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W’Bank: NNPC’s 3-month Deduction for Subsidies Surpass 2017 Disbursement

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  • W’Bank: NNPC’s 3-month Deduction for Subsidies Surpass 2017 Disbursement

The Nigerian National Petroleum Corporation’s (NNPC) deductions from crude oil sales revenue for petrol subsidies in the first three months of 2018 alone exceeded the deductions for the whole of 2017, a report by the World Bank has revealed.

Specifically, the Bank in report titled: “Nigeria Bi-annual Economic Update for Fall 2018,” disclosed that while the deductions for the 2017 full year totalled N107.3 billion, that for January to March 2018 alone, was a total of N139.3 billion. The report pointed out that landing and transportation costs for imported petrol continue to be higher than the capped domestic pump price, “giving rise to cost under-recoveries by the NNPC.”

Independent oil marketers have stopped importing petrol since 2016 for this reason.
“The volume of petrol imported by NNPC in 2018 has been higher than in any other year. During the first three months of 2018, NNPC imported more than half of what it had imported in the whole of 2016.

“The need to shore up fuel inventories may have contributed to this, but there have also been widely reported cases of fuel smuggling to neighbouring countries where pump prices are higher than the subsidised price in Nigeria,” it stated.

The report had three broad aims: key developments in the Nigerian Economy in the recent past; assessment of likely economic outcomes in the short-to-medium term given the policy developments and highlights of key short-term risks. In addition, it contained an in-depth examination of selected highly relevant economic policy topics.

It explained that federally-collected revenues were higher in the first half of 2018 than in the corresponding period of 2017, with both the oil and non-oil revenue components surpassing their levels in first half of 2017 in nominal terms.

The increase in net oil and gas revenue collections, it noted were particularly significant at 140 per cent, mainly on account of higher oil prices in 2018, relative to 2017 which had an average price of $71.3 per barrel.

“The oil and non-oil revenues were however lower than the government’s targets. While the oil price was higher than the budgeted price (US$71.3 compared to the conservative oil benchmark price of US$51 per barrel), oil output came in lower than the target (an estimated actual production of 2.0mb/d, compared to 2.3mb/d budgeted). Furthermore, deductions from gross oil revenues were higher than planned.

“The various prior deductions by the NNPC from oil sales (including ‘cost under-recovery’ for unbudgeted petrol subsidies) contributed to net oil revenues in first half being 34 per cent below budget,” said the report.

It further stated: “Available data indicate that NNPC deductions from crude oil sales revenue for petrol subsidies in the first three months of 2018 exceeded the deductions for the whole of 2017.

On how far the country has fared with its plan to exit the practice of engaging joint venture cash call in its oil production business, the report noted that: “The government indicated, since 2017, that it will introduce a new funding mechanism for the joint venture cash call payments (JVCC), allowing for cost recovery by the international oil companies (IOCs). “However, cash call transfers still continue to be made by NNPC from gross oil sales revenue, despite the JVCC not being budgeted for.

“The government also indicated through its 2018 budget plans to restructure its ownership (equity) in joint venture oil assets to reduce the joint venture costs to the Nigerian government. It is not clear how much progress has been made on this front,” added the report.

Continuing, the report stated: “Net accrual to the Excess Crude Account (ECA) in first half of 2018 was negative. This was despite the fact that actual oil prices were higher than the budget oil price benchmark (i.e. the assumed oil price used to prepare the federation revenue framework) of US$51 per barrel.

“The ECA was established on the basis of Section 35 of the federal Fiscal Responsibility Law which stipulates a commodity (oil) price-based fiscal rule requiring that savings should accrue to the ECA if the price exceeds the budget benchmark.

“However in recent past, accruals have not been realised because in practice, compensations are made for oil output shortfalls. Furthermore, the NNPC deductions are charged first to oil revenues before considerations for the ECA.

“In the first half of 2018, there was also a US$496 million withdrawal from the ECA for the purchase of fighter aircrafts for anti-terrorism operations.

“Thus, apart from a US$80.6 million that accrued to the account in May, there were no other accruals (besides investment income) and the account which opened at US$2.2 billion in January 2018, had a balance of US$1.9 billion at the end of June.”

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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Crude Oil

Oil Rises as Threat of Immediate Iran Supply Recedes

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Oil prices rose on Tuesday, with Brent gaining for a fourth consecutive session, as the prospect of extra supply coming to the market soon from Iran faded with talks dragging on over the United States rejoining a nuclear agreement with Tehran.

Brent crude was up by 82 cents, or 1.13%, to $73.68 per barrel, having risen 0.2% on Monday. U.S. oil gained 91 cents, or 1.3%, to $71.79 a barrel, having slipped 3 cents in the previous session.

Indirect discussions between the United States and Iran, along with other parties to the 2015 deal on Tehran’s nuclear program, resumed on Saturday in Vienna and were described as “intense” by the European Union.

A U.S. return to the deal would pave the way for the lifting of sanctions on Iran that would allow the OPEC member to resume exports of crude.

It is “looking increasingly unlikely that we will see the U.S. rejoin the Iranian nuclear deal before the Iranian Presidential Elections later this week,” ING Economics said in a note.

Other members of the Organization of Petroleum Exporting Countries (OPEC) along with major producers including Russia — a group known as OPEC+ — have been withholding output to support prices amid the pandemic.

“Additional supply from OPEC+ will be needed over the second half of this year, with demand expected to continue its recovery,” ING said.

To meet rising demand, U.S. drillers are also increasing output.

U.S. crude production from seven major shale formations is forecast to rise by about 38,000 barrels per day (bpd) in July to around 7.8 million bpd, the highest since November, the U.S. Energy Information Administration said in its monthly outlook.

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Crude Oil

Oil Prices Rise as Demand Improves, Supplies Tighten

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Oil prices rose on Monday, hitting their highest levels in more than two years supported by economic recovery and the prospect of fuel demand growth as vaccination campaigns in developed countries accelerate.

Brent was up 53 cents, or 0.7%, at $73.22 a barrel by 1050 GMT, its highest since May 2019.

U.S. West Texas Intermediate gained 44 cents, or 0.6%, to $71.35 a barrel, its highest since October 2018.

“The two leading crude markers are trading at (almost) two-and-a-half-year highs amid a potent bullish cocktail of demand optimism and OPEC+ supply cuts,” said Stephen Brennock of oil broker PVM.

“This backdrop of strengthening oil fundamentals have helped underpin heightened levels of trading activity.”

Motor vehicle traffic is returning to pre-pandemic levels in North America and much of Europe, and more planes are in the air as anti-coronavirus lockdowns and other restrictions are being eased, driving three weeks of increases for the oil benchmarks.

The mood was also buoyed by the G7 summit where the world’s wealthiest Western countries sought to project an image of cooperation on key issues such as recovery from the COVID-19 pandemic and the donation of 1 billion vaccine doses to poor nations.

“If the inoculation of the global population accelerates further, that could mean an even faster return of the demand that is still missing to meet pre-Covid levels,” said Rystad Energy analyst Louise Dickson.

The International Energy Agency (IEA) said on Friday that it expected global demand to return to pre-pandemic levels at the end of 2022, more quickly than previously anticipated.

IEA urged the Organization of the Petroleum Exporting Countries (OPEC) and allies, known as OPEC+, to increase output to meet the rising demand.

The OPEC+ group has been restraining production to support prices after the pandemic wiped out demand in 2020, maintaining strong compliance with agreed targets in May.

On the supply side, heavy maintenance seasons in Canada and the North Sea also helped prices stay high, Dickson said.

U.S. oil rigs in operation rose by six to 365, the highest since April 2020, energy services company Baker Hughes Co said in its weekly report.

It was the biggest weekly increase of oil rigs in a month, as drilling companies sought to benefit from rising demand.

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Crude Oil

FG Spends N197.74 Billion on Subsidy in Q1 2021

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The Federal Government has spent a total sum of N197.74 billion on fuel subsidy in the first quarter (Q1) of 2021, according to the Federal Account Allocation Committee (FAAC) report for May.

The report noted that the value of shortfall, the amount the NNPC paid as subsidy, in the March receipts stood at N111.97 billion while N60.40 billion was paid in February.

In the three months ended March, the Federal Government spent N197.74 billion on subsidy.

The increase in subsidy was a result of rising oil prices, Brent crude oil, against which Nigerian oil is priced, rose to $73.13 per barrel on Monday.

The difference in landing price and selling price of a single litre is the subsidy paid by the government.

On May 19, the Nigerian Governors Forum suggested that the Federal Government removed the subsidy completely and pegged the pump price of PMS at N380 per litre.

The governors’ suggestion followed the non-remittance of the NNPC into the April FAAC payments, the money required by most states to meet their expenditure such as salaries and building of infrastructure.

However, experts have said Nigeria is not gaining from the present surge in global oil prices given the huge money spent on subsidy.

Kalu Aja, Abuja-based financial planner and economic expert, said “If Nigeria is importing Premium Motor Spirit and still paying subsidy, then there is no seismic shift.”

“Nigeria needs oil at $130 to meet the deficit. In the short term, however, more dollar cash flow is expected and with depreciated Naira, it will reduce short term deficit.”

Adedayo Bakare, a research analyst, said that the current prices do not really mean much for the country economically.

He said, “The ongoing transition away from fossil fuels and weak oil production from the output cuts by the Organisation of Petroleum Exporting Countries will not make the country benefit much from the rising oil prices.

“Oil production used to be over two million barrels but now around 1.5 million barrels. We need OPEC to relax the output cuts for the naira to gain.”

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