Nigeria: Oil Theft, Petrol Subsidy, Push Nigeria's Currency to N700/$1 in Parallel Market

28 July 2022

Lagos — The inability of Nigeria to take advantage of rising international oil prices due to massive oil theft, skyrocketing petrol subsidy which remains a drain on the economy as well foreign exchange (FX) speculation by currency traders, among others have combined to push the naira to a record low of N710/$1 on the parallel market.

The development comes against the backdrop of seemingly unbridled borrowing and rising debt service cost which exceeded the country's revenues by as much as N310 billion in the first quarter (Q1) of 2022 and still continues to rise.

The naira depreciated to N710$1 on the parallel market yesterday, compared with the N670 to a dollar it closed the previous day. In the past few days, the naira exchange rate against the dollar has been on the decline on the parallel market.

Also, recent data from the Debt Management Office (DMO) revealed that yield on the 13 tracked Nigeria Eurobond prices has continued to dwindle.

The Eurobond price which opened trading in 2022 at $105.087 had dropped to $74.785, representing a decline of $30.30 or 28.8 per cent.

Nigeria, it was learnt, recently called off plans to sell Eurobonds this year due to the fear that it might be faced with low patronage as the country's fundamentals continue to weaken.

In June, the Debt Management Office (DMO) put Nigeria's total public debt (federal and state governments) at N41.6 trillion or $100.07 billion," at the end of the first quarter of 2022.

To compound its economic challenges, Nigeria's main source of FX revenue which is crude oil has also become a source of concern as the crisis in the sector continues to overwhelm the players.

Out of the 1.772 million barrels per day crude oil allocated to the country by the Organisation of Petroleum Exporting Countries (OPEC) in June, Nigeria was only able to produce 1.158 million bpd, according to the latest Monthly Oil Market Report (MOMR).

At a conservative average price of $110 per barrel for the month, a THISDAY analysis showed that Nigeria's daily underperformance pegged against the OPEC quota yielded a whopping 614,000 bpd or 19.034 million barrels deficit for the month.

A further breakdown revealed that valued against the daily oil price for the period, Nigeria may have lost as much as $2,093,740,000 to its inability to, for months, increase the country's production level.

For a country with huge foreign exchange shortages, if the loss had been plugged could have helped the cash-strapped federating units (states and local governments) embark on major projects.

It is worthy to note that the Nigerian National Petroleum Company Limited (NNPC) has not been able to contribute a kobo to the federation account this year.

Identifying massive crude oil theft as one of the reasons for its inability to meet its oil quota, the federal government had months ago, deployed heavy military presence in the Niger Delta to curb the menace. But even that move has not helped much. The navy appears either unwilling or unable to curb the menace.

Indeed, the top hierarchy of the navy fighting the menace in the Niger Delta have been fingered by locals and several top Nigerians of complicity in the growing oil theft.

A former Chief of Naval Staff, Vice Admiral Ibok-Ete Ibas, had admitted when he lamented the involvement of naval personnel in the illicit oil bunkering and theft in the country, warning them to desist.

"Any act of collusion with criminals or saboteurs of measures emplaced to checkmate illegalities will be met with stiff sanctions in accordance with the law of the land," he had warned at the decoration of newly promoted rear admirals at the navy headquarters in Abuja.

Although there is no official figure for crude oil stolen on a daily basis, industry players put the losses between 200,000 bpd to 400,000 bpd.

The Nigerian Upstream Petroleum Regulatory Commission (NUPRC) recently set up a committee to investigate the actual number. The group is yet to submit its report.

Tied to the country's under-production, a few weeks ago, the NUPRC Chief Executive, Mr Gbenga Komolafe, revealed that Nigeria lost $1 billion in revenue during the first quarter of this year due to crude oil theft, warning that the development was a threat to the economy of Africa's top producer.

Komolafe noted that of the 141 million barrels of oil produced in the first quarter of 2022, only about 132 million barrels of oil were received at export terminals.

"This indicates that over nine million barrels of oil were lost to crude oil theft ... this amounts to a loss in government revenue of about $1 billion ... in just one quarter," Komolafe added.

However, any hope of a quick recovery from the current economic downturn remains forlorn with fresh data from the NNPC indicating that subsidy on petrol now exceeds the country's total revenues from the sales of crude oil and gas.

Information from the NNPC's monthly presentation to the Federation Account Allocation Committee (FAAC) meeting held Tuesday, obtained yesterday showed that in the first half of 2022, petrol subsidy claims surpassed oil and gas revenue by a whopping N210 billion.

In addition, within the period under review, the NNPC recorded N2.39 trillion as gross revenues from oil and gas receipts, while subsidy claims amounted to N2.6 trillion.

The data further revealed that N1.59 trillion was used to cover part of the subsidy costs in the last six months, leaving an outstanding balance of N1.01 trillion to be recovered from July 2022 proceeds in August.

Nigeria is currently facing an economic crisis with rising debt servicing costs, fuel subsidy payments, which from all indications could exceed the budgeted N4 trillion this year as well as a massive drawdown on its Excess Crude Account (ECA). The federal government is projecting that petrol subsidy would rise to N6.72 trillion in 2023, if the country decides to continue with the controversial policy.

In January, February and March 2022, data indicated that petrol subsidy payments gulped N210.38 billion, N219.78 billion, and N245.77 billion, respectively while in April, Nigeria spent N271 billion and N327.07 billion in May 2022 to cater for the shortfall of the importation of petrol.

A further breakdown of the subsidy claims showed that N564.65 billion was carried forward from the previous month as an unrecovered value shortfall and N263.95 billion from May 2022 subsidy outstanding, including N501.30 billion for the current month's subsidy cost. Overall, the value shortfall for the period stood at N1.32 trillion.

Of the total figure, NNPC deducted N319.18 billion from the federation account, leaving an outstanding balance of N1.01 trillion to be carried forward and recovered from July proceeds due in August.

To compound the current subsidy crisis, Nigeria does not know its exact daily consumption of petrol and is believed to be subsidising neighbouring countries due to the arbitrage created by the subsidy in Nigeria.

The problem is expected to even worsen in 2023 with a current projection of as much as N6.72 trillion by the country in its 2023-2035 medium-term expenditure framework & fiscal strategy paper (MTEF&FSP).

Earlier in the year, the federal government deferred the planned petrol subsidy removal by 18 months, saying the impact would be too negative on the poor and the less privileged.

Nigeria imports all its petrol because it does not refine a drop of the product in the country as all the refineries have been non-functional for years. It operates a swap oil-for-petrol regime which is largely seen as opaque.

Added to that, it has in recent years experienced massive oil theft, deteriorating upstream infrastructure, critically reducing its capacity to push enough barrels into the international market.

In a related development, an oil pipeline capable of hauling 180,000 barrels per day across Nigeria has ceased transporting crude since mid-June due to theft, a person familiar with the information, told Bloomberg yesterday.

The Trans-Niger Pipeline (TNP) has yet to be formally shut, said the person who declined to be identified because the information isn't public. The link's capacity is about 15 per cent of Nigeria's most recent average daily output, according to Bloomberg calculations.

Nigeria, Africa's largest oil producer and a member of OPEC has tried to stamp out sabotage on its pipeline network in recent years.

Producers received as little as five per cent of crude volumes pumped through the pipeline between October 2021 and February, an industry union reported earlier this year.

It reflects a larger issue for Nigeria, which is facing shrinking investment and hasn't been able to meet its OPEC+ oil-production quota in order to benefit from a surge in prices.

The TNP was illegally tapped in about 150 places, the Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN) said in March when local government checked some of the areas where the theft occurred.

TNP is the same line that has recently drawn comments from Chairman of Heirs Holdings, Mr Tony Elumelu, among several industry operators who have raised the alarm on the growing oil theft in the country.

Senate Summons Emefiele

Meanwhile, the Senate yesterday resolved to summon the Governor of the Central Bank of Nigeria, Mr. Godwin Emefiele, to educate and inform the lawmakers in a closed session, on the reasons for the rapid depreciation of the value of the naira.

The red chamber also mandated its Committee on Banking, Insurance and Other Financial Institutions to assess the impact of CBN intervention funds meant to support critical sectors of the economy.

The resolutions were reached by lawmakers after the upper chamber considered a motion sponsored by Senator Olubunmi Adetunmbi (APC - Ekiti North).

The motion was titled, "State of CBN Intervention Funds and Free Fall of Naira."

Adetunmbi bemoaned Nigeria's economic reality amid an urgent call for "extraordinary measures".

He noted that the CBN through its numerous multi-sectoral intervention funds, provided special funds to support critical sectors of the economy.

He explained that in view of such interventions, it had become necessary to assess the state of implementation and effectiveness of the funds deployed for the purpose.

The lawmaker, recalled that the CBN in 2021, placed an indefinite halt on forex bidding by Bureau de Change operators (BDCS) and importers over allegations of abuse and mismanagement.

He observed that the halt by the CBN resulted in a spike of the exchange rate.

According to Adetunmbi, "the two instruments of Personal Travel Allowance (PTA) and Business Travel Allowance (BTA) could only serve less than 20 per cent of the total forex demand by travelers and businesses."

He expressed worry that the import and export window meant to serve the forex needs of business giants, "has become a rare opportunity that only a privileged few can access."

"These and a number of others have contributed to the excessive scarcity of forex in Nigeria today", he added.

He noted that as at the July 26, 2022, the exchange rate in the autonomous segment (BDCs) of the forex market is N670 to $1 and projected to end at N1000 by end of the year based on the current rate of depreciation."

He, therefore, advised the central bank to take new measures to curb forex scarcity and address the sliding rate of Naira exchange.

In his contribution, Senator Sani Musa (APC - Niger East), faulted the central bank's decision to halt forex biddings, thereby cutting off the parallel market - BDC operators.

According to him, the attempt by the CBN to control the value of the naira with the continuous exclusion of BDCs would only lead to its further depreciation.

He, therefore, advised the apex bank to rather ensure the regulation and monitoring of the parallel market.

"What CBN used to do was to give out $10,000to each of these BDCs with a clear directive for it not to be sold above N470 as against the $419 exchange rate. It worked.

"But today, nobody is determining where the rate is going and I can assure you we can't have that solution because we are only importing," he said.

On his part, Senator representing Katsina North District, Senator Ahmad Babba-Kaita, said one way to improve the value of the naira was to encourage foreign investments to attract inflow of other currencies into Nigeria.

"The only way we can access the dollar will be determined by other economies and not ours," he added.

He, however, attributed the lack of foreign investments into Nigeria on the poor security situation caused by banditry, terrorism and other criminal activities.

The Senate, in its resolutions, called on the CBN to urgently intervene to stop the rapid decline in the value of the naira vis-à-vis the dollar and other international currencies.

It also mandated the Senate Committee on Banking, Insurance and Other Financial Institutions to conduct an assessment of CBN intervention funds and the declining value of naira to come up with sustainable solutions.

However, speaking with THISDAY, the Head of Consulting at Agusto Consulting, Mr. Jimi Ogbobine said: "We all are witnesses to recent actions in the world, particularly the Russian-Ukraine crisis. However, I think it's not enough to just hinge Nigeria's forex troubles on the Russia and Ukraine crisis.

"We have been at this for a few years now, where the central bank has largely deployed demand management, and somewhat down orthodox monetary policy measures to try to curb money supply, on one hand and demand for forex, on the other hand. A lot of what we're seeing today is the foundation that lies with the consequences of those actions.

"The recent jump we are seeing is basically a result of a supply crisis in the forex market. So the foundation of all of these is demand versus supply and when demand outweighs supply you will see this kind of currency depreciation.

"If the central bank was able to meet forex demand, then we will not see this kind of price distortion. On one hand, Nigeria is not able to meet forex supply and on the other end we are trying to restrict and constrict demand which means that quite a number of legitimate requests for forex are now being diverted to the parallel market.

"So, while the official market seems relatively calm, the reality of the supply shortage is playing out in the parallel market where more legitimate request for forex is being diverted to because the official market is not able to demand."

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