In recent times, crude oil prices have risen, hitting $57 per barrel on the average, which when considered with Nigeria’s exclusion from an OPEC production freeze, may have increased accretion to the country’s foreign reserves. Chineme Okafor writes on how this positive development could impact the country’s economy
Nigeria’s approved crude oil price benchmark in its 2016 federal budget was $38 per barrel, but oil prices have averaged $57 per barrel, leaving an excess of about $19/b earned by the country.
By existing laws, these earnings from such excess crude oil revenue from her exports should be swept into an Excess Crude Account (ECA) which has now been replaced with the sovereign wealth fund managed by the Nigeria Sovereign Investment Authority (NSIA).
Following the Central Bank of Nigeria (CBN) September 2016 crude oil export records of 1.3mbpd, Nigeria may have earned an average of $9.1 million daily as excess oil revenue when prices of crude oil was $45.04/b, and $24.7 million now that prices are within $57/b.
In addition to the benefits gained from the oil price and gap in the budget benchmark, the country was also exempted from participating in a production freeze agreed on by members of the Organisation of Petroleum Exporting Countries (OPEC), and non-OPEC members led by Russia.
Within this agreement reached in December in Vienna, Nigeria is allowed to grow its oil production to 2.2mbpd to allow it recover from production disruptions she experienced in 2015 and 2016, and even though this has not been achieved yet, she has however continued to increase production from her oil fields.
As equally reported by the November 2016 monthly financial and operations report of the Nigerian National Petroleum Corporation (NNPC) and further confirmed by the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, daily oil production has continued to grow and was at 1.87mbpd in October. This production volume is however divided into various groupings as well as earnings from them.
With an excess earning of $19 on every barrel of oil produced and exported daily by the country, Nigeria should have some accretion to her foreign reserves so far and perhaps grown its balance from its share of oil sales and tax on oil.
To buttress this development, the October monthly report of the NNPC indicated that 18,049,253 barrels of oil was lifted by the Federal Government, 35,207,694 barrels by the International Oil Companies (IOCs) and other Independents, while 128,000 barrels was lifted through Alternative Funding, to bring the total lifting for the month to 53,384,947 barrels. Earnings from these in terms of royalties, tax oil and others would, if matched with the rising prices of crude oil, contribute to the country’s reserves.
The CBN also stated in its report of the 30-day moving average for reserves that $28,582,433,315 was grossed by it as at last week indicating a 2.49 per cent growth in the reserves.
Simply put by experts, the increasing reserves could spur some level of confidence in the government’s monetary and exchange rate policies, as well as provide the country with some good buffers against unexpected economic distress.
It will also enhance the capacity of the CBN to proactively intervene in the country’s foreign exchange market, thus providing some levels of control against adverse movement in the foreign exchange market to ensure stability of the economy.
In addition, the development provides some comfort to participants in the economy and foreign exchange market that the naira was backed by a strong external assets base. This in turn impacts positively on the equity markets and foreign investments.
Riding on the back of the two developments, market analysts posited that Nigeria could as well continue to grow her reserves and record excess revenue intakes because oil prices may remain quite above the 2017 budget benchmark of $42.50/b.
Crude oil prices have maintained a consistent rise, from about $53.13/b since January to about $54.24/b and then $57.01/b, which was recorded last week. Also, the rise which followed OPEC’s agreement with non-OPEC members to cut crude oil production by about 1.2mbpd may not be threatened by developments in the politics of the United States.
Analysts rather stated that emerging trends in the relationship between the United States and Iran which was only recently freed from an international trade embargo placed on it by the United States, may incentivise a continued price rise. They said if the development got uglier and Iran was banned from bring its crude oil into the international market, it could impact global oil supplies and drive up prices.
Iran is the third largest oil producer amongst OPEC members with about 3.975mbpd of production. The country was recently accused by the US of conducting tests of its medium-range ballistic missiles recently, with President Donald Trump saying the development could undermine the security, prosperity and stability of the Middle East.
The US also warned that it could take punitive measures against Iran, and had in this regard officially notified Iran that the development violated the United Nations Security Council Resolution 2231 against it not to undertake any activity related to ballistic missiles.
Ending Petrol Import by 2019
While Nigeria currently benefits from the rise in oil prices, she also has her predominantly import-based domestic petrol consumption draining the forex she gets from oil sales and her reserves.
According to reports, petrol importation, which requires some good volumes of foreign exchange has so far been the exclusive remit of the NNPC with about 90 per cent of imports done by it and 10 per cent by other independent oil marketers.
The country’s refineries in Warri, Kaduna and Port Harcourt which are managed by the NNPC have largely done poorly, and as such forced the country to depend on imported petrol and subsequent reliance on the reserves to fund the import.
This according to Kachikwu, will however change in 2019 when he noted the country would quit importation of refined petroleum products.
Kachikwu said at a public hearing on the review of pricing template for petrol, which the House of Representatives organised, that the refineries had been revived to contribute about eight million litres of petrol from over 20 million litres that is consumed in the country daily.
He explained that foreign investors have been invited to partner the NNPC to repair the country’s refineries within a two-year period, and that by 2018, the NNPC should be able to cut petrol import by 60 per cent while the private refinery currently under construction by the Dangote Group would clear up the balance by 2019 when it comes on stream.
Kachikwu said: “This has consistently served as a target for this government so that by December 2018, NNPC must be able to deliver on some of the terms given them, one of which is to reduce petroleum importation by 60 per cent. Cognisant of the fact that Dangote is building one refinery, we expect to have an excess situation.”
He said the current habit of selling crude oil alone at the international market must be reviewed by Nigeria to include sales of refined petroleum products, adding that other oil producers were already making the shift from crude oil sellers to sellers of refined products.
“The world is leaving that, every member of OPEC is leaving that because the pricing, volume and market challenges is now shifting from selling crude to selling refined petroleum products. That is what this country must do and there is a template we are working on,” Kachikwu explained.
According to him, the government would create an enabling environment to support local refining of crude oil.
He, however, noted that, “The issue is not giving licences to illegality, the issue is how do we ensure that we create an investment environment that pulls individuals from illegal creek activities to legal business activities?”
“We are looking at modular refineries, about 60 licences were given out just before this government came in and none of that was utilised because it requires a lot of money, land and crude security.
“But now we are going out to identify refineries, get individuals who can build refineries on the same platforms where our refineries are and identify some key specific modular refineries backed up by foreign investments working with state governments. Hopefully, this will address the restiveness you see in the Niger Delta,” the minister stated.