‘Petrol Subsidy Removal Can Save Nigeria $1bn Yearly’

‘Petrol Subsidy Removal Can Save Nigeria $1bn Yearly’

By Chineme Okafor

The United Kingdom (UK)-backed Facility for Oil Sector Transformation (FOSTER) has estimated that Nigeria could earn up to $1 billion in savings annually from the petrol subsidy removal.

FOSTER which works to achieve more effective use of Nigeria’s extractive industries to support national development, stated in a report obtained from its website that an additional $500 million profit could be made by the Nigerian National Petroleum Corporation (NNPC) and private oil marketing firms in the country within six months from the closure of petrol subsidy.

Titled, ‘COVID-19 and Nigerian oil and gas sector,’ the report studied the potential impacts of the pandemic on the country’s oil sector and offered solutions as well.

It explained amongst other potential challenges that changes in foreign exchange practices, delayed passage of relevant enabling laws such as the Petroleum Industry Bill (PIB) and opaque conduct of marginal oil fields rounds, as well as investment apathy could hit the industry hard.

“The government has effectively ended the parallel market for foreign exchange (FX) but the new rate used of N360/US$1 is about 25 per cent stronger than the parallel market rate of N450/US$1 on April 29, 2020.

“A recent new directive has the Central Bank of Nigeria (CBN) once again handling the foreign exchange sale of naira to oil and gas companies which had temporarily been handled by NNPC. The effects on NNPC operations without a smooth flow of FX is hard to predict, but it will certainly lead to a slow down or temporary halt to prompt cash call payments to NNPC’s Joint Venture (JV) partners who operate around half of Nigeria’s oil production. This could lead to further operational challenges and lower production levels from JV assets,” said the FOSTER report.

It further explained that while the industry eagerly awaits the passing of the PIB, which at year-end 2019 was thought likely to happen in the second quarter of 2020, “the crude price crash will further delay Final Investment Decisions (FIDs) on various upstream projects and lead to lower production in the next four to 10 years due to delayed or abandoned investment in new production.”

“This puts even more pressure on the PIB to cover a wide band of oil prices to draw globally mobile capital to Nigeria when oil prices stabilise. A general lack of new investment capital in the global energy markets, including the established Nigerian energy players curtailing their own investments, means that a number of initiatives in Nigeria will be slowed down,” the report added.

According to it, when passed, the PIB will normally come with a road show to international investors to incite their interests, but “in 2020 the reception of this would not be favourable as investors have more pressing issues to focus on including massive employee retrenchments and preserving some form of cash flow to their relevant shareholders.”

Notwithstanding, FOSTER said that, “one small upside to this situation is the NNPC GMD Kyari stating that the petrol subsidy would end. If true, this would save in the range of US$1 billion+ annually in rumoured (but not transparent) subsidy payments as well as providing new profits to either NNPC or private marketers in the range of US$500 million in a six-month period.”

Looking forward, FOSTER suggested areas the country could prioritise to reignite and increase the value additions from its oil and gas sector.

“During a period where new capital investments in the energy sector will be severely limited, Nigeria needs to continue its work to improve transparency and cut costs in the industry if the sector is to play its part in any post COVID-19 economic recovery.

“This would include addressing the following issues: Continue work on the PIB making sure that the resultant bill is robust enough to provide confidence over the operation and regulation of the sector to foreign investors, while ensuring new rent sharing includes an oil price band starting from $20/bbl.

“The fall in price of crude has, by default, eliminated the cost of maintaining a subsidised price for petroleum products. Although NNPC has announced the end of subsidy on the back of this, work still needs to be done on new policies and procedures to ensure this change is hardwired in and cannot be rolled back once oil prices start to rise again…there are potential profits of around $500 million or a three per cent increase in the revised 2020 budget if implemented correctly.

“Reduce costs and increase development impacts through better regulatory oversight and management of key sector agencies. Focus on the reduction of cross subsidisation in NNPC and its subsidiaries to find clarity on what headquarters costs really cover. Develop an efficient domestic gas utilisation plan to ensure revenues that might be lost from exports of Liquified Natural Gas (LNG) are mitigated through domestic consumption.”

FOSTER also called the country to end waste and leakage of funds through agencies tasked with delivering development benefits in the Niger Delta, stating that the Niger Delta Development Commission (NDDC) and Nigerian Content and Development Monitoring Board (NCDMB) have never accounted for the close to $1 billion they have received over the last eight to nine years and as such, “should be carefully scrutinised, and the payments stopped until improvements in governance are firmly in place.”

Related Articles