Lower Oil Price Threat to 2017 Budget

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Ejiofor Alike reports that the drop in crude oil price, after hitting a 2017 peak of $55 per barrel in February, poses a fresh threat to this year’s budget, which is predicated on an oil price of $44.5 per barrel

When President Muhammadu Buhari’s administration in December 2016, proposed the 2017 budget on a benchmark crude oil price of $42.5 per barrel, exchange rate of N305 per dollar and crude oil production estimate of 2.2 million barrels per day, the intention of the administration was to avoid the challenges that hampered the implementation of the 2016 budget.

The 2016 budget was predicated on a benchmark oil price of $38 per barrel, oil production of 2.2 million barrels per day and an exchange rate of N197 to the US dollar.

However, attacks on crude oil facilities and infrastructure by the Niger Delta militants and the plummeting crude oil prices, hampered the implementation of the 2016 budget.

The exchange rate fluctuations also affected the implementation of last year’s budget as the parallel market rate almost spiralled out of control, thus encouraging round-tripping, despite the several laudable policies enunciated by the Central Bank of Nigeria (CBN) to engender exchange rate stability.

At the peak of the militancy in 2016 and as confirmed by the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, about one million barrels per day of crude oil was affected by production shut-ins after the Niger Delta Avengers (NDA) had carried out the subsea bombing of the Forcados export pipelines.

At a point, Nigeria’s crude output dropped to 1.3 barrels per day, against the 2016 budget benchmark of 2.2 million bpd, while the oil price dropped to 2016 low of $27 per barrel in February 2016, far below the $38 estimate in last year’s budget.

President Buhari had acknowledged these challenges when he told the joint session of the National Assembly in December last year that “the implementation of the 2016 budget was hampered by a combination of relatively low oil prices in the first quarter of 2016, and disruptions in crude oil production, which led to significant shortfalls in projected revenue”.

According to him, this contributed to the economic slow-down that negatively affected revenue collections by the Federal Inland Revenue Service (FIRS) and the Nigerian Customs Service (NCS).

Buhari had also told the law makers that it was on the basis of his administration’s assumptions in 2016 budget that the “aggregate revenue was projected at N3.86 trillion while the expenditure outlay was estimated at N6.06 trillion. The deficit of N2.2 trillion, which was about 2.14 per cent of GDP was expected to be mainly financed through borrowing”.

“As at September 30, 2016, aggregate revenue inflow was N2.17 trillion or 25 per cent less than prorated projections. Similarly, N3.58 trillion had been spent by the same date on both recurrent and capital expenditure. This is equivalent to 79 per cent of the pro- rated full year expenditure estimate of N4.54 trillion as at the end of September 2016,” Buhari said.

 

Projections in 2017 budget

It was because of the challenges experienced in the 2016 budget that the executive arm of the government predicated the 2017 budget on a benchmark crude oil price of $42.5 per barrel, an oil production estimate of 2.2 million barrels per day, and an average exchange rate of N305 to the US dollar.

In fact, while the crude oil production estimate was retained at the 2016 figures of 2.2 million bpd, the price benchmark was also kept conservatively low at $42.5, considering the fact that the global benchmark crude price averaged $43.35 per barrel in 2016.

After dropping to all-time low of $27 per barrel in February 2016, the price still averaged $43.35 in the year.

So, it is expected that the price of crude this year will not be too far below that of last year.

Based on the assumptions in 2017 budget, Buhari had told the National Assembly members that the aggregate revenue available to fund the federal budget would amount to N4.94 trillion, 28 per cent higher than 2016 full year projections.

According to the president, crude oil is projected to contribute N1.985 trillion of this amount.

With regard to expenditure, the President said his administration had proposed a budget size of N7.298 trillion, representing a nominal 20.4 per cent increase over 2016 estimates.

He had also informed the law makers that 30.7 per cent of this expenditure would be capital in line with his determination to reflate and pull the economy out of recession as quickly as possible.

 

Looming threat to 2017 budget

However, when the National Assembly passed the 2017 Appropriations Bill, the law makers in their wisdom, raised the budget from N7.28 trillion earlier proposed by President Buhari in December last year, to N7.44 trillion.

According to the harmonised reports presented by the Appropriations Committees of the Senate and the House of Representatives, the law makers retained the 2.2 million bpd crude production estimate but pushed the benchmark crude price to $44.5 per barrel, with the anticipation that the price of crude would hover around $50 per barrel.

It was not clear what informed the decision of the National Assembly to increase the budget estimates, but this decision has set the alarm bell ringing with the Minister of Power, Works and Housing, Mr Babatunde Fashola, questioning the insertion of projects outside the purview of his ministry in the 2017 Appropriation Act by the National Assembly.

Fashola had argued that it was unfair to the Executive arm for the National Assembly to insert such projects after public hearings on the budget and defence of the fiscal estimates by the ministries.

“A budget is an estimation plan that set in motion what is to be spent, how much will be borrowed and how much will be collected,” Fashola had said.

It was not clear what informed the decision of the National Assembly to arrive at the assumptions that the oil price, which averaged $43.35 per barrel in 2016 would be around $50 per barrel this year.

But like Fashola pointed out, “the executive controls all the machinery for collecting taxes and other revenue with relevant data from the Ministries of Finance, Physical Planning and the Budget Office and others”.

“I am not saying that the legislature cannot contribute to the budget, but I hold the view that it cannot increase the budget because they do not collect the revenue with which to run or implement the budget,’’ he reportedly added.

Though Nigeria’s crude oil production is on the path of recovery with the country’s crude oil exports reportedly set to surpass 2 million bpd in August 2017, the highest in 17 months, the dwindling price of crude will potentially erode the gains in oil revenues estimated in the 2017 budget.

As the country’s oil and gas industry nears a full recovery from attacks by the Niger Delta militants that crippled production in 2016, production is recovering to 2.2 million bpd upon which the 2017 budget was predicated.

However, the dwindling price of crude after hitting the 2017 high of $55 per barrel in February this year, may hinder the attainment of the 2017 target unless crude production far exceeds the 2.2 million bpd in the budget.

To drain the oversupply in the global market and boost prices, the Organisation of Petroleum Exporting Countries (OPEC) and other producers had agreed to reduce output by 1.8 million barrels per day (bpd) from January for six months, and last month extended the deal for a further nine months until March 2018.

In spite of these global cuts in crude oil supply to the international market by OPEC and non-OPEC members, the oversupply has reportedly persisted, particularly with output rising in Libya and Nigeria, which were exempted from the cuts due to unrest that had limited their output.

Crude prices have also fallen by about 14 per cent since May 25, when OPEC agreed to extend its output limits by six months until March 2018.

The cartel and its allies had promised to restrict output until at least the end of the first quarter of next year to try to drain surplus supply.

But there were reports that crude oil price could fall further from the current $45 per barrel as inventories were still near record highs in many parts of the world.

Brent crude traded at $45.22 a barrel last week, after falling as low as $44.53. Before it rose to $45.22, Brent fell 2.6 per cent the previous session to $44.35, its lowest since November 2016.

OPEC’s pledge was to cut some 1.2 million bpd, while other producers including Russia agreed to bring the total reduction to almost 1.8 million bpd.

But even within OPEC, Nigeria and Libya, which were exempted from the output cuts have seen their production rising, thus undermining efforts led by Saudi Arabia.

While Saudi Arabia has reduced output, Nigeria and Libya are pumping more to the market.

Also, production in the United States, which is not part of the deal, has reportedly jumped 10 per cent over the past year to 9.33 million bpd.

The US government’s Energy Information Administration has raised its forecast for domestic output growth in 2017 to 460,000 bpd from a predicted decline of 80,000 bpd in December.

The International Energy Agency (IEA) said it expected oil supplies next year to outpace demand despite consumption hitting 100 million bpd for the first time.

According to the energy adviser to over 26 industrialised countries, the growth in crude oil supply next year is expected to exceed the anticipated pick-up in demand.

So, with the surplus inventory in the oil market, there are no strong indications that prices would recover soon and this will potentially threaten the 2017 budget unless Nigeria’s crude production hits an unprecedented peak.