2016 budget under threat as oil price nears production cost

The current dip in oil prices will significantly reduce the Federal Government’s take from the profits of oil and gas companies this year, raising further questions about the viability of the 2016 budget document.

Oil prices at less than $28 per barrel, make production unprofitable for many smaller Nigerian companies that pump at a cost of $30 per barrel and incur extra security costs to protect installations, analysts say.

Oil majors, such as Shell and Exxon Mobil, with larger economies of scale, pump at lower cost of about $20 for a barrel.

“Low oil prices will continue to prove a challenge for the Nigerian economy in 2016 even as the authorities have rightly budgeted relatively conservatively for oil,” Razia Khan, Chief Economist Africa, at Standard Chartered Bank, London, said in response to questions.

Oil accounts for two-thirds of the Federal Government’s revenue and about 90 percent of its foreign currency earnings.

Indigenous producers, including Seplat Petroleum Development Co., Neconde Energy Ltd., Conoil Producing Ltd. and First Hydrocarbon Ltd., account for about 20 percent of Nigeria’s production of 2.04 million barrels per day, with international oil companies making up the rest.

Petroleum Profits Taxes (PPT) generated by Nigeria’s Federal Inland Revenue Service (FIRS) fell by 55 percent to N1.09 trillion in 2015 from N2.45 trillion collected in 2014 data from the tax agency shows.

The 2016 budget forecasts a further slide in oil income to N820 billion ($4.1 billion).

West Texas Intermediate for February delivery fell as low as $28.36 a barrel on the New York Mercantile Exchange on Monday, the least in intraday trade since October 2003 while Nigeria’s 2016 budget is based on an oil price of $38 per barrel.

The International Monetary Fund projects Nigerian growth at 4.3 percent this year, 250 basis points below a ten year average of about 6.8 percent per annum.

With production cost of crude oil hovering at $25 per barrel and oil prices projected to trade below $20 per barrel by Standard Chartered, companies may cut production to avoid operating at a loss, leading to a lack of significant profit taxes to the Nigerian treasury in 2016.

Cyprian Nwuya a former Chairman, Institute of Chartered Accountants of Nigeria (ICAN) Lagos Mainland District, and partner at Agochukwu Okpalaoka & Co, an audit and tax consulting firm, says the fall in oil prices will significantly affect the petroleum profit tax for 2016.

“Since petroleum profit is based of the number of barrels exported, a dip in oil prices will reduce earnings of government and may even see oil and gas companies operating at a loss,” Nwuya said.

The Federal Government, through the Federal Inland Revenue Service (FIRS) charges up to 85 percent of the assessable oil profits as taxes.

Capital allowances at predetermined rates can be claimed by oil companies on qualifying expenses including plant, drilling and building expenditures.

Nigeria’s 2016 budget proposes to spend N6.07 trillion in total, with N2.64 trillion allocated for recurrent non-debt expenditure, N1.84 trillion for capital expenditure, and N1.47 trillion on debt service.

The budget has an embedded deficit of N2.2 trillion.

Meanwhile, the potential return of Iranian oil exports threatens to displace barrels from Nigeria that plugged supply gaps to countries like South Africa when sanctions were imposed on OPEC’s fifth-biggest producer.

Buying 51 million barrels of oil in 2014, South Africa was the biggest African importer of Nigerian crude.

However, before sanctions were imposed in 2012, South Africa purchased nearly 100,000 bpd of Iranian oil a day.

“The re-emergence of Iranian crude oil provides options for those willing to buy from Iran,” Avhapfani Tshifularo, executive director of the South African Petroleum Industry Association, told Bloomberg. “Iranian imports are likely to displace the Nigerian and Saudi Arabian crudes, since they seem to have filled the gap since South Africa stopped importing Iranian crude oil.”

PATRICK ATUANYA & JOSEPHINE OKOJIE