With a sharp decline in Nigeria’s oil export opportunities, there are indications that the country’s 2022 budget deficit might go up to about N10 trillion while petrol subsidy is likely to rise to N4 trillion.
This follows the declaration of force majeure by Shell Plc and Eni SpA on key oil flows which is seen as a major threat to disrupt supplies in a market that is already fretting about the impact of Russia’s invasion of Ukraine.
Force majeure is a legal step that allows companies not to meet contractual obligations for reasons that are out of their control.
An economist and chief executive officer (CEO), Centre for the Promotion of Private Enterprise (CPPE), Muda Yusuf, said the situation had exposed the weak security architecture of the country and the volatility of the oil exploration environment.
Yusuf cautioned that while Nigeria has been struggling to raise production capacity, a further decline in crude export would mean less revenue generation which, in turn, will affect budget implementation.
According to him, Nigeria is already struggling to make up about a N6 trillion budget deficit, but with additional revenue drop, investing in capital projects would be a challenge.
“Budget deficit may rise to about N10 trillion and with Nigeria importing refined petroleum, the landing price of the commodity (price before subsidy inclusion) is subject to prices of crude oil at the international market, subsidy payment will likely rise to N4 trillion.
“Nigeria exports crude oil and benefits from high crude prices, but since the country does not refine its own crude oil for local consumption, it has to import refined crude oil and it has to import petroleum at international market price, inclusive of other costs of refining, costs which collectively become the landing price.
“The biggest obstacle to enjoying gains from crude price increases is the country’s subsidy regime, which augments the landing cost of petroleum by fixing the cost of fuel below international market prices and paying the difference.
“Nigeria is leading in imported products, which means that the country is still subject to forces of importation and the international market for the landing cost of its refined petroleum. These landing costs determine how much is spent on subsidy per time,” he explained.
It recalls that the federal government had, at different times, attempted to end the subsidy regime because of its unsustainability, and this conversation heightened this year when the Nigerian National Petroleum Company Limited (NNPCL) put forward a N3 trillion subsidy request.
Nigeria spent N1.03 trillion on subsidies in 2021, according to NNPC, and the World Bank says Nigeria could end up spending N2.5 trillion or N3 trillion in subsidizing petrol in 2022, money it says could be put to better and more productive use especially considering Nigeria’s population.
The Bank has predicted that the economy of Nigeria would grow by 2.5 per cent in 2022 and 2.8 percent by 2023.
Meanwhile, Shell’s measure has been in place since March 3 and applies to its Bonny export program while Eni’s relates to Brass crude cargoes and follows a pipeline blast in the Bayelsa State.
Shipments of the two grades had been planned at a rate of 170,000 barrels a day next month but have been in a state of decline over the past few years, according to loading programs seen by Bloomberg. Flows back in 2020 were planned at about 320,000 barrels a day.
A force majeure doesn’t necessarily mean the entirety of supply will be lost for a given period of time. Stored cargoes could still be shipped and repairs would allow shipments to resume.
The market is closely watching what will happen to Russian oil supply in the wake of the country’s invasion of Ukraine. Some oil companies have stopped buying new cargoes from Moscow and some governments have announced that they are imposing bans on petroleum imports from Russia. Shell has said it will try to go elsewhere for barrels.
The lost shipments could be significant for Nigeria. The country was scheduled to export almost 1.5 million barrels a day this month, loading plans show.
It wasn’t clear when Eni’s force majeure began. The company said that Nigeria LNG is also affected by its measure.
Yusuf further lamented that Nigeria is missing opportunities offered by the Organisation of the Petroleum Exporting Countries and its Russia-led partners to raise its oil production by 400,000 barrels per day in March, sticking with its plan of unwinding remaining production cuts by the end of the year.
The decision was taken at the 25th OPEC and non-OPEC Ministerial Meeting held via videoconference.
The group, known as OPEC+, increased Nigeria’s oil production quota to 1.72 million bpd for March from 1.70 million bpd in February and 1.68 million bpd in January.
It said in a statement that in view of current oil market fundamentals and the consensus on the outlook, it was reaffirming the decision of the 10th OPEC and non-OPEC Ministerial meeting on April 12, 2020 which was further endorsed in subsequent meetings.
Yusuf, however, said this hike is now being hindered by lingering security challenges in the upstream oil sector and will deny the country opportunities to take advantage of the rising global oil prices.