Explainer: Why Nigeria can’t jubilate over rising oil prices

In a normal circumstances, Nigeria, as a big player in the international oil market, should have exploited the rising oil prices in the global market to generate more revenue and reduce pressure on the Naira. Daily Trust reported recently that Nigeria’s premium oil grade, Bonny Light, rose to $116 per barrel, from $112 recorded previously. […]

In a normal circumstances, Nigeria, as a big player in the international oil market, should have exploited the rising oil prices in the global market to generate more revenue and reduce pressure on the Naira.

Daily Trust reported recently that Nigeria’s premium oil grade, Bonny Light, rose to $116 per barrel, from $112 recorded previously. The price of crude oil now at the international market is the highest ever since 2014.

The ongoing war between Russia and Ukraine has distorted supply, and  strong global demand are some of the reasons for the surge in crude prices.

The rise in oil price means that the country now has a surplus of $54 for each barrel of crude produced as $62 per barrel is the benchmark price for oil in the 2022 budget, with a production base of 1.8 barrels per day.

However, the country cannot jubilate over the high oil prices due to some reasons, among them its inability to refine crude locally.

 Background

A breakdown of crude oil prices by Daily Trust from the return of democracy in 1999 till date shows that prices have fluctuated between $17 per barrel to $147 per barrel.

In 1999 to 2007, during the tenure of President Olusegun Obasanjo, the lowest crude oil price recorded was $17 per barrel while the highest was $72.5 per barrel.

Production then averaged two million barrels/day, with a height of 2.7mbpd around 2015.

Fast-track to late President Umaru Musa Yar’Adua’s tenure which was described as the era of oil boom, when price reached an all-time high of $147/barrel and lowest of $31/barrel. From 2007 to 2010, oil production also averaged 2.2mbpd.

During President Goodluck Jonathan’s tenure, which lasted from 2010 through 2015, average oil price was lowest at $52 in 2015 and highest at $111.63 in 2012, while production averaged 2.5mbpd.

Under the current administration of President Muhammadu Buhari, oil has averaged $61 per barrel so far. The lowest price of crude oil in this current administration was $41 per barrel in 2020 and the highest $116 per barrel. 

This means that for the first time since 2014, oil prices have crossed $100 since the commencement of the Russian attacks on Ukraine – for the past two months.

Ordinarily, with a budget benchmark of $62, Nigeria should have been saving about $38 per barrel and cashing out big time with foreign reserves, and the Excess Crude Account also appreciating. However, the country is grieving rather than rejoicing.

Why is Nigeria not rejoicing?

Although Nigeria is Africa’s biggest crude oil producer, the country is not reaping the dividends due to its inability to locally refine crude oil for domestic consumption.

It is also not benefitting from the rise in oil prices because it is not producing enough oil to take advantage of the high prices. Since 2015, Nigeria has hardly reached 2mbpd as production has always hovered between 1mbpd and 1.8mbpd. In fact, oil production figures currently are around 1.5mbpd although the budget is based on a production of 1.88mbpd.

According to the NNPC’s financial report for August 2021 (its latest), the share of production from June 2020 to July 2021 was a mere 28 per cent of the total 682.55 million barrels, which translates to 129,981,717 barrels for the 12 months. This is in variance with what the country used to get, about 40 per cent share when production levels were close to one billion barrels a year.

This is further compounded by the fact that the international market will remain very volatile and unpredictable in the coming months, meaning that oil exporting countries, including Nigeria, need to redouble their efforts in benefiting from the price surge.

Russia is said to be the third-largest producer of crude oil in the world after the United States and Saudi Arabia. The supply of crude oil from the transcontinental country goes across the world, particularly in Europe and Asia which underscores the relevance of the country’s oil to the world.

For instance, if the sanction by the EU on Russia takes full effect, it may result in major disruption in the world and will raise the price of oil further because of the huge volume of crude exported from Russia, if slashed, will automatically translate to high prices.

The resultant effect as it is being witnessed is that the market might continue to record increased instability as Nigeria will not be able to meet its quota caused by surging pipeline vandalism, oil theft and illegal refining in the oil producing states.

Similarly, the suspension of the implementation of the Petroleum Industry Act for 18 months by the federal government to pay subsidies is another huge challenge. Due to that pronouncement by the federal government, many oil and gas companies have not been investing much, while others are divesting. Already Royal Dutch Shell announced its plan to shift its onshore Nigerian oil assets in order to move to cleaner energy.

Also, Seplat Energy recently announced its plan to buy Mobil Nigeria’s entire oil assets, including its entire shallow water assets in the Niger Delta region.

Another critical factor hindering Nigeria from benefiting from global oil prices is the fact that the country produces crude oil but does not refine. Therefore, Nigeria while it imports refined petroleum, the landing price of the commodity (price before subsidy inclusion) is subject to prices of crude oil at the international market.

In a layman’s language, Nigeria exports crude oil and benefits from high crude prices, but since the country does not refine its own crude oil for local consumption, it has to import refined crude oil and it has to import petroleum at international market price inclusive of other costs of refining, costs which collectively become the landing price.

So, another obstacle to enjoying the gains from crude price increase in the international market is Nigeria’s subsidy regime.

The current subsidy regime operates in a manner whereby it augments the landing cost of petroleum by fixing the cost of fuel below international market prices and paying the difference.

The consequence is already glaring as the Nigerian National Petroleum Company Ltd (NNPC) recorded zero remittance in the first quarter of 2022.

Zero remittance from NNPC in Q1 2022

Meanwhile, in the three months under review, NNPC contributed zero amount to the federation account in the first quarter of 2022, with under-recovery being the excuse for non-remittance.

The company, at its monthly presentation at the last FAAC meeting, said it could not remit any revenue generated into the federation account as that was used to pay for fuel subsidies.

From January to March 2022, NNPC has expended a total of N675.93 billion on fuel subsidy payments.

Subsidy payment may lead to more borrowing – Expert

Reacting to the current surge in oil prices, Senior Economist with SPM Professionals, Mr. Paul Alaje, told Daily Trust that huge subsidy payment may no longer be sustained as it will pile up the country’s debt profile which is approaching N40 trillion.

He said already, the World Bank has cautioned Nigeria on subsidy payment, noting that it may be too expensive to maintain in the long run as the country already earmarked N4 trillion which was approved by the National Assembly for new borrowings to pay subsidy.”

He said the higher the price of crude oil at the international market, the more effect it would have on prices at the local market, noting that sustaining subsidies amid rising oil prices may lead to increased financial burdens for the country’s loan-sustained budget.

On the solutions, he said, “The federal government needs to reconsider the suspension of the PIA as it provides an avenue for huge investments and contributing meaningfully to Gross Domestic Product.”