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Nigeria's leading finance and market intelligence news report.

Nigeria risks spending 63% of oil revenues on petrol subsidy in 2022

Nigeria could spend about 63 percent of its oil income next year paying petrol subsidy if it doesn’t end the practice before August 2022.

The government anticipates producing about 1.8 million barrels of oil daily and has projected to earn N3.16 trillion as revenue. It could however end up spending N2 trillion at the end of the 12-month deadline given by president Muhammadu Buhari to quit the practice as stipulated in the Petroleum Industry Act (PIA) which became law in August.

This effectively means that the Federal Government has quietly deferred implementation of the PIA till August 2022, a development that delays reforms in the downstream sector.

The PIA provides for a full deregulation of the downstream sector with the regulator empowered to apply a backward integration policy that encourages local refining.

Under the Act, the license to import shortfalls may be assigned to companies with active local refining licences or proven track records of international crude oil and petroleum products trading.

“Full deregulation will lay down an open market for pricing of petroleum products and put an end to fuel subsidy,” analysts at PwC said in their review of the PIA.

But capping the retail price of petrol will deter marketers from importing petrol. Oil marketers under the aegis of Major Oil Marketers Association of Nigeria (MOMAN) have called for the full deregulation of the downstream sector of the petroleum industry within six months.

Nigeria could pay a steep price for continuing to pay subsidy as analysts, including Goldman Sachs have raised their forecast for year-end Brent crude oil prices to $90 per barrel from $80 on the back of quicker demand recovery from the pandemic and Hurricane Ida’s impact on US production.

Failure to remove subsidy could see Nigeria pay over N2 trillon by August next year on petrol subsidies.

Read Also: More pain for Nigeria as petrol subsidy consumes N608bn

The Nigerian National Petroleum Corporation (NNPC) which is due to get a makeover within the next six months and become a commercial entity, could still remain the sole importer of refined PMS into the country as a capped retail petrol price lower than landing cost will erode the profit margins of marketers who want to import petrol.

Earlier this year, the NNPC said it has been spending about N120bn monthly on petrol subsidy. This is constraining its ability to fund the sharing of oil incomes among the various tiers of government. In the last four months, the corporation has not contributed money to the Federation Account and Allocation Committee (FAAC).

Sources close to NNPC SAY of the 26 cargoes of crude the NNPC offers for trade, 11 are encumbered and 15 are used for NNPC under-recovery. Nigeria swaps crude for petrol under the Direct Sales Direct Purchase agreement where the NNPC offers refiners in Europe crude oil in exchange for refined petroleum products.

The danger for Nigeria’s economy is that more of the crude cargoes are being diverted for the DSDP programme than are used to settle government obligations. This is why the government has been on a borrowing spree to augment fallen oil sales.

To worsen the situation, Nigeria’s oil production has been declining so much that the country cannot even meet the quote set by OPEC. According to the newly released OPEC oil market report, Nigeria’s oil production averaged 1.247 million barrels by day in September while its quota is set at 1.5millon barrels per day.

Factoring in exchange rate, global oil prices and shipping cost, petrol prices are estimated at N212- N234/ltr compared to the retail price of N162-N165/ltr the government has mandated it be sold.

Analysts have long made an economic case against fuel subsidy including the fact that it is denying the country value that could have accrued from higher oil prices and translated into better infrastructure and economic growth.

“The economic case for the removal of Nigeria’s fuel subsidy regime is mounting by the day and the present administration seems undecided on how to proceed,” Joe Nwakwue, former chairman of the Society of Petroleum Engineers (SPE), told BusinessDay.

However, the political case has been harder to make.

“The government is in the process of fully deregulating the downstream petroleum sector which will end subsidies and free up funds for national development, including investment in renewables which will be part of the energy mix that ultimately powers our economy,” said Timipre Sylva, minister of state for petroleum resources, at the recent Seplat Energy conference last Thursday.

At various times, Sylva and Mele Kyari, the NNPC GMD have called for the removal of subsidies providing sound reasons why it is an economic pain. In the end, the government backtracked due to political reasons, according to analysts.

The prospect for removal does not look promising a year to the general elections where the ruling party could face a bruising fight to hold on to power.

Data from presentations to Federation Account and Allocation Committee (FAAC) seen by BusinessDay indicated that subsidy cost rose from N143.29bn in June to N175.32bn in July but fell to N149.28bn in August.

This pattern of expenditure could worsen if analysts’ projections on oil prices come true. Crude oil prices have risen nearly 45 percent from January $54.77 to over $80 and analysts at Goldman Sachs are forecasting $90 per barrel price in 2021 while JP Morgan analysts are even more bullish at $100 per barrel.

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