Despite oil price rally, the Nigerian government is not reaping much from its crude sales as the nation continues to buy refined crude at high prices due to the moribund state of domestic refineries.
Since oil price surged in recent months, analysts and Nigerian policy makers have received the news with mixed feelings and uncertainty.
Earlier in October, President Muhammadu Buhari presented the 2022 budget estimate to a joint session of the National Assembly.
The budget anticipates an exchange rate of N410.15 per dollar, a GDP growth rate of 4.2 per cent, and a 13 per cent inflation rate.
The president said the total federally distributable revenue is estimated at N12.72 trillion in 2022 while total revenue available to fund the 2022 budget is estimated at N10.13 trillion. This includes grants and aid of N63.4 billion, as well as the revenues of 63 Government-Owned Enterprises (GOEs).
Meanwhile, the proposed total expenditure for the year was put at N16.39 trillion with a crude oil benchmark price of $57 per barrel and daily oil production estimate of 1.88 million barrels (inclusive of condensates of 300,000 to 400,000 barrels per day).
Ordinarily, the surge in oil prices should help provide buffer for the government in the fiscal year. But in reality, the difference may not be very significant considering Nigeria’s oil consumption.
On September 28, Brent crude climbed 0.86 per cent to $80.22 a barrel, representing the highest surge since the last quarter of 2018. The global oil benchmark climbed a three-year high amid increasing demand for the commodity across the globe.
The prices climbed to multi-year highs shortly after a group of some of the world’s most powerful oil producers opted against a big supply boost, prompting analysts to conclude that crude prices could be poised to rally toward $100 a barrel.
In the first week of October, the Organisation of Petroleum Exporting Countries and non-OPEC partners, a group collectively referred to as OPEC+, said it would stick to its existing pact for a gradual increase in oil supply.
At the time, the international benchmark Brent crude futures had climbed to $81.74 a barrel, up more than 0.5 per cent for the session, while US West Texas Intermedfiate stood at $77.92, or roughly 0.4% higher.
Earlier in July, OPEC+ had agreed to raise output by 400,000 barrels a month until at least April 2022, ostensibly as a means to phase out 5.8 million barrels per day of existing output cuts.
The price rally comes against the backdrop of the recovery in global oil demand from the coronavirus pandemic amid rising prices of alternative energy sources. The United States, as well as India, another big oil consumer, both pushed for OPEC to consider more supply to ensure prices suit both producers and consumers.
A report by Reuters quoted analysts at Bank of America Global Research that the bank could bring forward its $100 per barrel oil price target if temperatures are colder than expected during the winter. The prospect could drive a surge in demand even higher and widen a supply deficit, the bank said.
There has equally been a rise in the price of natural gas. As the world economy reopens after lockdowns occasioned by the Covid-19 crisis, supply simply has not kept up with rising demands. In parts of Europe and Asia, power plants and factories are increasingly turning to a relatively cheaper fuel source for electricity, crude oil.
High prices make little difference for Nigeria
But speaking on the oil price rally last week, Zainab Ahmed, Nigeria’s Minister of Finance said that the nation earns little from oil price surge due to corresponding increase in expenditures.
She explained: “The high price of oil means that we would be able to earn more revenue. At $85 per barrel is way above the $40 per barrel we have on our 2021 fiscal projections.”
“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 told Bloomberg.
Aside the challenge of poor earnings from oil sales, Nigeria is equally recording shortfall in crude oil production.
In August, the nation’s production fell 6.68 per cent to 1.239 million barrels per day from 1.323mb/d in July, according to the Organisation of Petroleum Exporting Countries (OPEC). The oil production figure however excludes condensate which Nigeria is not under obligation to report to OPEC.
Earlier, at a meeting between OPEC and its allies led by Russia, the oil cartel had agreed to raise global oil supply amid surge in demand and ease of lockdowns across the world.
Nigeria has four operating oil refineries in Warri, PortHarcourt and Kaduna. But due to poor maintenance, the plants are in a state of partial shutdowns.
As part of plans to boost its earnings from oil, the Nigerian government is working with billionaire businessman Aliko Dangote to hasten the completion of his refinery in a Lagos surburb. Built with an investment of nearly $35.38 billion, the Dangote Refinery project covers an area of 250,000 hectares and is expected to be completed by 2022.
Once in full operation, the refinery is expected to produce gasoline and other petrochemical products such as polyethylene and polypropylene.
Speaking on what the refinery could do to Nigeria’s foreign exchange earnings recently, the governor of the Central Bank of Nigeria, Godwin Emefiele, said the federal government currently spent about 40 percent of its dollar earnings on the importation of petroleum products, putting pressure on the local unit.
“By the time the Dangote Refinery begins operation, it would be a major FX saving source for Nigeria,” he said.
“Right now, the overall forex we spend on imported items, the importation of petroleum products consumes close to 30 percent (by the time you add diesel, aviation fuel, petrol and the rest of that).
“The Dangote Refinery has the capacity to produce 650,000 barrels per day. There is a domestic component that is about 455,000 barrels. Even if the 455,000 is what is sold to Dangote in naira alone, it is going to be major forex saving for Nigeria.
“If you look at the cost of freight alone, it is a major saving for Nigeria. That is because if we have to go to Europe or other parts of the world to bring in petroleum products where we pay heavily in freight and in stocking those products in the high sea before we offload them, Nigerians would benefit a lot from the Dangote Refinery.”
Mr Emefiele added that the project is one of Nigeria’s backward integration programmes, and the government was “very proud of it.”
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