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Output Drops as Companies Combat Rising Energy Costs

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  • Output Drops as Companies Combat Rising Energy Costs

Operators in the real sector relying on diesel and gas for production now grapple with higher operational costs amidst drop in capacity utilisation levels. Nigeria’s foreign exchange earning is improving on the back of rising oil prices but manufacturers say challenges abound as energy costs rise above 40 per cent of operating costs.

Cost-cutting measures by firms will lead to job losses and slow down economic recovery. Having explored options of rightsizing and downsizing in the 2016 financial year as part of measures to stay afloat, many operators are considering further reduction in staff profile as they are having difficulty paying existing staff while rationing fuel consumption to cut down on operational costs.

With the ratio of output not commensurate with cost of input incurred by operators, capacity utilisation has dropped below 40 per cent from about 44 per cent recorded in the third quarter of 2016 forcing many services sectors to reduce numbers of hours spent at work.

Firms that had no previous challenges with energy costs have expressed worry about rising cost of operations amid lull in the economy, rising inflation and dwindling purchasing power of consumers.

Although the Automotive Gasoil (AGO) marketing industry, otherwise known as diesel has been deregulated, sustaining operations at N265 per litre for many businesses and $8 for one standard cubic metre of gas for gas users instead of $2.50 has become unbearable.

Already, some operators are exploring alternative energy like solar while those dependent on diesel are cutting back on the number of hours being used for operations.

Acknowledging these challenges, a communiqué issued at the end of the last monetary policy committee meeting of the Central Bank of Nigeria noted that the structural factors driving the sustained pressure on consumer prices, such as the high cost of power and energy, transport, production factors, as well as rising prices of imports are yet to abate.

For instance, latest data released by the National Bureau of Statistics (NBS) showed that there was cross-cutting price increase in all divisions and sectors nationwide, just as it said prices in communications and restaurant, hotels and hospitality sector recorded slowest pace of growth as at the end of 2016, many of whom are dependent on diesel to sustain their operations.

For manufacturers, it is a sorry tale as data from the association showed that capacity utilization is below 40 per cent while cost of providing alternative power, both for gas and diesel hit about N100 billion in 2016 compared toN58 billion in 2015.

With rising energy costs, President, Manufacturers Association of Nigeria (MAN), Dr. Frank Jacobs noted that the productive sector remains troubled due to various challenges in the operating environment.

“The absence of conducive manufacturing environment and basic infrastructure would continue to draw back the sector, except something urgent is done to reverse the situation. Power is a major cost for manufacturers and they will explore opportunities where it is cheaper to produce their goods.

“Conversion of diesel generators to gas is a viable alternative but it is not cheap for small scale industries, while gas supply has equally been hampered by continued destruction of oil and gas facilities by militants,” Jacobs added.

Explaining the plight of operators in the services sector, the Director-General of the Lagos Chamber of Commerce and Industry (LCCI), Muda Yusuf explained that the Federal Government is caught between managing the joy of rising oil prices and the negative effects of such on the productive sector.

According to him, government must be creative in tackling these challenges. Yusuf noted that businesses are being killed everyday through poor power supply and low purchasing power from consumers.

“Businesses are complaining. Petrol and diesel costs are unbearable at the current rates. It is a suffocating situation and I hope the issues of ease of doing business are addressed before opening markets to other economies,” he added.

Noting that business operators and Nigerians are patiently looking forward to the “change” that will bring about the economic turnaround of the country, the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), added that the real sector is reeling under the burden of rising costs of production in a state of near-economic stagnation, even as government seeks tax revenue from the sector to finance the economy.

The chamber noted that the rate of inflation has doubled, electricity generation reduced by almost 50 per cent, while the price of petroleum products has also doubled.

NACCIMA’s National President, Bassey Edem, noted that while the effort of the Federal Government in addressing the challenges can be acknowledged, the efforts have not translated into measurable positive indicators; rather it has led to a thing of worry to private sector operators.

The World Bank had in its latest report on the ease of doing business ranked Nigeria low among other countries.

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

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Energy

Africa Renewable Energy Fund II Secures €125 Million First Close With SEFA and CTF Investments

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Solar energy - Investors King

The Africa Renewable Energy Fund II has achieved its first close at €125 million, following a joint investment of €17.5 million from The Sustainable Energy Fund for Africa and the Climate Technology Fund through the African Development Bank.

AREF II, a successor to the original Fund, is a 10-year closed-ended renewable energy Private Equity Fund with a $300 million target capitalization. The Africa Renewable Energy Fund II, managed by Berkeley Energy, invests in early-stage renewable energy projects, thereby not only de-risking the most uncertain phase of power projects, but also promoting increased green baseload in Africa’s generation mix.

The Sustainable Energy Fund for Africa and the Climate Technology Fund will each contribute roughly €8.7 million to mobilize private-sector investment into Africa’s renewable energy sector. The Sustainable Energy Fund for Africa will also contribute financing to the AREF II Project Support Facility, which funds technical assistance and early-stage project support to improve bankability.

Other investors include the U.K’s CDC Group, Italy’s CDP, the Netherlands Development Finance Company (FMO) and SwedFund.

“We are proud to be associated with Berkeley Energy and other like-minded investors, and look forward to AREF’s continued success and leadership in promoting sustainable power development on the continent,” said Dr. Kevin Kariuki, the African Development Bank’s Vice President for Power, Energy, Climate and Green Growth.

In 2012, the African Development Bank selected Berkeley Energy, a seasoned fund manager of clean energy projects in global emerging markets to set up AREF. AREF II has a sharper strategic focus than its predecessor on “green baseload” projects that will deliver firm and dispatchable power to African power systems through hydro, solar, wind and battery storage technologies.

Luka Buljan, Berkeley Energy’s Managing Director, said: “We are very excited to have reached this milestone with strong support from our backers. The catalytic tranche from the Sustainable Energy Fund for Africa and the Climate Technology Fund will assist in mobilising private institutional investors up to full fund size of €300 million. We now look forward to concluding the fundraising and delivering projects that will provide clean, reliable and affordable energy across African markets.”

“AREF is intertwined with the Sustainable Energy Fund for Africa’s history and success, and we have worked closely over the last decade to create precedents in difficult markets and challenging technologies. We look forward to continued collaboration to accelerate the energy transition in Africa,” said Joao Duarte Cunha, Manager for Renewable Energy Initiatives at the African Development Bank and Coordinator of the Sustainable Energy Fund for Africa.

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Crude Oil

FG Earned $34.22B From Crude Oil and Gas in 2019 – NEITI

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Crude oil - Investors King

The Nigeria Extractive Industries Transparency Initiative (NEITI) on Thursday released its 2019 oil and gas industry audit report, which shows that Nigeria earned N34.22 billion from the oil and gas industry in 2019.

The audit, conducted by Adeshile Adedeji & Co. (Chartered Accountants), an indigenous accounting and auditing firm, reconciled payments from 98 entities. They include 88 oil and gas companies, nine government agencies and the Nigerian Liquefied Natural Gas (NLNG).

The 2019 figure is an increase of 4.88 percent over the $32.63billion revenue realised from the sector in 2018. A breakdown of the earnings showed that payments by companies accounted for $18.90billion, while flows from federation sales of crude oil and gas accounted for $15.32billion.

The report further showed that 10 years (2010-2019) aggregate financial flows from the oil and gas sector to government amounted to $418.544billion, with the highest revenue flow of $68.442 recorded in 2011, while the lowest revenue flow of $17.055 was recorded in 2016.

According to NEITI, the total crude oil production in 2019 was 735.244mmbbls, representing an increase of 4.87 percent over the 701.101mmbbls recorded in 2018. Production sharing contracts (PSCs) contributed the highest volumes of 312.042mmbbls followed by Joint Venture (JV) and Sole Risk (SR) which recorded 310,284mmbbls and 89.824mmbbls respectively. Others are Marginal Fields (MFs) and Service Contracts (SCs) which accounted for 21,762mmbbls and 1,330mmbbls respectively.

The report also showed that total crude oil lifted in 2019 was 735.661mmbbls, indicating a 4.93 percent increase to the 701.090 mmbbls recorded in 2018, with companies lifting 469.010mmbbls, while 266.650mmbbls was lifted by the Nigeria National Petroleum Corporation (NNPC) on behalf of the federation.

Analysis of crude oil lifted by NNPC showed that 159.411mmbbls was for export, while 107.239mmbbls was for domestic refining. 97 percent of the volumes for domestic refining (104.475mmbbls) was utilised for the Direct Sale Direct Purchase (DSDP) programme while the remaining 3 percent (2.764mmbbls) was delivered to the refineries.

NEITI reported that the value of the 2019 domestic crude oil earnings was N2.722 trillion. Of this figure, N518.074billion was deducted for Petroleum Motor Spirit (PMS) under-recovery by the NNPC.

This figure was N213.074billon above the approved sum of N305billion for under-recovery in 2019. Similarly, the sum of N126.664billion was incurred by the Corporation as costs for pipeline repairs and maintenances which showed a difference of N96.378billion from the approved sum of N30.287billion for that purpose.

The report also pointed out that N31.844billion was also deducted for crude and product losses due to theft.

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Crude Oil

Oil Prices Drop on Stronger U.S Dollar

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Crude oil - Investors King

The strong U.S Dollar pressured global crude oil prices on Thursday despite the big drop in U.S crude oil inventories.

The Brent crude oil, against which Nigerian oil is priced, dropped by 74 cents or 1 percent to settle at $73.65 a barrel at 4.03 am Nigerian time on Thursday.

The U.S West Texas Intermediate crude oil depreciated by 69 cents or 1 percent to $71.46 a barrel after reaching its highest since October 2018 on Wednesday.

Energy markets became so fixated over a robust summer travel season and Iran nuclear deal talks that they somewhat got blindsided by the Fed’s hawkish surprise,” said Edward Moya, senior market analyst at OANDA.

The Fed was expected to be on hold and punt this meeting, but they sent a clear message they are ready to start talking about tapering and that means the dollar is ripe for a rebound which should be a headwind for all commodities.

The U.S. dollar boasted its strongest single day gain in 15 months after the Federal Reserve signaled it might raise interest rates at a much faster pace than assumed.

A firmer greenback makes oil priced in dollars more expensive in other currencies, potentially weighing on demand.

Still, oil price losses were limited as data from the Energy Information Administration showed that U.S. crude oil stockpiles dropped sharply last week as refineries boosted operations to their highest since January 2020, signaling continued improvement in demand.

Also boosting prices, refinery throughput in China, the world’s second largest oil consumer, rose 4.4% in May from the same month a year ago to a record high.

This pullback in oil prices should be temporary as the fundamentals on both the supply and demand side should easily be able to compensate for a rebounding dollar,” Moya said.

 

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