Foreign exchange losses cost NNPC N124bn in two years

The worsening fiscal crisis facing the Nigerian government has put the spotlight on the state-owned oil company as new data showed the Nigerian National Petroleum Company Limited (NNPC) incurred an exchange loss of N124 billion in two years.

In the past, Nigeria’s sprawling oil sector offered a steady pipeline of foreign exchange earnings. There were big-ticket deals, and the businesses earned dollars, which meant investors did not have to bother too much about currency devaluation. Not anymore.

BusinessDay’s finding showed that NNPC suffered an exchange loss of N81.2 billion in 2021, up from N42.8 billion in 2020.

“The exchange loss occurred because of translation of foreign accounts payable transactions for domestic crude liftings during the year,” NNPC said. “Exchange loss from pre-export financing was transferred from Nigerian Petroleum Development Company (NPDC) to the corporation.”

Etulan Adu, an oil and gas production engineer, said the instability of the naira against the dollar could trigger more losses for the NNPC.

“The loss is because of exchange rate instability and an unstable economy that is prone to external shocks,” he said. “If our refineries were functional, there would be no need for these domestic crude lifting licences to foreign and local companies.”

With its transition to a commercial entity, other experts say there are growing concerns that the NNPC may battle old problems as it seeks to raise capital from financial institutions to fund projects and tackle funding shortfalls with joint ventures.

“The new NNPC Ltd is tied with old woes; investors who should bring FX earnings are turning to countries with clearer ease of doing business environment,” said Kelvin Atafiri, who runs Cavazanni Human Capital Limited, an investment firm exposed to the oil and gas sector.

Foreign investment into Nigeria’s oil and gas sector slumped 82 percent to a new low of $1.93 million in the second quarter of 2022, according to data from the National Bureau of Statistics.

BusinessDay’s findings also showed that NNPC has failed to make remittances into the federation account for the seventh month in a row on the back of huge subsidy payments.

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“Upstream oil and gas businesses are dollar-denominated because of their huge capital outlays and large intraday cash flows. Nigeria’s foreign exchange crises will always take a toll on every stakeholder in the energy business,” Atafiri said.

Nigeria’s foreign exchange risks are well documented and hardly new. In 2016, several investors were sent packing due to dollar shortages that saw the naira lose more than a third of its value after the dust settled.

This time is unique, however. Oil revenues have tanked despite high oil prices, with Nigeria missing out on the gains other oil peers are enjoying because it is exporting below capacity due to oil theft and declining investment.

The impact has been telling on the naira, which has fallen to the lowest ever in the parallel market, trading at N760 per dollar on Oct. 26, around 70 percent weaker than the less accessible official rate of N434.78 per dollar. That has left the gap between both rates at the highest since 2016.

Weak economic growth also leaves little to cheer about. Although the country’s growth rate has crossed 3 percent this year after six straight years of economic growth lower than population growth, there are signs of an economy still reeling from the impact of two recessions.