Home Uncategorized ANALYSIS – Nigeria splurges on oil price as petrol subsidies rise

ANALYSIS – Nigeria splurges on oil price as petrol subsidies rise

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Julia Payne

LONDON, September 29 (Reuters)Nigeria has failed to take advantage of the boom in oil prices that helped other exporters hedge against the effects of inflation, and millions more Nigerians are now facing poverty.

Figures from Nigeria’s state-owned oil company NNPC show it contributed nothing to the coffers in the first eight months of 2022, despite crude oil prices averaging $94 a barrel this year, up 42%. than last year.

The crux of Nigeria’s problem is that despite being the largest producer of oil and gas in Africa, the country is almost entirely dependent on imports to meet its gasoline needs.

It then subsidizes the cost for consumers, which has created a disparity between the price at the gas station and what people pay to fill their tanks in neighboring countries like Benin.

This has led to rampant smuggling, which in turn has increased Nigeria’s expensive petrol imports and destroyed the profits it should have made from crude oil exports, as it ends up buying far more than it needs.

“Hundreds of thousands of people (in Benin) organize their survival around this traffic,” Boris Ouenou, a Beninese economist, said of Nigerian gasoline smuggling.

“A liter of Nigerian petrol worth $0.45 (per litre) can be transferred to Benin for $0.70,” he added.

Estimates of the amount of gasoline smuggled abroad vary, with some independent researchers putting it at about 15 million liters per day, while the NNPC’s own estimate is 42 million.

The Nigerian National Petroleum Co (NNPC) said this month that petrol smuggling was distorting supplies, adding that it was working to combat it.

NNPC’s Federal Account Distribution (FAAC) shows that it transferred just over $3 billion from oil and gas sales to Nigeria’s federal account in 2020, dropping to about $1.4 billion in 2021 and zero in 2022.

Nigeria’s oil output has fallen to between 1-1.2 million bpd from pre-pandemic levels of 1.8 million bpd after decades of underinvestment in extractive assets, while pipeline theft is at its highest level in years, according to estimates , 200,000 barrels per day (bpd).

Gasoline imports, meanwhile, have more than doubled Nigeria’s estimated needs this year, Reuters calculations based on FAAC data show.

“We went from 30 million liters a day to 90 million during this administration with nothing to show that consumption has actually increased,” said Cheto Nwanze, managing partner at Lagos-based risk consultancy SBM Intelligence.

The NNPC recorded gasoline supplies of 90 million liters per day in March and 83 million in April, Reuters calculations showed. In the same months last year, imports amounted to 64 and 63 million liters, respectively, significantly exceeding national demand.

Nigeria’s dependence on imported oil looks set to continue, two industry sources familiar with the matter said, with a new refinery near Lagos unlikely to come on line before the end of 2023 and an upgraded 210,000 bpd Port Harcourt refinery . expected to take several years.

The NNPC and Nigeria’s finance ministry did not respond to multiple Reuters requests for comment.

“INTERESTING CASE”

Although the Nigerian government announced plans to end the gasoline subsidy last year, it backed off in July, citing concerns about potential social unrest.

The World Bank estimates that inflationary pressures will push an additional 7 million Nigerians into poverty this year, bringing the total to 45% of the 200 million population.

“Despite better-than-expected performance in the services and agriculture sectors and higher oil prices … Nigeria is facing a curious case of declining fiscal revenues,” Marco Hernandez, the World Bank’s lead economist for Nigeria, said in of the June Development Report. .

“This limits the government’s ability to expand essential services, support economic recovery and protect the poor during this difficult time,” Hernandez added in the report.

Nigeria’s Finance Minister Zainab Ahmed has repeatedly warned of the high cost of petrol subsidies, saying the bill could reach $16.2 billion in 2023.

And the World Bank has estimated that oil revenue foregone will amount to 5 trillion naira ($12.04 billion) this year thanks to subsidies, equivalent to 30% of Nigeria’s entire budget.

In 2020, NNPC retained 4% of oil and gas sales to cover petrol subsidies. Last year, this figure rose to 45%, and in 2022 it will reach 83% of sales.

As Nigeria’s finance ministry said in its latest budget outlook in August, rising fuel subsidies take money away from capital spending and are “a major drag on overall government revenue and financial position”.

“The subsidy on the supply of Petroleum Motor Spirit (PMS) has had a significant negative impact on government revenue,” the report added.

Nwanze of SBM Intelligence said: “The subsidy is a complete waste at the moment, but it is politically explosive.”

Nigeria is holding presidential elections in February amid rising prices as a result of the Ukraine crisis and post-pandemic supply chain bottlenecks.

In addition to the higher cost of buying gasoline, the more expensive swap contract also came at a bad time.

Until the end of last year, the NNPC covered its domestic petrol needs through Direct Purchase Contracts (DSDP).

NNPC now also buys specialized cargoes and through the Crude Refining and Direct Partnership Agreement (CORDPA), which involves paying higher premiums and waiting longer for traders to receive the crude oil supply as payment.

For example, in May, the DSDP premium was about $10 per tonne of gasoline, while the premium paid under CORDPA was $22, according to NNPC spreadsheets. Rates vary by season, and for most of the year these levels were between $35 and $50 per ton. NNPC paid $80 and $100 for some special cargoes.

And although petrol is subsidized, the amount paid by ordinary Nigerians at petrol stations remains higher than the set price.

In its 2021 and 2022 FAAC reports, NNPC set its subsidized price at 124 naira ($0.30) per liter, but the average pump price is close to 200 naira per liter in many states.

“We should have a big harvest, but alas, it is not happening,” lamented one Nigerian official.

Import of NNPC petrolhttps://tmsnrt.rs/3xgjEOE

Nigeria NNPC Petrol Subsidyhttps://tmsnrt.rs/3BR7VHJ

Ambiguous fate of producers as petrodollars flow

Flat returns https://tmsnrt.rs/3RQP8Ti

(Additional reporting by Kamilus Ebo in Abuja, Libby George in Lagos, Hamza Ibrahim in Kano, Tife Owolabi in Yenagoa and Anamesera Igboeroteonwu in Onitsha; Editing by Mike Collett-White and Alexander Smith)

((Mike.Collett-White@thomsonreuters.com; +44 7990 560 229;))

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.

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