Detailed guide for Oil and Gas Executives on how to build business resilience ahead of a recession.
The COVID-19 pandemic will go down as one of the worst crises in recent history. With the persistent increase in the numbers of confirmed cases and resulting deaths, the threat posed to the global economy is gradually surpassing what the world has ever seen before.
The International Monetary Fund (IMF) forecasts that the global economy will enter a recession that could be as bad as the 2008 global financial crisis or worse. In the World Bank Group’s monthly report for March, global composite PMI fell by 6.1 points – the steepest single-month decline since October 2001.
With the inevitable disruption to every facet of human life, the global demand for oil will not be spared. Now is the time for every player in the Oil & Gas industry in Nigeria to start building business resilience ahead of the looming recession.
Since March 2020, when WHO declared the Coronavirus outbreak a pandemic and lockdown policies became the norm around the world, the global prices of oil have steadily declined—further worsening the free fall fueled by the Russia-Saudi Arabia price war.
At the time of writing, Brent Crude, the internationally accepted oil benchmark, has slumped to $32.03 per barrel – a 53% crash since the start of the year. This slump comes amidst increasing fears that the economic shut down globally could continue for months, and the demand for crude oil would further wane.
While OPEC and other oil and gas producers are set to agree on the most massive crude output cut ever to stabilise the market, doubts remain as to whether the USA, the world’s largest producer, will support the deal by cutting its production.
Here in the Nigerian oil and gas market, despite a significant reduction in the official selling price to attract buyers, the struggle to sell our crude oil remains as Indian purifiers curtail yield and European plants put a halt to operations.
According to analysts, the oil price is so low that it is becoming unprofitable for business continuity. At an oil price averaging $22/barrel(as recorded last week) members of the Organization of Petroleum Exporting Countries, such as Venezuela, Nigeria, Algeria, Angola can’t contend with the lower prices of Saudi Arabia and Russia, who are flooding the market. Nigeria, especially as a high-cost producer, if not resilient, will literally be put out of business.
Higher-cost producers will have no choice but to stop production, particularly since storage capacities are almost saturated. Crumbling oil prices are costing the Nigerian oil and gas sector, and other oil producers not just lost income, but also market share they may never recover.
This crisis thus raises several unique challenges for players in the Nigerian oil and gas industry. And to navigate these challenges, there is a need for players in the oil and gas sector to be proactive and deliberate about taking measures that would help them build business resilience ahead of a recession and come out stronger beyond the downturn.
Below is a guide we’ve prepared for Oil & Gas Executives on quick and immediate steps to build business resilience and stay ahead of the looming crisis.
How to Build Business Resilience Ahead of the Recession
We forecast that declining revenues will present a significant challenge for oil and gas companies, especially those with higher operating costs or existing loan repayment obligations as they may be unable to service debts. As a result, some companies could as well be at the brink of bankruptcy.
Even if a halt in the price war between Saudi Arabia and Russia re-balances the market, and demand improves from containing COVID-19, the industry may still take about a year to recover (based on past production decline curves).
- Be on the look-out for Merger and Acquisition opportunities, as distressed and non-core assets could be a potential source of resources for competing companies.
- Consider diversifying or divesting your non-core, non-performing, or underperforming assets to raise resources, and invest in potential opportunities.
- If you are exposed to debt risks, consider refinancing or capital injection. Or review the prospects of a merger and start developing plans and having communications that can better guide this decision.
We expect there would be weak links in supply chains, as some vendors and suppliers would also be affected by the pandemic, and have financial and operational disturbances of their own.
This may create supply chain restrictions both locally and abroad. It is also expected that industry players will cut spending in non-core areas to free up funds to support operations
- Be proactive about identifying weaknesses in your supply chain, especially from vendors in places that have been severely affected by the pandemic.
- Begin searching for alternative suppliers and vendors.
- Be in constant communication with your vendors and suppliers to understand how their experiences could affect your business.
- Review your balance sheet to help understand your options in this new operating environment
Cash Flow Management
We expect constraints on cash flow from foreign operations – including funds repatriations complications and irregularities for multinationals. Cash could be held when goods and services are paid for but are not supplied because they are delayed or stranded. This may occur if the pandemic worsens in Nigeria.
- Reassess your cash flow forecasts, and consider your best and worst-case scenarios on the short and long run.
- Try to source locally. And if that’s not possible, put all possible measures in place to ensure you don’t pay external parties and vendors without acquiring your goods or services first.
- Assess countries & territories where your company could be vulnerable – both in cash repatriation and in stranded assets. Monitor and assess other geographical areas periodically and adjust your cash flow model as required.
In a bid to prevent a halt in operations resulting from personnel loss, we expect that oil and gas companies would immediately start putting safety measures in place for their employees. Organisations would transition towards remote work to prevent an outbreak within their ranks and reduce the number of workers at off-shore rigs as requested by the Federal Government.
Organisations are also likely to reduce staff and capacity in a bid to optimise costs and improve their cost structure as activity levels decline.
- Consider outsourcing some of your functions to specialised companies, and shift your internal non-core operating functions to contractors. Such changes can help you cut overhead costs and the need for maintenance.
- Be proactive in setting up measures that mitigate the risk of loss of staff due to the Coronavirus.
- Consider automating some business processes to minimise physical contact among staff.
- Put measures in place to ensure business continuity even if some staff fall ill and are unavoidably absent during this pandemic.
- Consider the impact that travels restrictions, quarantine and remote working could have on your business, and put plans in place to ensure they don’t disrupt operations (Click here on read our guide on managing remote work)
While we are uncertain about what the next few weeks or months will bring as we continue to encounter a global pandemic alongside an existential threat from the oil price crash, it is imperative for leaders to be proactive, resilient and act immediately to protect their employees, address business implications, challenges and risks in whatever ways they can.
The oil and gas industry is being severely affected by external events — and business continuity depends on several fast-changing variables. Planning for the future by deciding what assets, capabilities, and people you would need to survive this crisis is critical for the long-term sustainability of your organisation
The impending recession will force many Nigeria’s petroleum companies into aggressive cost-optimisation measures. However, organisations that strategically assess long and short term needs before making changes, and then taking calculated decisions will emerge in a stronger competitive position at the end of the pandemic.