Although crude oil prices have for months stayed above $100 in the international market, a development rarely seen, it has not had any positive impact on the Nigerian economy
Nigerians should ordinarily be rejoicing over the rising prices of crude oil in the international market. However, unlike many oil-producing countries, the country is not feeling the impact of the rocketing commodity prices for various reasons.
Aside the many wrong-headed policy decisions and neglect of major fundamentals, previous administrations and the present government have largely mouthed slogans, rather than get down to the hard work of giving the oil industry a general turnaround.
While other forward-looking nations are cognisant of the fact that investment remains key to the continuity of the sector, Nigeria has always seen it as a cash cow.
The unwritten rule has been to take and take more without giving back. Unfortunately, the sector does not work that way. Like it is done in farming, the sector requires planting (investment) before harvest (returns).
To be sure, the issues bedeviling the petroleum sector in Nigeria are not recent, but what is different with the current situation is that it is far worse than what obtained in the past—more like a mess.
NNPC’s Failure to Meet Obligations
As it is, Nigeria through the Nigerian National Petroleum Company (NNPC) cannot meet any of its obligations, whether in terms of gas supply, crude production, refining, remittances to the federation account, among others.
Benefiting optimally from the production of its oil and gas resources, has now become an uphill task, due in part, to Nigeria’s non-domestication of the proceeds of its resources, leading to a haemorrhage of the sector.
While in the past, it was taken for granted that once the prices of oil start rising in the international market, even for non-economists, it will rub off on the Nigerian economy vis-à-vis its foreign reserves, strengthening the naira and generally creating a more robust economic environment, many are now lost as to why the situation has changed.
Indeed, Nigeria’s most prized export commodity has risen from a low of $10 in 2020 to a high of $85 in 2021 and now around $120 in 2022. Recall that at some point it hit a record $139.
On the contrary, Nigeria continues to borrow massively in spite of what ordinarily should be a boom period for the economy and for foreign exchange inflow.
To the discerning, the reasons are not far-fetched. Nigeria now has to deal with paying more subsidy since there’s a positive relationship between the international prices of the commodity and how much Nigerians get the product at the pump.
While N400 billion was initially budgeted for the purpose, President Muhammadu Buhari has recently secured the stamp of the National Assembly to up it to N4 trillion for the year. This followed the deferment of petrol subsidy removal, which is part of the much-talked-about Petroleum Industry Act (PIA) by 18 months.
What that simply means is that the little gains from the sector, irrespective of the irredeemable inefficiency of the NNPC, is now being deployed in the payment of petrol subsidy.
With a consistently weakening price of the naira versus the dollar, things are now worse, since transactions in the oil industry are mostly dollar-denominated.
To put this in proper context, in the whole of the 12 months of 2021, petrol subsidy rose to N1.43 trillion, according to data from the NNPC. But total deductions in the first four months this year for the purpose has nearly hit N1 trillion (N947.53 billion). It has also exceeded the company’s initial projected N400 billion budget by N799.95 billion as of April.
Invariably, it has also significantly impacted the NNPC’s remittances to the Federation Accounts this year, because as it is, not even a kobo has been remitted to the joint account this year.
NNPC Imports Petroleum Products
Recall that the NNPC is currently the sole importer of the product into Nigeria as other marketers have stopped importing the commodity due to their inability to adequately access dollars for transactions.
A corollary to the payment of subsidies is the almost 100 per cent importation of all consumed products including petrol, diesel, kerosene and even percentage of gas, although the country has a whopping 206 TCF of proven gas reserves.
As it is, Nigeria does not refine a drop of products, so it imports all it needs to power the economy, costing billions in dollars, thereby fleecing the country of the much needed forex. Both the funding of subsidies and importation of products are largely opaque.
Nigeria’s Minister of Finance, Zainab Ahmed, recently attempted to explain the paradox between rising oil prices and negligible impact on the economy.
According to her, the situation of rising prices was having little impact because of corresponding increase in expenditures.
“The high price of oil means that we would be able to earn more revenue…but we also have the challenge of having to buy petroleum products for use in-country, because we do not have functional refineries. So that eats into the revenues we would have otherwise realised,” the minister said.
Another major reason Nigeria cannot take advantage of massive rise in crude oil prices is that it has not been able to meet its production allocation by the Organisation of Petroleum Exporting Countries (OPEC). So it has significantly under-produced for many months.
These challenges range from technical to community issues, outright oil theft, to ageing upstream assets, then incessant force majeure as well as its inability to restart its oil assets shut down in the wake of the Covid-19 pandemic in 2020.
Declining Oil Rigs
For instance, Data obtained from Baker Hughes Incorporated and OPEC showed that Nigeria’s oil rigs, which depict the level of oil production activities by operators, had reduced to 11 at the end of April 2022, a sharp decline from a three-year high of 30 rigs count recorded in 2015. According to the upstream commission, Nigeria has as many as 53 oil wells.
OPEC’s data also showed that Nigeria’s oil production has slumped to an average of 1.35 million barrels per day recently. Although it hit roughly 1.4 million bpd in May, according to secondary sources, Nigeria still has a deficit of 350,000 barrels per day.
At a price of $120 per barrel, that would translate to a whopping $42 million per day and roughly $1.302 billion every month. That would make massive difference in the country’s ailing economy.
In addition, Nigeria’s resources even if optimised, will make little impact on an uncontrolled population. Unlike small countries like Qatar and Saudi Arabia with small populations, Nigeria does not have a population policy, or if it exists it is not implemented.
Despite its huge oil reserves, Nigeria has one of the lowest production per capita among oil-producing countries in the world, producing less than a barrel per 100 people.
In Saudi Arabia, for instance, it is about 28 barrels per 100 people, in Kuwait it is roughly 60 barrels per 100 people, while in the United Arab Emirates (UAE) production per capita is 32 barrels per 100 people.
For mostly religious reasons, despite the urgent need to do so, Nigeria has refused to do something about its surging population, precipitated by a very high birth rate.
So, even if oil prices move higher than it is today, chances are that it will still a drop in the ocean, given a surging population and with the fact that Nigeria is producing less oil than it was drilling 25 years ago.
As a result, the economic indices remain grim. There’s simply no miracle to it. It’s pure garbage in, garbage out! For example, although oil prices rose by over 50 per cent in 2021, the Nigerian currency, the naira, fell 55.92 per cent in 2021, declining in value from N363/$ to N566/$, according to a recent report by the Financial Derivatives Company (FDC) Limited.
Declining income per capita
The Lagos-based research and consultancy firm further stated that the country’s income per capita shrank by 3 per cent to $2,100 during the year 2021, with Nigeria hit by two recessions in two years.
With life expectancy at 55.75 years, the 4th lowest in the world, and unemployment rate at 33.3 per cent, still the 4th highest in Africa, the report stated that Nigeria’s misery index hit 48.7 per cent last year.
Added to that, the FDC document indicated that 93.3 million Nigerians are currently neck-deep in poverty, even as diaspora remittance dropped by 26.09 per cent to $17 billion.
But while it would appear that there are no immediate solutions to the depressing economic indicators, however the silver lining may be that the country should be able to streamline its massive spending on importation of petroleum products if the expected Dangote refinery coupled with the rehabilitation of the state-owned refineries come online any time from next year.
With the planned completion of the humongous Dangote refinery, worth roughly $20 billion and covering around 250,000 hectares, the foreign exchange frittered on importing refined products could be retained in-country.
Once in full operation, the refinery is expected to produce petrol and other petrochemical products such as polyethylene and polypropylene.
Recently, the Central Bank Governor, Godwin Emefiele, said the federal government currently spends about 30 per cent of its dollar earnings on the importation of petroleum products, putting pressure on the local currency.
“By the time the Dangote refinery begins operation, it would be a major FX saving source for Nigeria. Right now, the overall forex we spend on imported items, the importation of petroleum products consumes close to 30 percent,” he said.
Somehow, all players in the industry agree that the current situation is unacceptable.
Minister of State, Petroleum Resources, Mr Timipre Sylva, this week in an interview with The Energy Year, a market intelligence organisation, described Nigeria’s situation as “precarious” because of the multitude of challenges besetting the oil sector.
According to the minister, while the goal is to restore Nigeria as the leading crude oil producer in Africa, if the country can tackle security and technical issues, it should be able to ramp up production to 2.6 million bpd, and in the long run, boost it to 3 million bpd.
Describing fuel subsidies as “the biggest impediment to the growth of the downstream sector, Sylva stated that nobody wants to invest in an industry where they cannot even recover their cost of production.
“Once the subsidies are removed and these projects are operational, a golden period for the Nigerian downstream sector will begin,” he maintained.
On Wednesday, Chairman, House Committee Chair on Public Accounts, Wole Oke, lamented that while many countries with oil endowments have been able to utilise the resources for the benefit of their citizens, Nigeria has not been able to do so.
He lamented that although Nigeria has similar potential as Saudi Arabia however, as at 2022, its Gross Domestic Product (GDP) per capita is 5,000 USD, while that of Saudi Arabia is $24, 224.
Oke said that while other nations were making progress, since the first quarter of 2022, NNPC has failed to make remittances to the Federation Account despite the current rise in price of crude oil, describing it as depressing. Where does Nigeria go from here? Well, as they say, there are no shortcuts!
