Subsidy: Surging oil price raises fears of fresh economic crisis

BY EMEKA EJERE

Despite Nigeria’s position as a major crude oil exporter, the steep rise in crude oil price occasioned by the ongoing escalation between Russia and Ukraine will constitute more cost than benefit to the country.

The increasing crude oil price implies that the controversial subsidy payments in the country will rise when the computation for this month is done, since the pump price of petrol in Nigeria has a direct relationship with the international crude oil prices.

Despite being the sixth largest producer in OPEC, Nigeria imports almost 100 percent of its petroleum product needs, often swapping crude oil for products. The country should have been saving as much as $50 per barrel above what it sells now at $117 per barrel, but the reverse appears to be the case, as the cost of under-recovery continues to soar, wiping out whatever would have gained.

Already, some states are set to face fresh economic challenges as the Federal Allocation has dropped to a four-year low. In January, the Federation Accounts Allocation Committee (FAAC) shared the sum of N574.66bn to the federal government, states and local government councils. The amount shared in January is lower than the N699.82bn disbursed in December 2021.

According to a communiqué issued at the end of a virtual meeting of the FAAC for February 2022 released on Thursday (Feb 25), this fall in FAAC allocations followed the federal governments announcement of its plans to deduct N950bn for the payment of fuel subsidy from allocations due to states in 2022.
President Muhammadu Buhari recently asked the National Assembly to approve an additional N2.557 trillion budget for petrol subsidy in 2022.

On Wednesday, crude oil price continued its upswing as Brent, Nigeria’s benchmark crude, rose above $113 per barrel for the first time in eight years. This was as the Organisation of Petroleum Exporting Countries (OPEC) resolved to continue the addition of a measured volume of 400,000 barrels per day, agreed with its allies, OPEC+, in August last year.

The producers’ group, which decided on the quota for member countries for April, allocated Nigeria 1.735 million barrels per day as its production quota for next month. But it remains doubtful whether Nigeria would be able to meet its allocation for the month. Indeed, Nigeria and Iran opposed to increase the output to tame price hike, as the earlier approved in January.

Nigeria’s crude oil production has failed to improve with the country unable to meet its OPEC imposed quota for seven consecutive months to January 2022. Last month alone, the country recorded a deficit of over 300,000 barrels per day, even though the total quantity of oil it drilled for that month, roughly 1.4 million bpd, was its best in several months.
But speaking at the just concluded 5th Nigeria International Energy Summit (NIES) 2022 in Abuja, the Group Managing Director of NNPC, Mele Kyari, noted that the oil firm would increase Nigeria’s oil production.

We must clear the resources of today and sustain the transition through some form of resilience until we get to 2060, he said.
And the easiest way to clear the wealth of today so that we can have the resources that will keep us through this transition is to immediately increase domestic crude oil production. There is no other way to do it.
Experts fear that If this trend continues this way in another six months, Nigeria should be looking at a subsidy cost of about N5 trillion or more.

In January, the Nigerian National Petroleum Company (NNPC) Limited claimed it expended N210.38 billion on petrol subsidy. For the month, the oil company did not remit any money to the federation accounts – an action that may make the state governments unable to pay salaries.

It has also earmarked N242.5 billion (about N143.7 billion for January 2022 recovery and November spot arrears of N98.8 billion) to deduct from governments revenue in February.
On Thursday, state governors lambasted the NNPC Ltd for not remitting any funds at last months FAAC meeting. The chairman of the Nigeria Governors Forum (NGF) and Governor of Ekiti State, Kayode Fayemi, also wondered how the oil firm was bold enough to declare profit when it had not been meeting its obligations.

Fayemi, who spoke alongside other governors during the NGF session on natural resources at the Nigeria International Energy Summit 2022 in Abuja. said, When you look at the statistics, transparency is central to the challenge we face in the oil sector. On my way here, I was looking at the Natural Resources Governance Institute Report and Nigeria is not doing very well.

We ranked 40 out of 58 natural resource countries on the transparency index because we are still believed to run a largely opaque oil industry. And we see it ourselves.

The NNPC declares profit, yet it cannot meet its obligations. My simple knowledge of economics teaches me that it is only after youve met all the obligations that you then talk about making profits.

So if your obligation to the federal accounts has not been met, how can you then talk about profit-making?

The NNPC report to the FAAC in January 2022 showed that despite crude oil trading above $80 per barrel, the Corporation remitted just N20.1 billion.

According to the data presented to FAAC, gross revenue from oil and gas sales was N438.42 billion but this was depleted to N49.75 billion following deductions for petrol subsidy, product losses, pipelines maintenance and repairs cost amongst others.

The N49.75 billion was further depleted by N29.66 billion deduction for government priority projects, leaving just N20.1 billion for the Federation Account.

With rising price of crude oil, the import bill for petrol which is wholly imported by the federal government is expected to rise, leading to higher subsidy deduction by the NNPC.

Experts are worried that rather than benefiting optimally from the surging crude oil prices, the inherent distortions in the Nigerian economy may worsen and topple the fragile economic condition.

Chief Executive Officer, Centre for the Promotion of Private Enterprise, Dr. Muda Yusuf, said rather than a blessing, the rising global crude oil price is a penalty for the economy.

The former Director General of the Lagos Chamber of Commerce and Industry (LCCI), in an interview, said the soaring oil price should ordinarily be a blessing and good news for the country as an oil producing entity. This, according to him, is because such development will naturally translate to more foreign exchange and revenue earnings for the country; more profits for the oil companies operating in Nigeria and for other stakeholders in the oil sector.

He regretted that because the country’s oil sector has been grossly mismanaged, the obvious boom in the price of the commodity cannot be celebrated.

“The rising oil price cannot be celebrated by Nigeria because it penalizes the Nigerian economy and this is a paradox. The implication of this rise in oil price is that our import bill for petroleum products is going to go up; the subsidy payment on petrol is going to increase,” Yusuf warned.

If this trend continues this way in another six months, then Nigeria should be looking at a subsidy cost of about N5 trillion or more.

Analysts at Cowry Asset Management Limited, a leading investment house, said they were concerned that Nigeria would not optimally benefit from any ensuing rise in crude oil prices due to its suboptimal crude oil production.

“This would increase pressure on the external reserves as well as exchange rates as oil dollar revenues, its primary foreign currency earner, would struggle to meet higher cost of imported refined products in addition to other imports,” Cowry Asset stated.

However, President Muhammadu Buhari believes that the rising crude oil prices present a great opportunity for Nigeria, especially with the passage of the Petroleum Industry Act (PIA).

Represented at the NIES by Chief Timipre Sylva, Minister of State for Petroleum Resources, the President noted that there is no reason why Nigeria should not maximize the huge opportunity offered by the rising oil price.

He said: “Crude oil prices are on the rise again after turning negative in April 2020. It is a great opportunity for us as a country.”

With the PIA in place, there should be no excuses. The enabling investment environment which has been the bane of the industry has been taken care of by provisions in the PIA.