Nigeria squanders oil price windfall as petrol subsidies soar

Nigeria failed to capitalize on the oil price spike that helped shield other exporters from the impact of inflation, with millions more Nigerians facing poverty.

Data from Nigeria’s national oil company NNPC shows it has contributed nothing to the state coffers in the first eight months of 2022, despite crude prices averaging $94 a barrel so far this year, an increase of 42% compared to last year.

At the heart of Nigeria’s problem, despite being Africa’s largest oil and gas producer, the country relies almost entirely on imports to meet its gasoline needs.

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

This led to widespread smuggling, which in turn drove up the amount of expensive gasoline Nigeria imported and wiped out the gains it should have made from crude exports, as it ended up buying far more than it needed. he needs.

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

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

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

The Nigerian National Petroleum Co (NNPC) said this month that gasoline smuggling was disrupting supplies, adding that it was working to crack down on it.

NNPC’s Federal Account (FAAC) allocation shows that it paid just over $3 billion in oil and gas sales to Nigeria’s Federal Account in 2020, falling to around $1.4 billion. dollars in 2021 and falling to zero in 2022.

Nigerian oil production has fallen to 1-1.2m bpd from pre-pandemic levels of 1.8m bpd after decades of underinvestment in upstream assets, while pipeline theft is at risk. its highest level in years, at around 200,000 barrels per day (bpd).

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

“We have gone from 30 million liters per day to 90 million during this administration with no evidence that consumption has actually increased,” said Cheta Nwanze, senior partner at Lagos-based risk consultancy SBM Intelligence.

NNPC recorded gasoline deliveries of 90 million liters per day in March and 83 million in April, according to Reuters calculations. In the same months last year, imports were 64 and 63 million liters respectively, well above domestic demand.

Nigeria’s reliance on imported petroleum products is set to continue, two industry sources with knowledge of the matter said, with a new refinery near Lagos unlikely to come online until the end of 2023 and an overhaul. of the 210,000 barrel per day Port Harcourt facility. should take several years.

The NNPC and Nigeria’s Ministry of Finance did not respond to multiple requests for comment from Reuters.

Although the Nigerian government announced plans to scrap the petrol subsidy last year, it then backtracked in July, citing concerns over 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 population of 200 million.
“Despite the better than expected performance of the services and agriculture sectors and rising oil prices…Nigeria is experiencing a curious case of falling tax revenue,” said Marco Hernandez, World Bank Senior Economist for Nigeria, in a June development report.

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

Nigerian 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 lost oil revenue will total 5 trillion naira ($12.04 billion) this year due to the subsidy, equivalent to 30% of Nigeria’s total budget.

In 2020, the NNPC withheld 4% of oil and gas sales to cover gasoline subsidies. This figure increased to 45% last year and in 2022 it reached 83% of sales.

The increase in fuel subsidies takes money away from capital spending and is “a heavy drain on the overall government revenue and fiscal position”, Nigeria’s finance ministry said in its latest fiscal projection in August.

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

SBM Intelligence’s Nwanze said, “The grant is a complete waste at this stage, but it is politically explosive.”

Nigeria is holding presidential elections in February amid rising prices due to the Ukraine crisis and post-pandemic supply chain bottlenecks.

Besides the higher cost of gas purchases, a more expensive swap contract also came at a bad time.

Until the end of last year, the NNPC covered domestic gasoline needs through Direct Sales Purchase (DSDP) contracts.

Now NNPC also purchases cargo ad hoc and through a Crude Oil Refining and Direct Partnership Agreement (CORDPA), which involves paying higher premiums and a trader waiting longer to receive his delivery from gross as payment.

In May, for example, the DSDP premium was around $10 per ton of gasoline, while the premium paid under a CORDPA was $22, according to NNPC spreadsheets. Rates vary seasonally and for most of the year these levels have been from $35 to about $50 per ton. NNPC paid $80 and $100 for some ad hoc shipments.

And although petrol is subsidized, the amount ordinary Nigerians pay at the pump remains above the set price.

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

“We should be harvesting a bumper crop, but alas it is not,” lamented a Nigerian official.
Source: Reuters (additional reporting by Camillus Eboh in Abuja, Libby George in Lagos, Hamza Ibrahim in Kano, Tife Owolabi in Yenagoa and Anamesere Igboeroteonwu in Onitsha; editing by Mike Collett-White and Alexander Smith)

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