A bi-monthly update report on the state of Nigeria’s economy prepared by Lagos-based economic research and analyses firm, Financial Derivatives Company (FDC), has disclosed that with the rising prices of crude oil at the international market, petrol subsidy will exceed $3.85 billion initial estimate by the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu.
The October 2018 edition of the report was obtained yesterday by THISDAY in Abuja, and it explained that Nigeria’s low capacity to locally refine the petrol it uses to run its economy would deny her the benefits she could have got from the rising price of crude oil.
Recent petrol supplies figures sighted by THISDAY indicated that the amount of financial subsidy Nigeria currently absorbs to keep petrol pump price at the government rate of N145 per litre had gone up to about N65.6k.
The surge followed the increase in landing cost of a litre of petrol to N196.3k, which when added to the N14.3k which is charged as distribution margin in the pricing template of the Petroleum Products Pricing Regulatory Agency (PPPRA), would amount to an open market price per litre of petrol of N210.6k and not the N145 the government pegged it.
In its analysis however, the FDC said: “Rising crude oil prices are set to send Nigeria’s bill for fuel subsidies rocketing, threatening to exacerbate the already precarious economic situation of Africa’s largest oil producer as it heads into election season.”
It explained further that “although Nigeria produces 1.7 million barrels of crude per day, it has very little refining capacity and imports roughly 90 per cent of its fuel, negating much of the benefits oil-producing nations accrue from high crude prices.”
According to it, when crude oil prices plunged to about $30 a barrel in 2016, Nigeria’s oil-dependent economy was sent into a recession from which it has barely recovered.
It added that while a rally has since pushed the oil price past $85 per barrel, Nigeria is not set to reap the benefits due to rising subsidy figures.
Quoting experts such as Tunde Ajileye, who is a partner at SBM Intel, a political and economic risk consultancy, the report said in this regards, “this is because its subsidy bill is likely to surge beyond the $3.85 billion annual tally the oil minister estimated earlier this year when prices were 20 per cent lower.”
Ajileye equally noted in the report that “we sit on a double-edged sword! When oil prices go down, government revenues go down and it becomes difficult to get foreign exchange. When oil prices go up, while there is usually an increase in government revenues, the big issue is that for refined products like fuel and diesel, the prices go up and the subsidy bill goes up.”
The report also stated that in April, when crude oil averaged about $70 a barrel, the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, stated that the annual fuel subsidy bill had risen to N1.4 trillion ($3.85 billion) which is roughly half the N2.67 trillion the government collected in net oil revenues in 2017 or a quarter of total net government revenues that year.
That month, it explained that the Nigerian National Petroleum Corporation (NNPC) paid roughly $215 million in under-recovery costs which means the difference between what it paid to import fuel and how much it sells the fuel for.
Also, in May, when Brent crude prices averaged about $77, it said the NNPC paid $245 million to fill the under-recovery gap.
“With oil prices now 10 per cent higher and climbing, that bill is set to soar, creating a predicament for the government ahead of February’s elections,” Ajileye added in this regards, warning that the outlay is unsustainable.
wThe further stated: “The government has to make a decision of whether to increase fuel prices domestically. That’s a very politically charged issue.”
Similarly, in his review of the situation in the report, Jubril Kareem, an energy analyst at Ecobank, explained that at the moment, no one knows exactly what the NNPC pays itself for such under-recovery.
Kareem said: “NNPC is just too big a company, and the opaqueness of the operations is actually aided by its own structure. It produces crude, buys crude, sells fuel as well as regulates itself.
“At least before, we knew what NNPC was paying in subsidy (because of monthly reports that the NNPC no longer regularly issues). Now you don’t know that. You would understand why a government would want to keep it that way.”
The report reiterated that petrol subsidies have long been the subject of abuse and corruption, adding that it equally encourages smuggling into neighbouring countries which include Cameroon and Benin, where fuel can be sold for twice the price, and even more as international oil prices rise.