How beneficial is rise in oil price to Nigeria? - OrientEnergyReview

How beneficial is rise in oil price to Nigeria?

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Pita Ochai

As oil price return to $70/bbl, exporting countries are on the jubilation side. Production cuts by the Organisation of Petroleum Exporting Countries, OPEC, and its partners, a coalition that pumps about half of the world’s oil, has rallied crude to a four-month high, a strategy they previously deployed in 2017 – but whereas that effort initially struggled, this time the impact has been almost immediate.

By cutting supply, OPEC and its allies prevented the re-emergence of a surplus due to booming U.S. shale output and a slowing global economy. As a result, oil prices climbed 27 per cent in the first quarter, their strongest in almost a decade. At about $70/bbl, crude is approaching the levels the Saudis and other OPEC members need to cover government spending.

Ordinarily, consistent rise in crude oil price should be a blessing to Nigeria considering the revenue that should accrue to the federation account. However, the country spends a lot of money to subsidise the consumption of petroleum products especially petroleum motor spirit.

According to the US EIA, member countries of the OPEC earned about $567 billion in net oil export revenues (unadjusted for inflation) in 2017. It said the 2017 net oil export revenues increased by 29 per cent from the $441 billion earned in 2016.

Yet, subsidy on petrol appears to have denied Nigeria the benefits from the oil price rise. Petrol supply figures recently indicated that the amount of financial subsidy Nigeria currently absorbs to keep the pump price of petrol at N145 per litre instead of the expected open market price may have gone up to N65.60.

Based on the oil price rise, the landing cost of petrol into the country had increased. It is reported that from operators in Nigeria’s downstream petroleum sector that the landing cost of a litre of petrol had gone up to N196.30 per litre.

Based on this, it added the N14.30 distribution margin approved in the last pricing template for petrol by the Petroleum Products Pricing Regulatory Agency, PPPRA, – an agency of the federal government responsible for periodically calculating and approving products’ pricing for the market – to the N196.30 landing cost, and arrived at N210.60, which should be the current open market price of a litre of petrol in the country.

Following from this, it then calculated the difference between N210.60 (actual market price per litre) and N145 (government price per litre) and arrived at N65.60, which is the subsidy or under-recovery recorded over every litre of petrol supplied by the Nigerian National Petroleum Corporation (NNPC), which has since October 2017 reportedly became the sole importer of petrol in Nigeria.

Further to this, multiplied the N65.60 by 46.54 million litres the ministry of petroleum resources disclosed was the daily petrol consumption level of the country in August and arrived at N3, 053,024,000, which was the figure the country may have incurred daily as subsidy on petrol consumption.

Additionally, for a period of 31 days, the calculation indicated that N94, 643,744,000 could have been absorbed as subsidy by the NNPC to keep the pump price at N145 per litre. Though the NNPC did not confirm the figures, its Group General Manager, Public Affairs, Mr Ndu Ughamadu, however, explained that it has the financial capacity to absorb any gap between the landing costs and pump price of petrol in the country.

Ughamadu equally stated that the NNPC would continue to shoulder such a burden to keep petrol supplies stable for all Nigerians. As it stands, the NNPC is currently playing the role of a ‘social supplier’ with reference to PMS. The NNPC has the financial capacity to absorb any gap between the landing cost and prevailing pump price of PMS,” said Ughamadu.

He added: “The Corporation, therefore, will continue to shoulder associated losses in order to ensure an adequate and robust supply of petroleum products to consumers and all Nigerians.”

In December 2017, when oil price was $64.37 per barrel, the NNPC’s Group Managing Director, Dr Maikanti Baru, disclosed to journalists that the landing cost of petrol was N171.40 and that a metric tonne cost $620. Similarly, Baru explained that NNPC’s crude for product swap programme – the Direct Sales Direct Purchases (DSDP) – was under pressure and unable to satisfy increased petrol consumption in the country because it was originally programmed to meet the country’s 35 million litres daily consumption level.

He particularly stated then that: “The landing cost goes with the CIF (Cost, Insurance and Freight) price of PMS. “The government has consistently indicated that the N145 per litre is the price and to do that, it has mandated the NNPC to keep the equivalent depot price of N133.28 per litre, which will keep a cap of N145 per litre, there is a lot of profit in-between after taking the transportation cost of N7 off, so there is sufficient margin for the marketers in that PPPRA template at the price cap.”

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