Thus far in Sep-2021, the FGN has spent N864.0bn (vs a total of N496.3bn of
NNPC remittances in 2021) on its under-recovery program to keep the price of
petrol fixed. The FGN's energy subsidy programs continue to create a gaping
hole in the FGN finances. Subsidy programs coupled with the revenue
underperformance, printing at just 67.0% in H1-2021 have led to increased debt
financing for the FGN. Infamously in April -2021, NNPC remittances were
net-zero, mainly due to the financing of the expensive program, which continues
to derail the downstream sector.
Regarding investments, the reluctance to
implement deregulation makes it largely unprofitable for significant oil
marketers to import PMS by sourcing FX in the parallel market. The current
price cap does not allow marketers to recover their initial costs. This
discourages market players from engaging in wholesaler activity and relying on
NNPC to import PMS, meaning all other marketers earn retailers' margins.
Looking forward, the implementation of the Petroleum Industry Act (PIA) and the
potential removal of the subsidy in 2022 is expected to provide some respite
for the downstream oil and gas sector. We are broadly optimistic
regarding the potential removal of subsidies as it would be a net benefit for
the oil and gas sector with regards to investments and reduced reliance on
On the downside, however, the months In the initial
aftermath of the subsidy removal will see rising inflationary pressures which
could be detrimental to household income considering the slow pace of household
income growth since 2015. As a result, we expect significant public backlash
and possible industrial actions.