at less than $50 per barrel. The exponential demand for these commodities is somewhat causing price differentials to continue, leading to speculation that they could become the most expensive crude oil varieties in the world. It is simple to comprehend the after-effect of the speculation: A favourable trend in Brazil’s oil could be seen in the coming months. Already Petrobras is seeking to explore new markets in Asia where there are substantial demands for light sweet grades of crude oil. The introduction of IMO2020 has played a big role in the surging demand for Brazilian crude blends among Asian refineries.

The new maritime regulations have also led to favourable circumstances, spurring demand for Brazil’s medium sweet crude in Singapore. Now what is anticipated is that the demand for Brazil’s pre-salt sweet medium crude oil grades will be met by increasing supply. The data released by the National Petroleum Agency shows that the pre-salt oil production of almost 2.6 million barrels per day last September was almost 13 percent higher than the previous year. The pre-salt output alone accounted for 89 percent of Brazil’s total petroleum production in 2019 compared to 78 percent for the equivalent month in the previous year.

Setbacks that could derail Brazil’s oil boom
New investments in exploration, production and refining among Petrobras and other major companies are estimated at $100 billion over the next seven years. But with the coronavirus pandemic there is no end in sight—for all industries, including Brazil’s oil. The very fundamental factors that secure the global oil industry have been disrupted: dramatic drop in oil prices, unexpected slashes in output and economic recession—thereby forcing many oil companies to review business and investment plans. Last year, even Petrobras had reported that it would cut its annual investment plan from $12 billion to $8.5 billion.

The production of medium sweet crude oil from pre-salt fields might continue to increase in volume. But there are indications of danger for Brazil’s oil boom. Europe is imposing fresh lockdowns in some of its largest economies that might have unintended consequences such as a decelerating world economy and a poor economic outlook. Another speculative theory is that Petrobras could ‘derail Brazil’s offshore boom’, on the back of its efforts to cut its five-year investment plan by a sharp 27 percent from a year ago.

This setback is justified, however. There are fears that it might reflect on Brazil’s oil boom. According to Petrobras, the severity of the pandemic has upset the demand for crude oil and derivative products in the big picture—leading to steep weaker oil prices. However, the company has said that it intends to spend $46 billion on exploration and production, especially with a keen focus on pre-salt oil assets. The move is meaningful because it is Brazil’s pre-salt assets that produce the sweet medium grade crude oil, which has become intensely popular in China and select parts of Asia—anchoring its famed oil boom.

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As the months roll by, the industry has recorded significant declines in prices—stoking panic. In late April, international benchmark for Brent crude dropped from over $60 per barrel to approximately $20 per barrel—pointing to a two-decade low. Even worse, an agreement established with Opec+ countries had forced African oil-rich countries to slash global output by an average of 24 percent. The easing of lockdown restrictions has caused a rebound of sorts in demand leading to recovery in oil prices to currently around $40 per barrel.

Some of the African countries which are heavily reliant on oil revenues are expected to see a continuous decline in income. Nigeria’s 2020 budget was decided on the basis of oil price at $57 per barrel and Angola at $55 per barrel. Statistics show that both countries record approximately 90 percent of their export earnings from oil sale. “The oil price collapse is anticipated to impact ‘government investment and financing needed for capital and social projects’—and if the decline in prices continue to remain, it will present an extremely ‘challenging situation for these African oil exporting countries,’ ” Pedro Omontuemhen, partner at PwC, told International Finance.

Will underexploited resources protect investor interest for long?
Although 16 African countries have refineries in the downstream sector, most of the produced crude oil is exported while petroleum products are imported. The fact is that the continent accounts for around 7 percent of the world’s reported crude oil and natural gas reserves—and as it remains largely underexploited will bring huge investor opportunities for the industry. This has made the continent a hotspot for foreign investment in oil and gas. The untapped potential of resources has reinforced investor interest in Africa’s oil and gas despite structural and commercial barriers.

What is even more impressive is that the continent’s hydrocarbon-harbouring countries collectively hold 125 billion barrels of oil and 13.8 billion cubic metres of gas, according to BP’s Statistical Review 2018. “In recent times, some of the largest oil and gas discoveries have been found in African acreages,” Pedro explained, pointing to the giant Zohr field which is an offshore natural gas located in Egyptian waters off the North African coast. Even the recently found Brulpadda field in deepwater South Africa holds a billion-barrel potential, while Senegal’s Yakaar field operated by Kosmos Energy has been ranked by PwC as one of the top ten largest discoveries in 2017. It is anticipated that Phase I and II of the Yakaar field project holds more than 1.5 billion equivalent barrels of gas. This means the continent is rich in onshore and offshore fields which are still in nascent stages of development, implying that the abundance of resources are seeking to attract foreign investment. Africa’s oil and gas fields are being currently explored and developed, with multinational giants like Total and Eni injecting cash into the continent. This is a positive indicator of the continent’s growing potential in hydrocarbons investment.

Decline in investment is observed
What determines the degree of investment in Africa’s oil and gas is the coronavirus pandemic. Its oil and gas companies are facing the downside effects of the pandemic—which has in many ways impacted investor confidence and stability in operations. The United Nations Conference on Trade and Development published its World Investment Report 2020 which observed that foreign direct investment to the continent will be affected by low prices of commodities, mainly oil—seen as a result of the pandemic. National oil companies have in fact planned cost containment programmes to mitigate these effects. For example, Aker Energy in Ghana has postponed the development of its Pecan field until further notice because of the protracted pandemic. In another example, Total in Nigeria has stalled development of the Preowei field which also includes seismic surveys on Preowei and Egina fields.

“Slump in foreign direct investment to Africa is observed, which is expected to be worsened by the contagion effects of the pandemic and low oil prices,” Pedro said. According to the International Monetary Fund, investors withdrew $83 billion from developing countries on the continent since the onset of the coronavirus crisis, marking the largest capital outflow ever. Another reason for decline in investment in the industry can be attributed to new investment regulations introduced for multinational oil companies—which saw foreign direct investment to West Africa lowered by 21 percent to $11 billion last year.

It is a known fact that the pandemic has brought unprecedented changes to the oil and gas industry. According to Pedro, the anticipated fall in demand for oil exporting African countries implies that exports of crude this year will be down by an average of 10 percent compared to recent years. He even restated that the value of African oil exports at $40 per barrel could further drop to levels last recorded two decades ago. It is a natural consequence. These low prices coupled with diminished output can force major oil producers on the continent to encounter loss of billions of dollars of value loss this year.

It is not the end for oil producers
Currently, the oil and gas companies operating in Africa are challenged on the back of the protracted pandemic, political chaos, lack of adequate infrastructure, regulatory uncertainty, delays in enforcing laws and local and regional insecurity. Because of these combined challenges, foreign direct investment to the continent had been affected even prior to the coronavirus epidemic. For example, foreign direct investment to sub-Saharan Africa decreased by 10 percent to $32 billion in 2019, while East Africa reported a decrease of 9 percent to $7.8 billion as a result of political tensions in some parts of the region. For that reason, long-term planning is essential to cope with uncertain events taking place globally. It is also important for oil and gas companies to exercise control costs while analysing risks and benefits of new projects and capital to invest. Such decisions will become responsible for regulatory, environmental and political considerations in the industry.

On the bright side, African oil and gas producers have an opportunity to bounce back from the current situation through four approaches. The first approach is to diversify the economy away from oil. The second approach is to invest in refining capacities whether they are conventional or modular. The third approach is to monetise gas. The fourth approach is to eliminate subsidies on petroleum products. “The oil and gas industry has been through the cycle of boom and bust before. I think in about a year or two we should be out of this pandemic. Investment in oil and gas should be at full throttle again,” Pedro said.

Policy reforms are needed
For that reason, many oil and gas countries are reviewing policies. The Nigerian government has signed the Deep Offshore and Inland Basin Production Sharing Contract Bill 2019 with an intent to apply price-based and field-based royalties to further increase treasury revenue. In this context, Pedro explained that there is an increasing pressure for E&P companies to supply gas for local power generation, industry and general consumption before starting export activities. Prioritising local beneficiation of hydrocarbon resources will ensure industry development in the best interest of the local population.

Another unaddressed challenge is the unpredictability of the industry. It seems that twelve sub-Saharan African countries made their first major discoveries during the period from 2001 to 2014—and each of those countries had fallen short in expectations to achieve their first oil and gas revenues within the stipulated time—despite strong support from governments, companies and international organisations. For real, Guinea Bissau, Liberia, São Tomé and Principe and Sierra Leone have considered their discoveries to be commercially unviable and the commercial discoveries made by other African countries are yet to reach production.

Pedro explained that the government revenue had fallen below the set expectations in Ghana, Niger and Mauritania, further resulting in reduced revenue forecasts. Extreme optimistic expectations have pointed out that in hindsight the policies did not seem realistic even during the pre-price collapse period. Another disappointing factor is that many African governments have made scarce investments in financial and human resources to manage the industry which is unfair considering the ratio of benefits generated from it.

Governments’ strategic initiatives for investors
To a great capacity, African governments have the power to attract foreign investors through strategic initiatives. It seems that the continent’s 30 National Oil Companies are involved at various points of value chain and at different maturity levels. The evolution of African Oil Companies from field operators to services providers shows a progressive transition in the industry. Many countries from West Africa have in fact sought regional expansion across the continent in an attempt to drive regionalisation. Even oil and gas ministries have legislated and implemented policies and regulations to establish Africa as an attractive destination for investors.

According to Pedro, some examples of policies to attract foreign investors are outstanding. An example of that is Mauritania’s tax and fiscal system which is aimed at easing exploration to generate massive returns to investors—if hydrocarbons are found. The system requires no royalty payments and corporate income tax floats around 25 percent. Even Egypt’s new oil and gas contract enables investors to gain control over their production shares instead of having to sell them to the government at pre-set prices. “On the security front, African governments and oil companies are protecting the security of energy infrastructure and assets,” he concluded.

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On the bright side, Opec has built a robust model with a deep focus on collaboration, discussion and information-sharing — highly effective to member countries, oil producers and customers largely dependent on stable economic conditions.

Opec and all of its allied countries except one have agreed to extend oil production cuts through July. The countries even include Russia and Mexico who had pledged to slash oil production 9.7 million barrels a day in May and June — marking the deepest cut agreed to by the world’s oil producers. This in turn has helped to increase prices on the back of resurging demand for crude. In fact, it was reported that the output adjustment in May and June has provided relief to the market and demand has picked up as economic activity is slowly resuming back to normal.

African oil-rich countries take a hit
But the same cannot be said for African oil-rich countries heavily hit by Opec’s production cuts. It started in May when Open and its member countries decided to cut oil output by 23 percent each. With that, it is worth noting that the decision has had a negative impact on African oil-rich countries majorly relying on revenue generated from petroleum commodities.

This is especially true because 14 countries in sub-Saharan Africa produce oil, which accounts for a major chunk of their export income. The major oil producers in Africa include Nigeria, Angola and Gabon. In fact, Angola, Algeria, Nigeria and Libya among others are increasingly dependent on hydrocarbon sales — making them the main casualties of reduced oil output. It appears that an increase in prices between $50 to $60 would allow them to earn the necessary amount of foreign exchange to further carry out development projects.

Despite that, the African Petroleum Producers Organisation showed its support for the resolutions that were determined during the 9th Opec and non-Opec Ministerial meeting. Established in 1987, the African Petroleum Producers Organisation is a body of African countries producing petroleum — and seeks to foster cooperation and harmonisation of efforts among oil producing countries on the continent. The body’s efforts in supporting the resolution is aimed at resolving the global oil crisis caused by the coronavirus outbreak and a price war between the Kingdom of Saudi Arabia and Russia.

It appears that the petroleum ministers and representatives of member countries of the African Petroleum Producers Organisation have taken a stand to support the decisions and processes undertaken by all parties to address the complexities and volatility of the global oil market. The African Petroleum Producers Organisation said in a statement that “Furthermore, we urge the G20 countries to offer assistance to Africa as we struggle to wade off this pandemic and price stabilisation process in the oil markets and encourage the most equipped laboratories and medical institutions in the world to find effective measures accepted by all (proven and consensual scientific results) to rapidly eradicate the progression of the current Covid-19 pandemic.”

Angola resists steeper production cut at first
Earlier this month, Angola was resisting Opec’s request for a steeper oil output cut in line with the agreement between all member countries. As stated earlier, the Opec and allies led by Russia have been slashing output since May, with a record of 9.7 million barrels per day following the pandemic-led crisis.

At first, it was reported that Angola was unwilling to compensate for its overproduction during the period between July and September, however, it would be able to do so between October and December. Against this background, Nigeria and Algeria had to reach out to Angola to encourage it to execute the agreement.

On a close note, Angola saw oil production cut by Opec, its allies and other top oil producers as an insufficient measure to balance global markets. Resources and petroleum minister Diamantino Azevedo, told the media, “It is up to everyone to understand that, despite the measures taken by Opec, oil producers in various countries should be aware that they may be called to take more drastic measures.”

One of the more serious problems identified in increasing production was lack of storage capacity. Angola had pumped 1.28 million barrels per day in May, observed Opec data. This is equivalent to 100,000 barrels per day exceeding its target. That said, the oil producing country slashed its production to 1.24 million barrels per day in June, resulting in 60,000 barrels per day above its target, based on a Reuters survey.

The production cut has had an impact on its long-term supply contracts. In the country, oil accounts for 90 percent of total export revenues and the value of oil exports dropped by approximately 50 percent during the period between April and May. Angola is the second largest oil producer on the continent. This points to Angolan economist Carlos Rosado de Carvalho’s view in an interview with a local media report that “oil is the biggest source of revenue for the Angolan State, and if the State is going to have less revenue, it means that it will invest less, that way the economy ends up suffering.”

But Angola has received a lot of pressure from the joint ministerial monitoring committee to comply with the supply cuts agreements. In addition, other countries including Iraq, Kazakhstan, Nigeria and Gabon have been pressured to commit to the agreement as well. More recently, the country agreed to comply as per its supply cut agreement with the joint ministerial monitoring committee and is willing to compensate for its previous overproduction by reducing output between July and September. The record cuts from all parties are underway before narrowing down to 7.7 million barrels per day until December.

Nigerian economy to suffer from oil slump
Even Nigeria is expected to feel the pinch on the back of slashing oil production. The World Bank forecasts that the country will shrink by 10.6 percent this year, especially with it bringing down its oil production to 1.412 million barrels per day in an effort to comply with the agreement with OPEC and its allies.

In May, the country implemented only 52 percent of the defined output when it pumped 1.613 million barrels per day. Now Nigeria requires to slash approximately 67,000 barrels per day over the next three months to offset the overproduction. Last month, Group Managing Director of the Nigerian National Petroleum Corporation, Mele Kyari, told the media, “Definitely by the end of June, we’ll see full compliance from Nigeria. It will be done in the first half of July in the worst-case scenario. Over the past 10 days, the country has been cutting more than required under the OPEC+ pact.”

That said, the country had reassured its commitment to Opec and its allies on the new extension deal which points to 9.7 million barrels per day. It has promised to show support and collaborate with all parties involved in the deal to rebalance and stabilise the oil market.

The impact of the price slump on African countries is well understood and exporters are bearing the brunt of it on a large scale. In many cases, it is also having a residual effect on the GDP and revenue from sale of hydrocarbons.

Another alarming factor is that Nigerian banks will face serious consequences from oil producers determined to survive the pandemic. This means that traditional firms will be forced to have restructuring discussions with their lenders if the current market conditions continue beyond the next few months.

Truth be told, oil and gas companies account for 30 percent of all banking loans in the third quarter of 2019 and borrowing accounts for 24 percent of all non-performing loans in the country. Some of the lenders with heavy exposure to Nigerian oil companies are First Bank, GTB, Zenith and Access Bank — meaning that when oil prices fall it will directly impact naira and have an indirect effect on the banking industry. Also, power producers and manufacturers might suffer from a weaker naira and further impact banks’ capacity to provide loans.

World Bank, IMF predict GDP drop for African oil producers
A report titled Global Economic Prospects was published by the World Bank in June which found that Nigeria’s energy sector will shrink 10.6 percent this year. In response, the government introduced a revised budget altering the oil price from $57 a barrel to $25 a barrel. In addition, the officials have approved $5.5 billion in loans to finance the new budget deficit.

Austin Avuru, CEO of Seplat Petroleum, told the media, “Overall, our target is to get close to a neutral cash flow position in 2020. So the main target of our budget restructuring is to be able to survive FY 2020, with the hope that during 2021 prices will climb back and we will manage to resume our planned investments. Meanwhile, in 2020 the key word is survival.”

The World Bank said that energy importers on the continent will be protected from the downside effects of the pandemic. Analysts have also expressed views that a reform of subsidies in energy-importing countries could result in freeing up public funds toward economic recovery.

The World Bank has pointed out that African countries including Djibouti, Egypt, Morocco and Tunisia are expected to experience a 0.8 percent drop in GDP this year, compared to the 5 percent contraction predicted for oil exporters in the MENA region last year. Even sub-Saharan Africa exporters are anticipated to experience a 3 percent drop in GDP which is above the average of 2.8 percent GDP.

The International Monetary Authority (IMF) released a report earlier this year which projected that Algeria’s economy on the back of high debt levels and a nil sovereign wealth fund will contract by 5.2 percent this year but revive by a 6.2 percent growth next year. The post-pandemic era might be a challenge for African oil-rich countries to reach market stabilisation in the long-term.

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