Nigeria: At $100 Per Barrel, Govt to Subsidise Ex-Depot Petrol Price By $8.5bn in 2022 - Report

10 May 2022

At an estimated $100 per barrel of oil this year, Nigeria will subsidise the ex-depot price by about 50 per cent or $8.5 billion in 2022, a new report by Renaissance Capital (RenCap) a frontiers market investment bank, has stated.

RenCap, which also provides institutional research and investment management services, stated that the quantum of funds will amount to about 1.8 per cent of the country's gross domestic product (GDP).

Nigeria has a largely opaque petrol subsidy programme and for years has imported all products consumed within the country, although it doesn't know the exact number of litres consumed on a daily basis.

All the country's refineries, which were left to deteriorate over the years, have been non-functional, resulting in a Direct Sale, Direct Purchase (DSDP) arrangement, which basically entails swapping crude oil for refined products.

This year alone, the government is set to spend N4 trillion for that purpose, having deferred the removal of subsidy by 18 months due mainly to the expected negative reaction from the masses, being an election period.

The government has also said it postponed the removal as entailed in the Petroleum Industry Act (PIA) because of the crushing impact the development would have on Nigeria's poor.

However, the RenCap report stated that the sum to be paid for subsidy this year will be about 34 per cent of the government's total revenue as well as 50 per cent of net oil proceeds.

"Assuming $100/bbl oil prices and our forecasted gasoline crack (the difference between one barrel of gasoline and one barrel of crude) of $10/bbl for 2022, we estimate that Nigeria will need to subsidise 50 per cent of the ex-depot price or $8.5 billion (1.8 per cent of GDP), assuming 400kbopd of gasoline consumption and imports.

"The number is comparable with the provision of N4 trillion ($9.6bn) for the petrol subsidy in the federal government's revised FY22 budget. At $100/bbl. In 2022, we estimate the petrol subsidy to be 34 per cent of the governments gross oil revenue and 50 per cent of net oil revenues," it stated.

On the impact of a naira devaluation on the numbers, it estimated that at N500/$ and N600/$ and assuming that the pump price does not change, the subsidy will cost $10 billion and $11.3 billion respectively (at $100/bbl of Brent) or $1.3 billion for a NGN100 movement of the naira relative to the dollar.

In its estimate for the petrol subsidy, RenCap said it was making an assumption that Nigeria consumes 23 billion litres of petrol a year (400kbpd), which is taken from the most recent 12-month consumption, according to the Nigerian National Petroleum Company (NNPC).

As a federation, which operates at three levels of government, the document stated that the payments were being undermined by the rising subsidy payments, declining oil production and high oil production costs.

"NNPC reportedly only remitted 20 per cent of its projected contribution to the federal account in 2021 and failed to remit anything in January," it added. Indeed for the whole first quarter of this year, the national oil company remitted nothing, a THISDAY report recently indicated.

Many economic experts support the removal of petrol subsidy, although the argument has always been whether it is right at this time when most of the economic indices and key forecasts appear to have deteriorated in the last few years under the current administration.

For instance, real GDP Year-on-Year has shrunk from 6.3 per cent in 2014 to an estimated 2.9 per cent in 2022, oil production has reduced from 2.4 million bpd to about 1.4 currently while population has grown from about 160 million in 2011 to over 200 million in 2022.

A further breakdown of the indices by RenCap analysts indicated that as of 2011, while total public debt was 17.6 per cent of GDP, in 2022, it is 35.1 per cent while trade balance which was 13.5 per cent of GDP in 2011 presently stands at 0.3 per cent.

Net Foreign Direct Investment (FDI), which was $8.1 billion in 2011 is now $2.1 billion, according to estimates by RenCap, while gross external debt which was $21 billion in 2011 had jumped to $80 billion at the time the report was being put together this year.

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