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Oil rally slows possibility of urgent economic reforms in Nigeria

Oil rally slows possibility of urgent economic reforms in Nigeria

Nigeria’s economy managers have cause to worry as Brent crude price per barrel hovers around the $60 dollar mark.

Benchmark Brent crude price has rallied from its 02 January low of $54.91 to $60.90 as at 17 January, 8:20 local time and down to $60.50 at 17:00. It ended at $62.70 on 18 January. It has on average hovered around $60 mark since 10 January, according to data obtained from NASDAQ, an American stock market.

Benchmark crude oil price for Nigeria’s 2019 budget is $60 per barrel. An oil price rally would have signalled good tidings for Africa’s biggest crude producer but this will be delusory because higher oil prices mean Nigeria is losing time to ditch its bloated subsidy regime, which has created a black hole in the countries public finances and requires low oil prices to make government muster the necessary political will to design and implement urgent pro-market policies in the downstream oil and gas sector, such as deregulating it.

Lower oil prices often force the Nigerian government to undertake painful necessary reforms.

This scenario played out in 2016 when oil prices fell below $40 per barrel in the first three months of that year. Low oil prices cut revenue in half. The situation was further worsened by the destruction of oil and gas infrastructure by Niger Delta militants whose campaign shut in a quarter of Nigeria’s oil production.

Nigeria has budgeted $1 billion to sustain the subsidy regime in the 2019 budget.

“Higher crude oil price will affect the price of petroleum products in the international market, which means Nigeria will pay more to subsidise the import of petrol” Diran Fawibe, chief executive officer of International Energy Servies Limited said on a phone interview.

Oil subsidy or under recovery as the Nigerian National Petroleum Corporation (NNPC) prefers to call it, has been rising astronomically within the last 24 months. A recent BusinessDay investigation found that between 2006 – 2015, the NNPC claimed N170.60 billion as under-recoveries while it claimed N632.20 billion in twos alone (2017 and 2018), a 217 percent jump.

“Until we are self-sufficient in refining crude oil, we will continue to have the subsidy. A subsidy is simply the difference between the landing cost and pump price. Dangote refinery may change the narrative when it comes on stream” Fawibe said.

In the past, Organisation of Petroleum Exporting Countries (OPEC) cuts were effective to rein excess production and shore up oil prices. But the influence of OPEC as a cartel is waning and now needs non-members buy-in to exert influence. The threat of United States shale production could also derail any cuts meant to raise oil prices.

“The rise and fall in oil prices last year points to the volatility inherent in the oil and gas industry. So, the rise in oil price should not distract the government from paying attention to the necessary economic reforms needed to steer Nigeria away from over-dependence on oil” Adeoye Adefulu, an energy partner at Lagos-based Odujinrin and Adefulu law practice.

“In addition, to have sustainable growth in the downstream oil and gas sector, the subsidy regime needs to be scrapped because it funds consumption, with finances that could be used to develop social infrastructure and services such as education and hospitals” Adefulu added.

Analysts cite the wasteful subsidies on petrol as being responsible for value destruction in the downstream sector, locking out foreign participation because a price pet makes supply uncompetitive.