Banking crisis imminent over debt by independent oil producers

The global decline the prices of crude has resulted in huge debts by independent oil producers risk which may cause liquidity crisis among local banks that finance them in the country.

Some of the indigenous oil firms that are going through this financial crisis include Shoreline, Aiteo Group, Eroton Exploration & Production Company, Seplat Petroleum Development Company, and others.

The independent oil producing firms account for about 90% of the $8 billion that are being owed to financial institutions, including local banks. While a portion of those loans were hedged at $50 per barrel, a greater percentage of them were not. This, thereby, raises the risk of default by the oil firms.

According to data from the Central Bank of Nigeria (CBN), about a third of loans by the Nigerian banks were given to oil firms, although some of their transactions are hedged.

The impact of the Coronavirus pandemic, coupled with the oil market crisis, has seen global crude oil prices crash far below the projected price for the year. While the Brent crude sold at slightly above $21 per at the weekend, Nigeria’s headline crude, Bonny Light, sold for slightly above $16 per barrel.

In fact, the Bonny Light was earlier sold at a hugely discounted price of $10 per barrel due to the supply glut in the market and the issue of storage crisis.

This will greatly affect the ability of the independent oil producers to meet up with their debt obligations to local banks, as they will need crude oil to sell between $35 and $40 per barrel in order to stay in business.

While commenting on the situation, the Chief Executive Officer of Shoreline Group, Kola Karim, said:

“Government needs to come up with the independents and the other oil producers, a financial rethink of the funding mechanics for the industry, if not we’ll see a total collapse which in turn will drag down the banks.”

Meanwhile, some analysts are of the opinion that if this low crude oil price persists for about 6 months, a full-blown crisis will be experienced in the banking sector. Already, Nigerian banks are said to be complaining about the N1.4 trillion debt they are owed. This is because the situation is making it difficult for them to meet regulatory cash reserve targets.