4th July, 2013
Nigeria faces dire financial straits from developments in local and international oil markets
After few days of bickering, the federal and 36 state governments eventually agreed to reconvene the meeting of the Federation Accounts Allocation Committee on Wednesday 19 June, to share the funds that accrued to the central purse for the month of May. The monthly meeting ended in virtual chaos the previous Thursday as the Commissioners of Finance from the 36 states of the federation walked out on Dr. Yerima Ngama, the Minister of State, Finance, and Jonah Otunla, the Accountant-General of the Federation – the representatives of Federal Government at the forum. That was over allegations of unpaid arrears amounting to about N160 billion.
The Forum of Finance Commissioners, led by Timothy Odaa of Ebonyi State, at a press briefing later that Thursday, attributed the boycott of the FAAC meeting to non-implementation of earlier decisions and resolutions of the forum on the part of Federal Government, which is in control of the purse. He cited as example, failure of Federal Government to release funds from the excess crude account for the augmentation of last month in line with the resolution mutually passed at that month’s meeting without any explanation.
This, he said, was in addition to non-payment of the N160 billion arrears of February, as agreed to by all the parties at the previous month’s plenary session. “We represent our various states and local governments and cannot be pushed around anyhow. Contractors handling various state projects had to be paid salaries, the various programmes and projects of states and local government must be financed. We use this occasion to call on the President and the Governors to have a meeting with a view to resolving the misunderstanding,” Odaah, who described the administration of FAAC meetings by the finance ministry as a great failure, told journalists.
Just as the finance commissioners demanded, President Goodluck Jonathan met with some state governors in Abuja, where he set up a committee, headed by Isa Yuguda, the Bauchi State governor, to find ways out of the brewing financial crisis. Dr. Ngozi Okonjo-Iweala, Coordinating Minister for the Economy and Minister of Finance, later told journalists that an agreement on how to resolve outstanding issues pertaining to the Federation Account was reached at the meeting with the President. This paved way for the reconvening of the FAAC meeting the two Wednesdays ago, at the end of which the three tiers of government shared N620.65 billion among themselves as allocations for the month of May.
Yet, the fact is that disagreements between state commissioners and federal government officials over the sharing of revenue accruing from the centre are becoming too frequent in recent times, with many FAAC meetings ending in disarray like the one of May. For one, there have been disputes over deductions and remittances by Federal Government agencies, especially the Nigerian National Petroleum Corporation, NNPC. Most of the 36 states generate less than 30 per cent of the revenue they spend in paying salaries and carrying out infrastructural development in their areas. As such, they depend on allocation from the federal purse to meet their capital and recurrent expenses, as acknowledged by the Chairman of the Forum of Finance Commissioners.
State governors, in the past, accused the oil corporation (which is in charge of sale of crude oil through which about 80 per cent of funds shared from the central pool monthly is earned) of unde- remittance and sometimes, unusually high deductions for things like payment of petroleum subsidy. Indeed, it was believed that opposition to Governor Rotimi Amaechi of Rivers State’s continuance as the Chairman of Nigeria Governors’ Forum by the Presidency was because of his campaign for greater transparency in the management of funds in the national treasury. Governor Kayode Fayemi of Ekiti State recently confirmed this. Fayemi argued that the Rivers State governor has done very well in pushing the position of his colleagues on issues like the Sovereign Wealth Fund, Excess Crude and illegal deductions on fuel subsidy. For example, NNPC is currently repaying by instalment the sum of N450 billion, which according to states, it unjustifiably deducted from the remittances it was supposed to make to the federation account for subsidy payments.
The corporation agreed to pay back the funds after much wrangling by the states and nudging by the federal government. Even then, the quantity of oil produced by the country and revenue earned from its sale have been a matter of conjecture, with NNPC refusing to come clean on its earnings in spite of agitations by different stakeholders. The agitations for greater transparency in the management of national revenue and activities of revenue generating agencies will certainly get louder as the country now battles a financial crisis which threatens to ground activities at the state and federal levels.
The amount available for sharing among the three tiers of government has been in progressive decline in recent months, though the federal government has intermittently dipped its hands into the controversial excess crude account to augment amounts available in the purse. For instance, Ngama told journalists at the end of last week’s FAAC meeting, that the gross revenue of N590.77 billion received for the month was N30.29 billion lower than the N621.07 billion received the previous month.
While officials of federal government, led by Dr. Okonjo-Iweala, had always publicly affirmed that the Nigerian economy was doing well, backing their arguments with the increasing GDP growth figures, there has been anxiety recently that the shortage of revenue may derail the 2013 budget and ultimately plunge Nigeria into a financial crisis it is not prepared to handle.
Nigerian crude oil production is, according to reports, now about 1.3 million barrels per day, a far cry from 2.53 million bpd estimate in the 2013 budget. Nigeria oil production has actually taken a hit from activities of sophisticated oil thieves and illegal bunkering operators who vandalise crude oil pipelines to steal the product for sale to rogue traders offshore the country or for local refining at illegal refineries located across the Niger Delta.
Multinational oil operators, led by Shell Production and Development Company, SPDC, have continued to complain about the increasing sophistication of the oil thieves who seemed to have the backing of well oiled barons. Men of Nigerian security agencies have so far proved incapable of stopping the national resource hemorrhage. Indeed, the allegation is that some top military chiefs are neck-deep in the grand oil theft. The Economist of London, which in 2012 tagged Nigeria “the world’s capital for oil theft”, said it will be difficult to actually know the extent of the country’s loss to the oil thieves “because Nigeria does not know how many barrels it produces”.
The NNPC, in a statement issued in April indicated that the country lost N191 billion or $1.23 billion to oil thieves in the first quarter of the year, even as it indicated that there has been significant drop in crude oil production due to incessant theft and vandalism. In the statement, signed by Tumini Greeen, its Acting Group General Manager, Public Affairs Division, NNPC indicated that crude oil production in the first quarter of the year hovered between 2.1 million and 2.3 million barrels per day, down from the projected estimate of 2.48mbpd. “Expectedly, this fall between actual production and forecast in first quarter 2013 has resulted in a drop in crude oil revenue of about $1.23bn (N191bn) that should have accrued to the Federation Account,” Green said. Green also informed that the NNPC/SPDC Joint Venture had also declared a force majeure on Bonny Crude, due to sabotage of its pipelines by oil thieves, an action which resulted in the shutting in of another 150,000bpd.
“Investigations showed that 53 break points were discovered along the 97-kilometre Nembe Creek Trunkline. Repair work is expected to last about six weeks. This will further reduce our April and May monthly average to about 2.2mbpd and further decrease crude oil revenue by about $554m (equivalent to N83bn) that should have accrued to the Federation Account,” said Green. International Energy Agency, last year, said that Nigeria was losing about $7 billion annually to oil theft as the oil majors were forced to declare force majeure as a result of damages to their pipelines.
A report in one international publication indicated that while at the height of militancy in Niger Delta in 2009, oil companies operating in Nigeria declared force majeure 12 times, the figure dropped to four in 2010 after declaration of amnesty for the militants, but went up again to 11 last year. This, the international publication said, is an indication that the hundreds of billions of naira poured into the amnesty programme since 2009 may have been a waste. A report by Reuters last month indicated that Nigeria’s oil exports have fallen to a four-year low as a result of crude oil theft and shut down of facilities. “There have been growing opportunities for some of these organised criminal syndicates to operate with greater impunity,” the publication quoted Roddy Barclay, publication analyst at Control Risks, a London-based business consulting group, as saying. “Certainly, some of the ex-militant actors that were engaged in the armed attacks against the oil industry are now also involved in the more criminally lucrative theft,” he added. Mutiu Sunmonu, Country Chair/Managing Director, SPDC, had described the situation as “unprecedented”, with over 60,000 bpd being stolen from Shell alone in the early part of the year. Incessant declarations of force majeure, a legal notice that absolves an oil firm of liabilities for failure to meet supply obligations to crude buyers due to circumstances beyond its control, analysts said, has dented the reputation of the country as a reliable supplier. Reuters quoted Rolake Akinkugbe, head of energy research, Ecobank Group, as saying: “The lower figure could further dent Nigeria’s reputation as a reliable exporter, and could prompt buyers to seek alternative suppliers. It further puts into question their competitive position, as it gives the impression that there is no security of supply, so buyers could look to other markets where they see supply as more stable.”
Apart from declaring force majeure and shutting production, oil majors like Shell, Exxon Mobil Corporation, Chevron Corporation, Total SA and Eni SpA, which run joint ventures with NNPC and produced most of the oil in the country, have been massively selling off their onshore assets. The latest of such divestment was by Chevron, which revealed about two weeks ago that it was selling its 40 per cent interest in oil mining leases, OMLs, 83 and 85 located in the shallow waters off the coast of Bayelsa State from its portfolio. Ironically, most of the companies are retaining their offshore assets. The companies indicated that the divestment of assets is in reaction to continuing uncertainty in the country’s oil and gas industry as a result of delay in the passage of the vital Petroleum Industry Bill, PIB.
But the companies are also selling their onshore assets to avoid the problems of theft of crude and the associated consequences, and are concentrating on developing their offshore assets. Recent report of the Organisation of Oil Exporting Countries, OPEC, indicated that while countries like Saudi Arabia, Angola, and the UAE recorded increase in the month of April, Nigeria crude oil production declined from the 1.923 million bpd in April to 1.902 million bpd in May, Nigeria is due to export around 1.85 million bpd in June.
Even then, the country is increasingly finding it difficult selling off the oil it produces, due to technological breakthrough in oil production and refining. The development of shale technology or what is being called the Shale revolution in the United States has resulted in a boost in crude oil production in the North American country. As a result, oil production in the US is not only at its highest level in more than two decades, the country’s dependence on oil imports is also at its lowest level since 1997. This has led to drastic reduction in the quantity of oil imports by the country.
But it is has been bad news for Nigeria, which used to count the U.S. among its largest and most important customers for its crude oil. At its peak, Nigeria was exporting about 1.6 million bpd to the U.S., which was roughly a fifth of oil import by the American country. However, a recent report indicated that with the production boom in the U.S., as a result of the discovery of shale technology, Nigeria’s oil export to the U.S. has been on steady decline. Also significant is the fact that light, sweet crude, the kind of oil being produced by Nigeria and favoured by US refineries, is being produced with the shale technology. Thus, most refineries in the U.S. now rely on light oil produced locally, shipped by pipelines, rail and barge to their refineries.
As such, information from U.S. Energy Information Administration indicated that the growth of US domestic light shale oil production has resulted in a sharp 63 per cent drop in U.S. dependence on imports of light sweet Nigerian crude in just five years, from a peak of 1.084 mbpd in 2007, to just 405,000 bpd in 2012.
International Environmental Agency predicted that the U.S. will add another 2.8 mbpd of production by 2018 at a break-even price of less than $70 per barrel, which is more than the whole of Nigeria’s oil output in 2012. This implies that America may totally stop oil import from Nigeria about five years from now. With the U.S. market slipping off its hands, Nigeria has had to find buyers for its crude oil. A report indicated that the country was to sell cargoes of Qua Iboe crude, one of its benchmark grades, at nearly $0.40 a barrel below the official price in January.
Analysts indicated that this meant the country lost about $380,000 per cargo. Also, India is now the single-largest importer of Nigerian crude. India’s demand for crude oil is rising and analysts contend that it makes economic sense to ship it from Africa due to the geographical proximity to the continent.
Analysis from Platt, an international energy agency, indicated that India now accounts for about 17 per cent of the crude imports from Nigeria. India is expected to import at least 13 cargoes, or 17 per cent of the 75 scheduled for export, from Nigeria by end of May. In March and April, India imported six and seven cargoes, respectively. One cargo is averagely around a million barrels of crude oil. “Shale oil and the increase in their gas production is already affecting our exports to the United States,” said Alison Madueke, the Minister of Petroleum Resources in Abuja in February. She also announced at the last meeting of OPEC in Vienna, Austria, that the organisation has set up a committee to study the likely impact of shale oil on the price of crude oil, even as she said Nigeria will continue to explore Africa and Asia for alternative markets for its crude oil.
She was however quick to note that though Asia has always been an alternate market for quite a long time and it will remain so for the future, China, the biggest consumer in the Asian continent itself is also trying to to discover shale gas and oil within its territory. In the first quarter of 2013, total revenue to government was estimated at about N1.8 trillion, grossly below the budgeted figure of N2.84 trillion. Federal government has taken care of the N1.02 trillion shortfall in the revenue for the first quarter by drawing from the excess crude account and borrowing. For instance, while the budgeted amount for borrowing in 2013 is N577 billion, government has already borrowed N285 billion in the first quarter of the year. Analysts contend that if the shortfall in revenue as a result of low volume of crude oil sale continues, Nigeria may only realise about N7.3tn for the 2013 fiscal year from N11.34tn projected gross federally collectible revenue in the 2013 budget.
One of the assignments the Yuguda committee was saddled with is drawing up measures for a more vigorous fight against oil theft. In the same vein, the Federal Government has also said it will now do a better monitoring of the revenue generating agencies to ensure to remit more to the federal purse so as to make more funds available for spending. Also, President Jonathan met with all the Nigeria security chiefs on Friday 21 June to discuss how to end the massive oil theft. Details of decisions reached at the meeting were not made public.
But last Monday, Nigeria’s leading opposition party, Action Congress of Nigeria, asked the government to let Nigerians know the actual state of the country’s economy. The party had on 24 February warned of an impending collapse of the economy, citing falling crude oil production, massive oil theft, Shale oil production in the US, the regular declaration of force majeure by oil firms, the fact that oil firms are divesting instead of investing in the sector and what it described as “freewheeling spending by a profligate government”. The party added that one needs not be a Harvard-trained economist to know that dark clouds are gathering over the economy. As a way out, the opposition party advised the federal government to cut the astronomical cost of running a bloated government and take urgent measures to diversify the economy and shore up the production of oil, which remains the mainstay of the country’s economy.
But it is an advice which the state governments, some of which are even more profligate than the federal government, should also take to heart. In the long term, the states will have to begin to look for ways of ending their dependence on Abuja if they don’t want to be caught off-guard in the looming financial crisis.