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Tuesday, January 18, 2022

Nigerian banks at risk due to debts by independent oil producers

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The global oil crisis, which has caused a historic crash in crude oil prices, is currently affecting Nigeria’s indigenous crude oil-producing firms. This unfortunate situation is also believed to pose a serious threat to Nigerian banks.

What we know: A monitored report from Bloomberg suggests that these independent oil producing firms, which pump some 400,000 barrels of crude oil per day (about a fifth of the country’s crude oil output), risk causing some liquidity crisis among some of the local banks that finance them.

See the oil firms: 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.

(READ MORE: Nigeria’s bonny light crude price falls below Brent crude, WTI)

Why is this happening? 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 barrel yesterday, 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.

Banking crisis imminent over debt by independent oil producers

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.

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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.”

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(READ MORE: Nigerian crude producers smashed by low crude oil prices)

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.

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