The U.S. is reducing its oil import including from Nigeria.
There are indications that Nigeria may not be able to finance its 2013 budget given the declining demand of its crude oil by major buyers such as the United States and the glaring fact that the nation will have to look at other light oil importers to supply its oil.
A report by Financial Derivatives Company, a diversified financial services institution, states that at present, the total crude oil imports into the U.S. (which accounted for 30 per cent and 33 per cent of Nigerian crude oil exports in 2010 and 2011 respectively with oil receipts ranging from $19bn, $31bn and $34bn in 2009, 2010 and 2011 respectively) are declining and those from Nigeria are declining at an even steeper rate as the U.S. is expected to become the world’s top oil producer by 2017 and to be possibly self-sufficient in its energy needs by 2035.
The firm said the implications of these developments are very crucial for Nigeria whose budget revenue depends on oil.
“A drastic fall in crude oil exports will significantly affect the country’s fiscal policy as oil receipts determine the country’s expenditure plans. In the simplest terms, the country will not be able to finance its budget.
“It will also hamper the development of the newly established Sovereign Wealth Fund and will lead to the rapid depletion of the recovering Excess Crude Account as the country looks towards meeting its budget needs without raising its high debt profile to an alarming level,” the report stated.
According to the report, the supply and demand dynamics of the oil market are changing and on the supply side, countries like the U.S. and Libya are increasing their levels of oil production while oil is being discovered in more countries. Demand will be based on the type and grade of oil needed. An example of the changes in demand is the U.S. which is producing its own light oil, resulting in less demand for Nigeria’s oil which is light.
“There are reports that China has already surpassed the U.S. as top importer of Nigerian oil. However, the point to consider is whether China will completely fill the gap the U.S. leaves when it completely halts its imports of Nigeria’s oil.
“China has an energy-intensive growth model with its manufacturing industry driving the country’s growth. As China reduced its imports from Iran in 2012, it has diversified its import sources to other countries including Nigeria to reduce the risk of disruptions. This indicates that China might not be able to fill the gap that will exist if the U.S stops importing oil from Nigeria as it looks to moderate its demand among several sources,” the report stated.
It stated that consequently, Nigeria will have to look at other light oil importers like India, the third single-largest importer of Nigerian oil, to increase the level of their oil imports from Nigeria.
“In the unlikely situation that China picks up all the dropped barrels by the U.S., there is another challenge in the form of distance. It takes about 7000 more miles to reach China than it takes to reach the U.S. from the Nigerian ports.
“This long distance is associated with extra monetary and time costs. Oil companies in the Philippines stopped importing oil from Nigeria because of the far distance and the fact that the cost of importing from countries in the Middle East was relatively cheaper,” it stated.
The report stated that while there is the possibility that the distance will not be a big factor for China, if it is, Nigeria will become a last resort for oil importers when their demand cannot be met by countries located closer to them.
“All evidence shows that Nigeria’s future is uncertain as it is not exactly clear which countries will purchase Nigeria’s oil in the near future. China looks like the best option but the distance from Nigeria is a major disadvantage.
“This uncertainty throws a dagger in the plans of Nigeria’s Medium Term Expenditure Framework (MTEF) as well as the proposed 2013 budget. Clearly, action must be taken to ensure that country will meet its budget requirements,” the report said.
Since the end of the Cold War, the U.S., China and others have seen African oil as part of an effort to diversify away from too high a dependence on Middle East oil, according to an article by Chatham house, an independent policy institute based in London.
According to the article, which focused on Africa’s expanding energy landscape, over the last decade the growing demand from Asia, especially India and China, has also impacted on how African governments look at oil and gas export markets.
“The figures speak for themselves: the International Energy Agency projects that China will become the world’s largest net importer of oil by 2020, and China already receives an estimated one-third of its oil imports from Africa. Angola is the second largest supplier of imported oil to China after Saudi Arabia, and India imports some 12 per cent of its oil from Nigeria. Africans need jobs, but the oil and gas industry itself never employs enough,” the article stated.
The article suggested that the way out and the key is to use any oil funds to build up a competitive economy. It is also important to remember that 38 out of 54 African countries – over two thirds – are still net importers of oil, and so oil price volatility remains a major challenge.
Nigeria’s oil and gas industry has been undergoing major challenges, a major hurdle being the Petroleum Industry Bill that has been lingering for years.
According to President Goodluck Jonathan, the 2013 Budget is underpinned by the following parameters; Oil production of 2.53 million barrels per day, up from 2.48 million barrels per day for 2012, Benchmark oil price of US$75/barrel, an increase from the US$72/barrel approved in the 2012 Budget.
Based on these assumptions, the gross federally collectible revenue is projected at N10.84 trillion, of which the total revenue available for the Federal Government’s Budget is forecast at N3.89 trillion, representing an increase of about 9 per cent over the estimate for 2012.
An aggregate expenditure of N4.92 trillion is proposed for the main budget of the 2013 fiscal year, representing an increase of about 5 per cent over the N4.7 trillion appropriated for 2012. This is made up of N380.02 billion for Statutory Transfers, N591.76 billion for Debt Service, N2.41 trillion for Recurrent (Non-Debt) Expenditure and N1.54 trillion for Capital Expenditure.
Finance analysts said there are major risks if oil prices decline and /or production prices dip by about 10-20 per cent and 15-20 per cent respectively, as there remains no clear or precise funding plan or alternative for a major financing of a vital infrastructure road map and other proposed projects.
Support PREMIUM TIMES' journalism of integrity and credibility
Good journalism costs a lot of money. Yet only good journalism can ensure the possibility of a good society, an accountable democracy, and a transparent government.
For continued free access to the best investigative journalism in the country we ask you to consider making a modest support to this noble endeavour.
By contributing to PREMIUM TIMES, you are helping to sustain a journalism of relevance and ensuring it remains free and available to all.
TEXT AD: To advertise here . Call Willie +2347088095401...