NIGERIA risks losing outright gains from rising oil price of above $100 dollars per barrel since it has failed to embrace reforms that could make it reap such gains.
Nigeria’s highly priced brent crude presently sells for $123.06 per barrel, a price which could have impacted on Nigeria’s economy postively and reduced borrowing.
A large chunk of Nigeria’s income and its Federating budgets are dependent on proceeds from oil resources. Furthermore, sharing of allocations by the Federation Account Allocation Committee (FAAC) to the Federal, states and local governments is derived from proceeds from Nigeria’s oil earnings, which have risen from the effects of the Russia-Ukraine war, but are having no positive impact on the country’s fortune because of oil imports.
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Poor economic choices by the government and delay in the implementation of the Petroleum Industry Act (PIA) have threatened Nigeria’s federation allocation and foreign exchange inflows.
As a result of poor inflow of oil remittances, the federal government had borrowed over N10 trillion from the Central Bank of Nigeria (CBN), a step which intensified inflationary pressures on the overall economy.
To compound the concerns, Nigeria is currently not meeting the Organisation of Petroleum Exporting Countries (OPEC) allocated oil quota of 1.7 million barrels per day, as oil theft and pipeline vandalism have made it produce a lesser number of barrels.
OPEC’s data showed that Nigeria’s oil production has slumped to an average of 1.35m barrels per day. Although it hit roughly 1.4m bpd in May, according to secondary sources, Nigeria still has a deficit of 350,000 barrels per day to contend with.
How does this hurt the economy?
On the back of dwindling revenue resources following poor revenue management of oil resources, the government has resorted to borrowing.
According to the latest figures from the National Bureau of Statistics (NBS), Nigeria’s debt figure has risen to N41.6trn. The government has to borrow to meet most of its capital and recurrent expenditure, including payment of salaries.
The nation’s current foreign exchange crisis arose largely from plummeted oil income, which is a dollar-related business and contributes largest to Nigeria’s foreign exchange earnings.
Oil majors look away from investing in Nigeria
Nigeria has been witnessing gradual divestment by key international oil companies, whose investments are worth billions of dollars.
Shell, ExxonMobil, Chevron, and Total have divested their operations to other regions, despite Nigeria being Africa’s biggest producer of oil in the region.
The Chief Executive Officer of the Nigerian National Petroleum Company Limited (NNPC), Chief Mele Kyari had, at the ongoing International Energy Summit (NIES 2022), said oil majors were leaving Nigeria and shifting their portfolios to where they could add value to their journey towards carbon net-zero commitment.
Kyari noted that major oil companies were leaving Nigeria not primarily because there were no opportunities in the country, but because of the push from fossil fuels in the last 10 years.
However, analysts say there are several other critical issues that have also contributed hugely to the divestment.
The ICIR had reported that by November 2020, the NNPC had paid $3.1 billion to five international oil companies (IOCs) for cash-call obligations, but the oil company still owed the IOCs a $1.5bn debt.
By last year, the NNPC owed Shell Petroleum Development Company (SPDC) an outstanding balance of $917m, while Total E&P Nigeria Limited and Nigerian Agip Oil Company were owed $252m and $370m respectively.
Lack of refineries forces government to import PMS
The Nigerian government has settled for importation since the state-owned refineries – Port Harcourt, Kaduna and Warri refineries – became redundant.
The country is known to have consequently been losing billions of dollars from crude oil swap deals.
According to the Nigerian Extractive International Transparency Initiative (NEITI) 2021 reports, Nigeria lost a whopping N2.1trn as a result of crude oil production deferment in one year.
The NNPC uses direct sales and direct purchase agreements for its fuel importation. This method has made it the sole importer of fuel, crowding out other importers who had complained of inaccessibility of the dollar to engage in the importation.
Borrowing over N4trn to pay for PMS subsidy
For the NNPC, anything above $70 – $80 per barrel of crude will create major distortions in its projections and add more difficulties to the company,” as Kyari said during a February summit on oil in Abuja.
He had argued that because of the subsidy payments, rise in global oil price creates problems for Nigeria’s oil sector because of delayed reforms.
The NNPC helmsman is concerned that the country spends N4trn to sustain subsidy, and lamented that oil prices had started exiting the comfort zone set by the NNPC and becoming a burden.
Industry analysts say a government that complained about low oil prices when it came into power in 2015 to be complaining now about rising oil prices shows poor fiscal reforms in the sector.
“The current rise in global oil price is not showing in government’s revenue. This is the time to build up reserves for the rainy day. In fact, the rainy day is here, but we are being beaten by heavy rains,” a professor of Energy Economics at the University of Ibadan, Adeola Adenikinju, told The ICIR.
Nigeria’s Minister of Finance, Zainab Ahmed, recently attempted to explain the paradox between rising oil price and its negligible impact on the economy.
According to Ahmed, rising oil price situation was having little impact because of corresponding increase in expenditures.
“The high price of oil means that we would be able to earn more revenue, but we also have the challenge of having to buy petroleum products for use in-country, because we do not have functional refineries. So that eats into the revenues we would have otherwise realised,” the minister said.
Recently, the CBN Governor, Godwin Emefiele, said the federal government currently spends about 30 per cent of its dollar earnings on the importation of petroleum products, putting pressure on the local currency.
“By the time the Dangote refinery begins operation, it would be a major FX saving source for Nigeria. Right now, the overall forex we spend on imported items, the importation of petroleum products consumes close to 30 per cent,” he said.
Harrison Edeh is a journalist with the International Centre for Investigative Reporting, always determined to drive advocacy for good governance through holding public officials and businesses accountable.
We all know and understand the devestating effect of not meeting crude oil sales targets on Nigeria’s economy. Why is NNPC and their appointed traders not making a direct sales drive in to the major mid European oil refineries? A competent sales team of 10 professionals would be welcomed in the Baltic States and other east Europe refiners.