Wednesday, September 29, 2021 / 01:11
PM / by CSL Research / Header Image Credit: WSJ
Earlier this week, the benchmark price of Brent reached US$80 per barrel, the highest price in three (3) years. We expect this would reflect well on Nigeria's oil proceeds. The price movement was driven by improved energy demand, despite the current wave of the delta variant of the coronavirus, force majeure, and supply control. While this should provide some respite for Nigeria's current fiscal strain, the attendant rise in pump price of petrol which comes with it, leaves us with a question. Does an increase in oil price effectively amount to any gains for Nigeria?.
Prior to the discovery of crude oil in commercial quantity at Oloibiri in present day Bayelsa State, Nigeria's priority export commodities were mainly agricultural produce. The main outputs were crops, with cocoa, rubber, groundnut, hide and skin, coffee, palm oil, and palm kernels being the mainstay, as agriculture contributed an average of c.57.0% and c. 64.5% of Gross Domestic Product (GDP) and export earnings between 1960 -1970, respectively. The tide had since changed following the discovery of crude oil.
However, the Nigerian government's inability to maintain a functional refinery for a sustained period has continued to mask the impact of rising oil prices on revenue. Rising oil price bodes well for the Nigerian budget, given its benchmark price for crude oil for the 2021 fiscal year is pegged at US$40/bbl. On the flip side however, an increase in oil prices implies an increase in the price of petrol which currently implies an increase in subsidy.
Since the increase in the global price of crude oil, there have been expectations that the retail pump price of petrol would rise following an increase in the landing cost of petrol and claims of full deregulation of the sector by the government. In September 2020, the Minister of State for Petroleum Resources, Timipre Sylva, announced that the government will take a backseat in the regulation of the price of petrol, noting that market forces and crude oil price would continue to determine the cost of the product. That has not been the case however and with no provision for petrol subsidy in the 2021 budget, the NNPC has resorted to direct deduction from FAAC remittance, which it terms 'value shortfall' in its books.
In our view, the existence of functional refineries in the country will be one step to reducing the amount expended on subsidies. Dangote's integrated refinery has enormous economic potentials given its capacity to meet local demand and serve the needs of neighbouring countries. At a time when the Federal Government is exploring possible options to alleviate the pressure on foreign exchange reserves, the project will enable the government to conserve the much-needed foreign exchange expended on the importation of petroleum products. The Group Managing Director (GMD) of Nigerian National Petroleum Corporation (NNPC), Mele Kyari earlier this year put Nigeria's daily consumption of refined crude oil at 377,358bpd, implying that Dangote Refinery alone with its 650,000bpd capacity can more than meet local demand. BUA refinery and other modular refineries are also projects which are expected to increase the country's refining capacity.