Following rising price of crude oil to $90 a barrel, experts in the oil and gas industry have said the decision of the FG to retain subsidy payment till the end of the year will take the shines off the PIA, warning of economic crisis that may likely to occur due to government’s continued borrowing and inability to meet fiscal obligations.
As of noon of Thursday, even after the weekly U.S. inventory report from the EIA showed a build in crude oil inventories, West Texas Intermediate (WTI) was trading at $88.23, Brent crude oil, Nigeria’s benchmark was trading at $90.87 per barrel.
The oil price increase presents Nigeria and other oil producing economies the opportunity to increase their crude oil production amidst low cushing and distillate inventories, combine with supply jitters in Europe, Russia-Ukraine tensions, and falling Russian seaborne crude imports from the Baltics.
Specifically the price is increasing as inventories at the Cushing hub in Oklahoma, United States—the delivery point for WTI—sunk by another million barrels on Tuesday, according to API data, to the lowest point since 2012—more than 30% below the five-year average.
Another factor according to EIA data is that distillate inventories also saw a large draw of 2.8 million barrels, sending inventories to 2014 lows.
Amidst the above factors the tension between the West and Russia over Ukraine, according to expert is expected to continue to push prices up. There are strong indications that this is the year the world will accommodate COVID-19 so we expect demand for oil to increase as jet travel and movement would increase.
However the experts and industry analysts challenged the NNPC to take advantage of the price increase to upscale its production from 1.2 million barrels per day to 1.614 million barrels per day OPEC+ quota.
According to them since crude oil export play a dominant role in Nigeria’s economy accounting for about 90 percent of its gross earnings, there is need to address oil facility sabotage and upscale production capacity to 2.2 million barrels per day as predicted by Timipre Sylva, Minister for State Petroleum Resources.
Dr. Boniface Chizea, Managing Director /Chief Executive Officer at BIC Consultancy Services said, “Oil price increase is a double-edged sword to Nigerian economy, with some positives and negatives.
“On the positive side this means that crude oil export proceeds will amount to more money for fiscal purposes, thereby providing funds to be shared between the Federal, state and local government.
“At the same time the export revenue will lead to more foreign exchange supply in monetary purposes.
“Unfortunately, the negative is that the bulk of the oil revenue will be used to service revenue needed for the into importation of petroleum products from other countries because of lack of local refining.
“The revenue will also be needed to offset the total of N3 trillion requested by NNPC to fund fuel subsidy in 2022.
“For a long time it has not gone beyond $100 per barrel in 2004, but now that it is picking up, that should mean more money for us as our 2022 budget benchmark price of crude from $57 to $62 per barrel.
“It means more money for Federation Account Allocation Committee (FAAC) and Excess Crude Account(ECA) should be substantial but unfortunately more of the gains will go into subsidy payment which will shoot up due to rising price of crude oil.
“This is why we are not making progress and We are in an unfortunate situation where we put the gains on subsidy. If subsidy is going to continue till the end of the year, then Nigeria will have to borrow money to fund subsidy.
In his attempt to proffer some quick solution, Dr. Boniface as the Govt to manage the situation and block revenue leakages. He added that the refineries needs to fully operate optimally and Dangote’s refinery should be encourage to take off in September, 2022.
Professor Adeola Adenikinju is a Professor of Energy Economics and Director of the Centre for Petroleum, Energy Economics and Law (CPEEL), University of Ibadan the rising oil price presents Nigerian government the opportunity to earn sufficient revenue from oil export for FAAC to be shared with state and local government. He added that the rising oil export revenue will provide much needed foreign exchange into Nigeria.
He said, “Unfortunately, Nigerian cannot take full advantage of the abundance of the oil reserve for several reasons due to declining and poor production output. There is a lot of sabotage on our oil pipelines and facilities.
“Nigeria will need to work on its production volumes and take away subsidy. We know what to do but unfortunately the government does not have the political will to address the issues.
“For instance in crude production in Bonny Island, which used to be around 1 million barrel day is now around 35,000 barrel per day. We need to address the oil community issues which is bringing about the sabotage. Government has to declare the sabotage issues as a national emergency .
Professor Adeola however urged Nigerians to decide what they want and what is best for them, noting that once crude oil price goes up, the state government will not have sufficient money to fund their budgets.
He said, “If we have to continue with subsidy payment, and losing increase oil revenue to servicing subsidy , then there won’t be money to be shared among the state and local government. This will amount to massive lay off staff and owe workers’ salaries will be owed.”
“FG on its side, would still have to borrow money to finance the budget and pay subsidy because the larger percentage of the oil production revenue would go into servicing subsidy.
He therefore used the Organised Labour to support the government in agree to remove subsidy, noting that attention should be given to those that would be affected if subsidy is removed.
“So this is a choice we have to make,” the Professor said.