Nigeria’s fuel subsidy burden to surpass N2.5trn –Investigation

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As crude price soars to eight-year high of $104

Uba Group

BY VICTORIA ONU, ABUJA

Crude oil price rose to its highest level of $104 on Sunday under the administration of President Muhammadu Buhari, following rising geo-political tension and higher demand for the black liquid.

This is the highest level since the Buhari administration took over on May 29, 2015.

Based on analysis of crude oil data, the last time the price of crude oil was as high as the current price was on September 30, 2014, when the product sold for $96.77 per barrel.

The drop in the price of crude oil since 2014 had marked the end of an oil boom era for Nigeria and the start of a protracted period of a fall in oil revenues, multiple devaluations and recessions and an accumulation of debt not seen since the return to democracy in 1999.

While some analysts are of the view that the current oil price increase may not deliver the same sort of revenues recorded by Nigeria in 2014, others argued that the country still stands to benefit and will cash in on its oil exports as the price of the black liquid is beginning to rise.

Data from the Central Bank of Nigeria showed that Nigeria earned about $11.3bn from crude oil and gas exports in the third quarter of 2021 when oil prices averaged $75 per barrel.

Nigeria’s average crude oil production increased by 3.83 per cent from 1.228 million barrels per day to 1.275 million barrels per day.

While there has been an increase, the country still struggles to meet up with its OPEC quota of 1.66 million barrels per day.

In the 2022 budget, the Federal Government pegged the crude oil benchmark at $62 per barrel with the projected oil production put at 1.88 million barrels per day.

According to the government, an oil revenue forecast of N3.362trn to fund the 2022 budget would be higher by N1.35trn or 67.18 per cent above the previous year’s target of N 2.011trn.

With higher crude oil price which is above the budget benchmark of $62 per barrel, experts are of the view that Nigeria may not be able to maximize the benefits because of the rising fuel subsidy burden.

As of 2021 when crude oil price averaged $62 per barrel, the Federal Government spent a whopping sum of N1.2trn subsidizing petrol.

With oil prices hitting its highest level in eight years, there are fears in government circles that the country may surpass the N270bn monthly fuel subsidy budget.

A top government official told our correspondent that when the fuel subsidy budget was being prepared two months ago, it was hinged on crude oil price of about $85 per barrel.

The official said, “The 2022 budget was prepared based on the assumption of crude oil price of $62 per barrel. What this means was that the government revenue to fund the budget was based on that parameter.

“Now we had envisaged that the signing of the Petroleum Industry Act will abolish the era of fuel subsidy but the regime of subsidy was pushed forward by 18 months which means we will continue to subsidize the product.

“Since we rely solely on importation of petrol for domestic consumption, the fear now is that with the tension caused by the Russia-Ukraine conflict, we are heading for an energy crisis and this might push up demand and price of crude oil.

“What this means is that we have to spend more on petrol import which will keep going higher and the fear is that the N2.55 trn budget may not be able to finance import of petrol.”

The Federal Government had earlier expressed concern over the rising international prices of crude oil, saying the increase is not good for the country.

The Minister of State for Petroleum Resources, Timipre Sylva, had maintained that Nigeria’s comfort zone in terms of oil prices was between $70 and $80 per barrel, stating that at the moment, Nigeria was not gaining anything from the soaring prices.

Nigeria’s controversial fuel subsidy regime, which could gulp over N2.55trn this year, coupled with its inability to ramp up production to meet the quota allocated by the Organization of Petroleum Exporting Countries have combined to limit the gains from the oil price hike.

Sylva blamed the inability of Nigeria to activate the oil wells it shut down when OPEC instructed producing countries to cut production as well as the lack of investment in the upstream sector for the country’s inability to increase production.

The minister stated, “I’m hopeful the prices will move around, maybe $80, maybe $70. We are hoping it will come down to somewhere around $70 to $80, which will be sustainable for us by the end of the year.

“We are working hard on that (production increase). What happened to us was the fact that we had to cut back at the time, and, of course, in such a way you can’t really cut back mathematically.

“So, you want to cut back 100,000 barrels that you shut out, maybe we’ll shut down about 200,000 to 300,000 barrels. So at the end of the day, we over-complied because we just couldn’t achieve it mathematically.

“In trying to cut down, we cut down too much. And now to come back, it’s not been easy for us to get the wells back to production.”

Already, the International Energy Agency had said that crude oil prices would continue to soar as rising Covid vaccination rates, loosening pandemic-related restrictions, and a growing economy resulted in global petroleum demand rising faster than petroleum supply.

Crude oil export constitutes over 90 per cent of foreign exchange as dollar-starved Nigeria would see enough forex to boost its reserves which is currently at $40.1bn.

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