Interview with Eng. Mahaman Laouan Gaya, Former minister, Former Secretary General of the African Petroleum Producers’ Organization (APPO), Expert in petroleum matters.

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1. What’s your own reading of the oil industry at a time when prices are gloomy, but also impacted by the current global Covid-19 pandemic ?

Eng. Mahaman Laouan Gaya : Let me say at the outset that the current drop in the price of barrel of crude oil is not solely due to the appearance of the Covid-19 ; but this pandemic went beyond the international oil market to the whole world economy. This is reminiscent of the subprime crisis in the United States which ended up affecting the entire world economy in 2008. Let us remember that in 2019, the United States threatened to produce more oil in 2020 and given the prospects that world stocks are likely to experience a record increase, OPEC+ (the 13 members of OPEC and its 10 allies led by Russia) has decided to reduce its production by 500,000 new barrels in addition to the cut of 1.2 Mb/d (Million barrels per day) already agreed in December 2018.

This would bring the level of reduction in the OPEC and its allies supply to 1.7 Mb/d and the agreement should be valid at least until March 31, 2020. When they met on December 06, 2019, the OPEC+ member countries agreed to strengthen their production cuts, to support oil prices and better, the Saudi Minister of Energy, Abdel Aziz ben Salmane to announce that if the different producers respect their production quotas, his country has intention to consent Additional voluntary reduction of 400,000 b/d, bringing the OPEC+ reduction down to 2.1 Mb/d. Indeed, Saudi Arabia has a particular interest in supporting oil prices in the context of the entry of its national giant Saudi Aramco on the Riyadh Stock Exchange on December 11, 2019. But on the sidelines of these meetings, Russia said it could no longer continue to make sacrifices to reduce its production, while the main beneficiaries were the Americans.

Indeed, the Americans were playing “stowaways”; they are waiting for other countries to cut their production before oil prices go up and they will take advantage of it. This is basically the real reason for Russia’s refusal to agree to a reduction in its production.

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At the OPEC+ meeting on March 6th, Russians then slammed the door, and their niet provoked the ire of Saudi Arabia which immediately promised to flood the world with almost 3 Mb/d and also lower the selling price to its traditional customers.

The coronavirus pandemic, declared in December 2019 in China, but “exported” in the first weeks of 2020 has further complicated matters.

Beyond strictly medical concerns, the coronavirus then set in motion the entire Chinese economy and, by extension, the world economy. China, the world’s largest importer and second largest consumer of crude oil after the United States, has put all of its economic activities on hold almost to a halt, which has affected all of its trading partners ; first and foremost, the major European economies.

In view of its multiple and all-round relationships, not a single country in the world has been spared. At the beginning of the spread of the pandemic, several airlines and shipping companies had suspended their movements first with China and later worldwide.

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With the pandemic reaching almost every country, more than 3.5 billion people around the world are in confinement. This therefore assumes that there are no more trips (in private cars, buses, planes, trains, boats, etc…); otherwise no consumption of hydrocarbons.

The situation is very critical today. The shutdown of many industries and transportation has severely slowed economic activity worldwide.

If on the health plan, the Western powers are dithering to take the Covid-19 pandemic more seriously, on the economic plan, the time is no longer for procrastination (Donald Trump seems indeed more concerned about the economic impact of the coronavirus that the human slaughter in American hospitals).

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Between the collapse of oil prices, the brutal fall in stock markets, the plunge in world trade, the sudden disappearance of demand in whole swathes of the economy, humanity stings straight in that in geopolitics, the Anglo-Saxons call the “perfect storm”; that able to take in its path all socio-economic sectors. Imagine that it is 9000 billion dollars of market valuation that disappeared in nine (9) days, at the beginning of March 2020 because of this coronavirus pandemic ! Let us remember that during the financial crisis of 2008 or those of sovereign debts in 2011, the Euro zone paid dearly for its waltzes-hesitations to intervene massively and urgently to put out the fire ; this time, it will be more complicated. The coronavirus crisis caused a drop in demand for black gold (lockdown of more than 3.5 billion people, cessation of industrial and transport activities) by more than 15% (around 15 Mb/d) while production is not weakening.

Despite their differences, the 23 OPEC+ member countries began a long and tedious negotiation process on April 9th at 4 pm. After 4 days and 2 long nights of discussions, alternating with many upheavals (Mexico which did not seem to want to accept the quota having been allocated to it), they finalized on April 12th a reduction agreement of 9.7 Mb/d, for the period from May 1st to June 30th, 2020. On May 1st and until the end of June, a total of 14.5 Mb/d (compared to production levels at the beginning of April) will be withdrawn from the market by OPEC+.

The reduction must then go to 8 Mb/d for the last six months of this year, then to 6 Mb/d from January 2021 to April 2022. The tireless efforts of OPEC Secretary General, HE Sanusi Barkindo, are to be commended throughout these long and difficult negotiations to reconcile the different parties.

These world oil powers (large and small) had no other choice than to hear, if they wanted to avoid a “collective suicide”.

Even Donald Trump rushed into a “Tweet” saying The big oil deal with OPEC+ is done. This will save hundreds of thousands of energy jobs in the United States.

I would like to thank and congratulate President Putin of Russia and King Salman of Saudi Arabia. I just spoke to them from the Oval Office. Great deal for all ! These 9.7 Mb/d represent a reduction in supply of 10%, compared to the situation before the coronavirus crisis (which for the moment is a breath of fresh air for the oil markets) and although this reduction in supply is historically high, it remains less than the decrease in demand caused by the coronavirus crisis.

Also, with the collapse in demand for oil, storage capacity has filled up at high speed around the world, to the point where it is currently almost 90% saturated. In addition to the traditional storage tanks, oil pipelines, tank cars and oil tankers are currently used as oil storage tanks. Thousands of ships loaded with crude oil are immobilized in all the oceans and seas over the world.

Never since the first oil wells were drilled in the middle of the 19th century (it was in Titusville, Pennsylvania – USA), the world had not faced such a surplus of crude oil, and suddenly we don’t know what to do with it yet! So, as long as it is not sufficiently destocked, the surplus will always persist on the markets and this will not be likely to push up the prices of the barrel in the immediate future. But despite this spectacular announcement of a reduction of 9.7 Mb/d, the oil markets remain timid ; and this Friday, April 17th, a barrel of Brent flickers between 27 and 29 dollars. Some estimates show a reduction in the consumption of black gold of between 25 and 30%, or 25 to 30 Mb/d to significantly raise the price of a barrel. Never seen ! The situation is hardly bright for Saudi Arabia (leader of the oil producing countries), since in 2020, a budget deficit estimated at $ 50 billion is expected, which will be financed up to 40% by debt issues ; oil will not be enough to make up for the rest.

To further complicate matters, the rites of pilgrimages to Mecca and Medina (Umrah and Hajj) who are after oil the second provider of budgetary revenues for the Kingdom are cancelled this year due to covid-19 (it is incidentally the first time this has happened in the history of Islam). The price sought by the Wahhabi monarchy to balance its budget is closer to $ 85 per barrel, while other OPEC+ members expect a price of $ 65 to $ 70 per barrel. This hypothesis is not easy to reach at the moment and to think of getting there, the challenge would be to widen, at least temporarily, this alliance called OPEC+ to include producing countries like Canada, Brazil, Norway, the United Kingdom, Egypt, and perhaps the United States (a requirement of Russia) and ask everyone to make an effort to reduce their production. In any case, the situation is cascading, and everything seems on the verge of collapse : economy, society and worse, it is to be feared that this situation will generate socio-political unrest in certain countries. Not being of a pessimistic nature, I pray and would like to make a mistake in my analysis but the situation both from the health point of view and from the economic one is very worrying, and whatever happens, in fine, the consequences of Covid-19 will be very deep and painful. May God forbid !

1. How do countries and companies investing in oil infrastructure navigate the economics of such multi-billion projects when the oil price is so low ?

Eng. Mahaman Laouan Gaya : As you can see, since the onset of the coronavirus pandemic, the oil industry has been going through difficult times. World demand has dropped considerably, crude prices have collapsed by almost 55% since the beginning of the year, bringing Brent crude of the North Sea to 23 dollars on March 30th; unheard of since 2003. But the very short-term consequences could be very disastrous, because unlike the 2014 crisis, this is the first time that world demand for oil has contracted so much. Otherwise, the drop in consumption and the weak dynamism of oil on the markets will lead to low revenues for companies and even for producing countries. In other words, the oil companies, big and small, will therefore do everything to “survive”, and no longer prosper ; which would result in a significant drop in investment this year.
Taking the case of certain African producing countries, where the cost of producing a barrel is estimated between 20 and 30 dollars and that today oil prices, in an uncertain perspective, hover around 30 dollars; so we agree that there is no reason for a private company to engage in costly and unprofitable investments at this time. The urgency at the moment is the preservation of their capital and the many investment projects will unfortunately be essentially “sacrificed”. The pressure that the oil companies will face on their profits will force them to delay the start of all their projects and even to cancel certain contracts. It appears that more than half of the major projects (on-shore and off-shore oil projects, refineries, liquefied petroleum gas units, etc…) which were to be launched in 2020 could be delayed, if not purely and simply cancelled. There are, for example, around the world, twenty-eight (28) FPSO units under construction. It should be remembered, a FPSO (Floating Production Storage and Off-loading) is a floating unit (particularly efficient) for the production, processing, storage and unloading of oil and gas produced at sea. Fifteen (15) FPSO units are under development in China, seven (7) in South Korea and Singapore, while the rest is shared between other regions of the world. If the current situation continues, the delivery times for these juggernauts for the start of production on several global projects could be reduced to nine (9) or even twelve (12) months. Knowing that to produce a unit of FPSO, it takes an average of thirty-six (36) months, the appearance of the coronavirus could extend the completion of a construction project to forty-eight (48) months, or four (4) ) years. The large companies, which in addition are the largest investors, would therefore find themselves in an untenable situation. In addition, the reductions in capital spending recently announced by nine (9) major oil companies, including Saudi Aramco, Exxon Mobil and Royal Dutch Shell, would amount to $ 38 billion, a decrease of 22% compared to their initial spending plans of $ 175 billion. The super-majors BP, Exxon Mobil, Royal Dutch Shell and French Total have all announced drastic plans to save money and cut investment in recent days. In Africa, the situation is hardly bright, since in the face of this double shock from the collapse of oil prices and the coronavirus pandemic, the upstream of the African oil sector should reduce its investment expenditure by approximately 33% this year, according to a study by market analyst Wood Mackenzie. The petroleum industry being very capital intensive and presenting very many risks, no African country can commit its budgetary receipts in this “adventure”. These risks have always been assumed by companies that invest through contracts (Production Sharing Contract or Concession Contract). The majors, on which Africa depends, have announced significant reductions in investment spending (CAPEX) by 20 to 30%. Several projects in Algeria, Angola, Egypt, Mozambique, Nigeria and Senegal are expected to be delayed. Libya already plunged into a political and security crisis should also suffer from this decline, but also Chad Congo-Brazzaville, Equatorial Guinea, Ghana, South Africa, South Sudan, and Sudan, all of which have oil industry investment projects in 2020.M. GAYA MAHAMAN LAOUANABUJA – NIGERIA. (Outlook Media).