Liquefied Natural Gas Price Crashes by 50%, Says Report
09 Jan 2015
Ejiofor Alike
Nigerian Punch
As the price of crude oil dropped from $115 per barrel in June 2014 to less than $60 in December, a new report by Wood Mackenzie indicates that the spot price of Liquefied Natural Gas (LNG) also crashed from a peak of over $20 per million British Thermal Unit (mmbtu) in February 2014 to less than $10 per mmbtu in November 2014.
Since October 12, 1964 when ‘Methane Princess’ delivered the first LNG cargo to United Kingddom’s Canvey Island regasification terminal, the LNG business has expanded from a single trade between Algeria and the UK to over 400 trade routes, involving 45 countries.
Also from October 1999 when Nigeria exported its first cargo through the Bonny Island plant of the Nigeria LNG Limited, the company has since shipped over 3,000 cargoes to its customers in Europe, America and Asia, converting over four trillion Cubic Feet (tcf) of associated gas to LNG and Natural Gas Liquids (NGLs) for both export and domestic uses.
The LNG produced from NLNG’s six trains had accounted for about 10 per cent of the global LNG market and this growth between 1996 and 2008 earned NLNG the record as the fastest-growing LNG project in the world.
To strengthen her global market share and possibly occupy the second –largest LNG exporter after Qatar, the country had targeted to build Olokola LNG and Brass LNG projects, as well as additional Train 7 in NLNG.
However, rather than pushing ahead with these projects, uncertainty of the operating environment made investors to put these projects on hold.
Nigeria’s lost opportunities went elsewhere as LNG from other countries, especially in Europe’s North Sea, Indonesia, Malaysia, Qatar and Algeria, got to the global market and weakened Nigeria’s market share, reducing it from 10 per cent to seven per cent.
Wood Mackenzie said in its annual review released yesterday that as the LNG industry celebrated its 50th birthday in 2014, the industry may have matured, but still not short of surprises.
According to the report, lower demand from Asia contributed to the crash in LNG spot prices last year by about 50 per cent.
While 30 mmtpa of new production capacity took Final Investment Decision (FID) in 2014, Asian spot LNG prices peaked at over $20 per mmbtu but fell to under $10 per mmbtu
South Korea also imported nine per cent less LNG in 2014 than 2013, while Papua New Guinea (PNG) exported 3.7 million tonnes in first seven months of operation, operating at close to 90 per cent of nameplate capacity.
Also in 2014, 67 new LNG ships were ordered, topping the previous peak of 52 ordered in 2011
Wood Mackenzie’s Principal Analyst, Mr. Giles Farrer, said global LNG production was up five million metric tonnes per annum (mmtpa) to 246 mmtpa and overall trade was boosted by higher levels of re-exports.
“But the big surprise was that Asian LNG demand was much lower than expected. Demand in emerging markets, like China, failed to grow to the extent anticipated and demand in the established South Korean market fell considerably,” he said.
“Prices dropped in the summer as new supply from PNG LNG and reduced Asian demand left the Pacific basin long supply. Then fell further - as Brent oil tumbled from $110 per barrel in August to below $60 per barrel in December,” Farrer added
As Wood Mackenzie’s report shows, 2014 was the year in which the long awaited wave of new Pacific supply started to arrive.
The report noted that PNG LNG, a $19 billion liquefied natural gas project by ExxonMobil in Papua New Guinea (PNG) began production in May, and had a phenomenal year, reaching full capacity from both trains in five months.
This, according to the report, was in marked contrast to Angola LNG, which despite only starting up in June 2013, was shut in May 2014 for extensive repairs.
Nigeria on the brink over price slump, subsidy debacle
January 06, 2015
BY MICHAEL EBOH
Nigerian Vanguard
The continuous decline in the prices of crude oil in the international market in addition to throwing up a number of challenges for the Nigerian economy, has also brought up yet another controversial issue the issue of petroleum subsidy removal.
Nigeria’s fuel subsidy regime, which started with good intentions to end volatility of supply and stabilise domestic prices later metamorphosed into a drain pipe for the country’s resources, with the frittering away of billions of naira by unscrupulous individuals.
Specifically, as at the end of 2013, Nigeria has spent about N10 trillion on subsidy payments; between 2006, when the Petroleum Support Fund (PSF) Scheme kicked off and 2013.
For 2014, the Federal Government budgeted N971.1 billion for payments of subsidy, keeping it at the same level with 2013.
In the 2015 budget, the Federal Government showed signs of cutting down on subsidy, proposing N460 billion as subsidy for Premium Motor Spirit and N160 billion as subsidy for kerosene.
Nigerians became aware of the irregularities in the subsidy scheme, when a number of panels were set up to probe the scheme in 2012, after a failed attempt by the Federal Government to completely remove subsidy on petroleum products.
Today, with the consistent decline in the prices of crude oil, trading around $60 per barrel, from about $110 per barrel a couple of months ago, questions are again being asked as to the actual price of petroleum products and how much Nigerians are supposed to be paying on these products.
An enormous amount of the country’s resources appeared to have gone down the drain, especially with the lack of transparency in the subsidy programme.
In controversial and questionable circumstances, the Federal Government, a couple of days ago, disclosed that it withdrew $1 billion, about N170 billion, from the Excess Crude Account, to settle debts owed petroleum products marketers.
Minister of Finance, Ngozi Okonjo-Iweala, who made this known during the presentation of the 2015 budget, stated that the clarification becomes necessary following allegations by Mr. Timothy Odaah, Chairman of the States Finance Commissioners Forum, that the funds are missing and could not be accounted for.
Odaah had raised an alarm that the 36 states and the Federal Capital Territory (FCT) were not aware of the whereabouts of the funds.
Such controversies and many more have been connected to Nigeria’s petroleum subsidy over the last couple of years and provided a veritable avenue for the pilfering of Nigeria’s financial resources.
Furthermore, the amount the country said it will be paying PMS importers in 2014 as subsidy is almost twice the amount allocated for education in the 2014 budget, which is N495.28 billion; more than three times the N262.74 billion budgeted for health; and 148 per cent more than the N655.47 billion allocated for the Universal Basic Education Commission, UBEC and the Tertiary Education Trust Fund, TETFUND.
In terms of welfare, subsidy provisions in 2014 can pay the salaries and wages of about half the workforce of Ministries, Departments and Agencies, MDAs, at the federal level given the N1.723 trillion provided for personnel cost in the budget.
However, despite calls for a reduction in the prices of petroleum products, the Petroleum Products Pricing Regulatory Agency (PPPRA), in a document obtained from its website, put the market price of PMS at N98.66 per litre, as at December 19, 2014, compared to N108.38 per litre as at December 9, 2014 and N141 per litre in 2012 when attempt for a total removal of subsidy failed.
The PPPRA put the amount paid as subsidy for the period at N1.66 per litre.
According to the PPPRA, the Expected Open Market Price (EOMP) of fuel is N98.66; Landing Cost — N83.17; Ex-Depot price is N81.51 per litre, while the regulated price is N97 per litre.
The PPPRA explaining the process of computing the market price of PMS, in its products pricing template, said it employs Import Parity Principle, which includes: landing cost of products; margins for the marketers, dealers, and transporters; jetty-depot Through-put; other charges and Taxes.
The PPPRA said the objectives of the pricing template are: transparency, full cost, recovery, fairness, responsiveness, efficiency and competitiveness.
Nevertheless, despite the PPPRA’s claims, analysts are of the view that the current decline in the prices of crude oil has made it imperative for the Federal Government to discontinue the fuel subsidy programme and utilise the funds for more beneficial purposes.
In addition, a number of economic analysts have issued stern warning that unless something urgent is done as regards subsidy and other measures, the Nigerian economy might be in a turbulent situation, due to the declining crude oil price.
Specifically, analysts at BGL Research are of the view that the declining oil prices and glut in the crude oil market have exposed the country to exchange rate volatility and other economic risks.
The analysts, in their ‘Nigeria Economic review and outlook for 2015,’ disclosed that the unfolding oil price scenario and the consequent exchange rate depreciation, official and unofficial by about 20 per cent on the average, could translate to a higher inflation scenario in 2015.
They said, “The reality in the economy suggest that monetary policy will be non-accommodating in 2015. This would be dictated by the eventual trend of the oil price and the consequence effect on the government primary balances, foreign exchange rate volatility and the foreign reserves.
“The current level of external reserves at US$36.76 billion can cover seven months of import. However, this would deteriorate to below US$30 billion before the end of the second quarter if the oil price trend continues below the US$65 per barrel.
“At that level, no monetary policy reversal is expected regardless of the pro-growth and pro employment stance of the Governor of the CBN. “Interest rate will therefore remain high for most part of 2015 with a potential for increase in Monetary Policy Rate, MPR, if macroeconomic stability is threatened. A further increase to 14 per cent in late 2015 is plausible.”
Also, analysts at Financial Derivatives Company Limited, led by Mr. Bismark Rewane, the Chief Executive Officer said that the decline in the global prices of oil has been met with mixed feelings as importers of refined petroleum products count their gains, and manufacturers lament the rising impact on the cost of funds and currency depreciation.
According to them, the falling prices are, therefore, likely to lead companies to defer their Final Investment Decisions (FID), a decision that can hurt the global economy.
They said, “Most oil exporting countries including Nigeria, Venezuela and Russia are embarking on austerity measures. For example, further decline in oil prices may spur a total overhauling of the budget assumptions for 2015. This is because the 2015 budget benchmark oil price of $65 per barrel is above the current market price of crude oil and may suggest a downward review of the benchmark figure.”
Continuing, the analysts said, “Our outlook for inflation is unlikely to influence the exchange rates following its recent devaluation by eight per cent. However, the naira will continue to experience volatility at the interbank and parallel markets due to emerging and sustained demand pressures from foreign investors.
“This will result in the continuous depletion of the foreign reserves if the CBN sustains its currency stability drive. Also, the CBN is likely to take caution in depleting the external reserves as global oil prices remain low or decline further.
“We estimate that the naira will trade within N183-185/dollar at the interbank market against the dollar in the coming month.”
Speaking in the same vein, Mr. David Adonri, Managing Director, Highcap Securities Limited, explained that the oil price slump has brought about an urgent need for the country to resolve the issue of subsidy on petroleum products.
According to him, at current price of crude oil, I believe fuel subsidy may no longer exist; however, the opportunity has come for the matter to be resolved once and for all.
He maintained that fuel subsidy, has over the years, served as a major avenue for the depletion of the country’s foreign exchange reserves, as well as helped in no small measure in inhibiting Nigeria’s economic growth and development.
Adonri said, “Fuel subsidy has remained a wrong economic policy for long. It is a needless consumption subsidy in a developing economy that requires massive production subsidy. Since importation accounts for higher quantity of fuel consumed in Nigeria, it is the major source of depletion of the country’s foreign reserve.
“Nigeria has comparative advantage in production of petroleum products. If the potential is properly developed through private sector capital formation, the country can end her import dependence and even become an exporter. Success of the Nigerian Cement industry in this regard demonstrates the feasibility of becoming a net exporter of petroleum products as well.
“Nigeria is a mono-product economy which depends on crude oil export to survive. The economy is equally heavily dependent on imports for survival. It is not an economy constructed to withstand external shocks.”
Continuing, he said, “As a result of the absence of a heavy industrial base, the country lacks domestic engineering infrastructure to foster import substitution through industrialisation.
The long term solution to arresting the usual panic that greets every decline in crude oil price is reduction of the economy’s import dependence.
“Development of the engineering infrastructure is the critical factor required for Nigeria’s industrialization and technological breakthrough. It is failure of the fiscal authorities to implement long term industrialization strategies that compels the monetary authorities to take brutal short term measures to tighten money supply and mitigate inflation that currency devaluation can provoke, each time crude oil income is threatened.”
Also speaking, Mr. Patrick Okigbo, Principal Partner, Nextier Capital Limited, said, “We have always advocated the removal of fuel subsidy, especially as it has become evident that it is a source of corruption and leakage to the economy.
“The reality, however, is that the drop in international oil prices should translate to lower fuel pump prices. The fact that we have not seen a downward adjustment in fuel pump prices is an indication of the inefficiencies in the market.”
He, however, allayed fears that the removal of subsidy will have a negative impact on the country, noting that the drop in international oil prices is expected to make up for the increase in price from the subsidy removal.
Commenting on the austerity measures introduced by the Federal Government in light of the oil price slump, Okigbo said, “It is a shame that we did not save up for the rainy days and we are now facing the perfect storm.
“We should have restructured the economy during the oil boom years and developed new engines of growth for the economy. We should have also cut back on recurrent expenditure during those years. Now, we have no option but to swallow the bitter pill of economic restructuring.
“We know what to do. They are amply documented in many policy documents of the government. What we lack is the political will to drive the desired reforms. May be this economic malaise will provide the impetus to make those changes.”
In a presentation titled, “Institutional and Legal Arrangements for Fuel Subsidy Regime,” Dr. Fatima Waziri-Azi, Head of Department of Public Law at the Nigerian Institute of Advanced Legal Studies, NIALS, explained that the subsidy programme has revealed a new trend of corruption in Nigeria.
According to her, it has witnessed situations whereby people collect subsidy payments for not supplying petrol, whilst they collect foreign exchange for the purpose.
Waziri-Azi said corruption in fuel subsidy ensures that the society loses in two ways, “First, some of the subsidies do not reach the intended beneficiaries, and second, the misused subsidy feeds the black economy.”
However, providing suggestion on ways to safeguard the economy against the shock of falling crude oil price, irrespective of fuel subsidy removal or not, Kate Isabota, an analyst at Dunn Loren Merrifield Asset Management and Research Company said, “Nigeria’s economic and political administrators should strongly consider evolving the current system into one that stimulates healthy competition, provides incentive compatibility to states to create their own revenues and increase the overall wealth of the nation.”
According to the analyst, the multiplier effect of such a development on employment and other economic activities will subsequently result in an improvement in the state’s revenue profile, adding that the foregoing indicates a critical need to move Nigeria towards sustainable economic development.
“Unfortunately, we believe this may never be achieved with Nigeria’s current revenue sharing mechanism due to the low incentive it creates for states to want to seek other revenue generating options to improve their respective IGRs.
“The country therefore needs to develop a structure that incentivises and supports states to generate revenues. This is critical to the development of infrastructure in Nigeria, before the oil runs dry,” he said.
Making a strong case for subsidy removal, finance commissioners from the 36 states of the federation, had in one of their monthly Federation Accounts Allocation Committee, FAAC, meeting in Abuja, passed a resolution asking President Goodluck Jonathan to withdraw subsidy of petroleum products.
Speaking on behalf of the group, Ebonyi State Commissioner for Finance, who is also the Chairman of the Finance Commissioners Forum, Mr. Timothy Odaah, stated that fuel subsidy had failed to achieve its objectives and had become a source of massive fraud which must be discontinued in the interest of the Nigerian public.
He said, “We looked at subsidy on oil and see that it is more or less a solution worse than the problem you intend to solve. Looking at it, you discover that it is not solving the problem it is meant to solve.
“But you discover now that it is the average poor man that suffers. For example, stand by the street, most of the transporters are not applying any benefit from subsidy in what they charge. We know of course that the Federal Government had a good intention to subsidise transportation so that it will be to the absolute benefit of the poor man and every Nigerian.”
In its response, the Federal Government hinted that plans to review petroleum prices have been put on hold until after crude oil price stabilises in the international market.
Okonjo-Iweala disclosed that the Federal Government is consulting with the PPPRA on the issue and hopes that it will be provided with the best way to address the issue.
She said, “With declining crude oil prices, soon there will no longer be subsidy on petroleum products. But government is not going to take a decision till after the current volatility in crude oil prices has stabilised.
“We do not want to reduce fuel price today, only for crude oil price to rise tomorrow, and we resort to adjusting the pump price again.”
However, it is expected that President Goodluck Jonathan will remove petroleum subsidy if he is eventually re-elected, but, what is not known, is the reaction the removal will elicit from Nigerians.
- See more at: http://www.vanguardngr.com/2015/01/nigeria-brink-price-slump-subsidy-debacle/#sthash.mDMEQ1pz.dpuf
 |
| Diezani Alison-Madueke is the Petroleum Minister of Nigeria and President of OPEC. |
Ejiofor Alike
Nigerian Punch
As the price of crude oil dropped from $115 per barrel in June 2014 to less than $60 in December, a new report by Wood Mackenzie indicates that the spot price of Liquefied Natural Gas (LNG) also crashed from a peak of over $20 per million British Thermal Unit (mmbtu) in February 2014 to less than $10 per mmbtu in November 2014.
Since October 12, 1964 when ‘Methane Princess’ delivered the first LNG cargo to United Kingddom’s Canvey Island regasification terminal, the LNG business has expanded from a single trade between Algeria and the UK to over 400 trade routes, involving 45 countries.
Also from October 1999 when Nigeria exported its first cargo through the Bonny Island plant of the Nigeria LNG Limited, the company has since shipped over 3,000 cargoes to its customers in Europe, America and Asia, converting over four trillion Cubic Feet (tcf) of associated gas to LNG and Natural Gas Liquids (NGLs) for both export and domestic uses.
The LNG produced from NLNG’s six trains had accounted for about 10 per cent of the global LNG market and this growth between 1996 and 2008 earned NLNG the record as the fastest-growing LNG project in the world.
To strengthen her global market share and possibly occupy the second –largest LNG exporter after Qatar, the country had targeted to build Olokola LNG and Brass LNG projects, as well as additional Train 7 in NLNG.
However, rather than pushing ahead with these projects, uncertainty of the operating environment made investors to put these projects on hold.
Nigeria’s lost opportunities went elsewhere as LNG from other countries, especially in Europe’s North Sea, Indonesia, Malaysia, Qatar and Algeria, got to the global market and weakened Nigeria’s market share, reducing it from 10 per cent to seven per cent.
Wood Mackenzie said in its annual review released yesterday that as the LNG industry celebrated its 50th birthday in 2014, the industry may have matured, but still not short of surprises.
According to the report, lower demand from Asia contributed to the crash in LNG spot prices last year by about 50 per cent.
While 30 mmtpa of new production capacity took Final Investment Decision (FID) in 2014, Asian spot LNG prices peaked at over $20 per mmbtu but fell to under $10 per mmbtu
South Korea also imported nine per cent less LNG in 2014 than 2013, while Papua New Guinea (PNG) exported 3.7 million tonnes in first seven months of operation, operating at close to 90 per cent of nameplate capacity.
Also in 2014, 67 new LNG ships were ordered, topping the previous peak of 52 ordered in 2011
Wood Mackenzie’s Principal Analyst, Mr. Giles Farrer, said global LNG production was up five million metric tonnes per annum (mmtpa) to 246 mmtpa and overall trade was boosted by higher levels of re-exports.
“But the big surprise was that Asian LNG demand was much lower than expected. Demand in emerging markets, like China, failed to grow to the extent anticipated and demand in the established South Korean market fell considerably,” he said.
“Prices dropped in the summer as new supply from PNG LNG and reduced Asian demand left the Pacific basin long supply. Then fell further - as Brent oil tumbled from $110 per barrel in August to below $60 per barrel in December,” Farrer added
As Wood Mackenzie’s report shows, 2014 was the year in which the long awaited wave of new Pacific supply started to arrive.
The report noted that PNG LNG, a $19 billion liquefied natural gas project by ExxonMobil in Papua New Guinea (PNG) began production in May, and had a phenomenal year, reaching full capacity from both trains in five months.
This, according to the report, was in marked contrast to Angola LNG, which despite only starting up in June 2013, was shut in May 2014 for extensive repairs.
Nigeria on the brink over price slump, subsidy debacle
January 06, 2015
BY MICHAEL EBOH
Nigerian Vanguard
The continuous decline in the prices of crude oil in the international market in addition to throwing up a number of challenges for the Nigerian economy, has also brought up yet another controversial issue the issue of petroleum subsidy removal.
Nigeria’s fuel subsidy regime, which started with good intentions to end volatility of supply and stabilise domestic prices later metamorphosed into a drain pipe for the country’s resources, with the frittering away of billions of naira by unscrupulous individuals.
Specifically, as at the end of 2013, Nigeria has spent about N10 trillion on subsidy payments; between 2006, when the Petroleum Support Fund (PSF) Scheme kicked off and 2013.
For 2014, the Federal Government budgeted N971.1 billion for payments of subsidy, keeping it at the same level with 2013.
In the 2015 budget, the Federal Government showed signs of cutting down on subsidy, proposing N460 billion as subsidy for Premium Motor Spirit and N160 billion as subsidy for kerosene.
Nigerians became aware of the irregularities in the subsidy scheme, when a number of panels were set up to probe the scheme in 2012, after a failed attempt by the Federal Government to completely remove subsidy on petroleum products.
Today, with the consistent decline in the prices of crude oil, trading around $60 per barrel, from about $110 per barrel a couple of months ago, questions are again being asked as to the actual price of petroleum products and how much Nigerians are supposed to be paying on these products.
An enormous amount of the country’s resources appeared to have gone down the drain, especially with the lack of transparency in the subsidy programme.
In controversial and questionable circumstances, the Federal Government, a couple of days ago, disclosed that it withdrew $1 billion, about N170 billion, from the Excess Crude Account, to settle debts owed petroleum products marketers.
Minister of Finance, Ngozi Okonjo-Iweala, who made this known during the presentation of the 2015 budget, stated that the clarification becomes necessary following allegations by Mr. Timothy Odaah, Chairman of the States Finance Commissioners Forum, that the funds are missing and could not be accounted for.
Odaah had raised an alarm that the 36 states and the Federal Capital Territory (FCT) were not aware of the whereabouts of the funds.
Such controversies and many more have been connected to Nigeria’s petroleum subsidy over the last couple of years and provided a veritable avenue for the pilfering of Nigeria’s financial resources.
Furthermore, the amount the country said it will be paying PMS importers in 2014 as subsidy is almost twice the amount allocated for education in the 2014 budget, which is N495.28 billion; more than three times the N262.74 billion budgeted for health; and 148 per cent more than the N655.47 billion allocated for the Universal Basic Education Commission, UBEC and the Tertiary Education Trust Fund, TETFUND.
In terms of welfare, subsidy provisions in 2014 can pay the salaries and wages of about half the workforce of Ministries, Departments and Agencies, MDAs, at the federal level given the N1.723 trillion provided for personnel cost in the budget.
However, despite calls for a reduction in the prices of petroleum products, the Petroleum Products Pricing Regulatory Agency (PPPRA), in a document obtained from its website, put the market price of PMS at N98.66 per litre, as at December 19, 2014, compared to N108.38 per litre as at December 9, 2014 and N141 per litre in 2012 when attempt for a total removal of subsidy failed.
The PPPRA put the amount paid as subsidy for the period at N1.66 per litre.
According to the PPPRA, the Expected Open Market Price (EOMP) of fuel is N98.66; Landing Cost — N83.17; Ex-Depot price is N81.51 per litre, while the regulated price is N97 per litre.
The PPPRA explaining the process of computing the market price of PMS, in its products pricing template, said it employs Import Parity Principle, which includes: landing cost of products; margins for the marketers, dealers, and transporters; jetty-depot Through-put; other charges and Taxes.
The PPPRA said the objectives of the pricing template are: transparency, full cost, recovery, fairness, responsiveness, efficiency and competitiveness.
Nevertheless, despite the PPPRA’s claims, analysts are of the view that the current decline in the prices of crude oil has made it imperative for the Federal Government to discontinue the fuel subsidy programme and utilise the funds for more beneficial purposes.
In addition, a number of economic analysts have issued stern warning that unless something urgent is done as regards subsidy and other measures, the Nigerian economy might be in a turbulent situation, due to the declining crude oil price.
Specifically, analysts at BGL Research are of the view that the declining oil prices and glut in the crude oil market have exposed the country to exchange rate volatility and other economic risks.
The analysts, in their ‘Nigeria Economic review and outlook for 2015,’ disclosed that the unfolding oil price scenario and the consequent exchange rate depreciation, official and unofficial by about 20 per cent on the average, could translate to a higher inflation scenario in 2015.
They said, “The reality in the economy suggest that monetary policy will be non-accommodating in 2015. This would be dictated by the eventual trend of the oil price and the consequence effect on the government primary balances, foreign exchange rate volatility and the foreign reserves.
“The current level of external reserves at US$36.76 billion can cover seven months of import. However, this would deteriorate to below US$30 billion before the end of the second quarter if the oil price trend continues below the US$65 per barrel.
“At that level, no monetary policy reversal is expected regardless of the pro-growth and pro employment stance of the Governor of the CBN. “Interest rate will therefore remain high for most part of 2015 with a potential for increase in Monetary Policy Rate, MPR, if macroeconomic stability is threatened. A further increase to 14 per cent in late 2015 is plausible.”
Also, analysts at Financial Derivatives Company Limited, led by Mr. Bismark Rewane, the Chief Executive Officer said that the decline in the global prices of oil has been met with mixed feelings as importers of refined petroleum products count their gains, and manufacturers lament the rising impact on the cost of funds and currency depreciation.
According to them, the falling prices are, therefore, likely to lead companies to defer their Final Investment Decisions (FID), a decision that can hurt the global economy.
They said, “Most oil exporting countries including Nigeria, Venezuela and Russia are embarking on austerity measures. For example, further decline in oil prices may spur a total overhauling of the budget assumptions for 2015. This is because the 2015 budget benchmark oil price of $65 per barrel is above the current market price of crude oil and may suggest a downward review of the benchmark figure.”
Continuing, the analysts said, “Our outlook for inflation is unlikely to influence the exchange rates following its recent devaluation by eight per cent. However, the naira will continue to experience volatility at the interbank and parallel markets due to emerging and sustained demand pressures from foreign investors.
“This will result in the continuous depletion of the foreign reserves if the CBN sustains its currency stability drive. Also, the CBN is likely to take caution in depleting the external reserves as global oil prices remain low or decline further.
“We estimate that the naira will trade within N183-185/dollar at the interbank market against the dollar in the coming month.”
Speaking in the same vein, Mr. David Adonri, Managing Director, Highcap Securities Limited, explained that the oil price slump has brought about an urgent need for the country to resolve the issue of subsidy on petroleum products.
According to him, at current price of crude oil, I believe fuel subsidy may no longer exist; however, the opportunity has come for the matter to be resolved once and for all.
He maintained that fuel subsidy, has over the years, served as a major avenue for the depletion of the country’s foreign exchange reserves, as well as helped in no small measure in inhibiting Nigeria’s economic growth and development.
Adonri said, “Fuel subsidy has remained a wrong economic policy for long. It is a needless consumption subsidy in a developing economy that requires massive production subsidy. Since importation accounts for higher quantity of fuel consumed in Nigeria, it is the major source of depletion of the country’s foreign reserve.
“Nigeria has comparative advantage in production of petroleum products. If the potential is properly developed through private sector capital formation, the country can end her import dependence and even become an exporter. Success of the Nigerian Cement industry in this regard demonstrates the feasibility of becoming a net exporter of petroleum products as well.
“Nigeria is a mono-product economy which depends on crude oil export to survive. The economy is equally heavily dependent on imports for survival. It is not an economy constructed to withstand external shocks.”
Continuing, he said, “As a result of the absence of a heavy industrial base, the country lacks domestic engineering infrastructure to foster import substitution through industrialisation.
The long term solution to arresting the usual panic that greets every decline in crude oil price is reduction of the economy’s import dependence.
“Development of the engineering infrastructure is the critical factor required for Nigeria’s industrialization and technological breakthrough. It is failure of the fiscal authorities to implement long term industrialization strategies that compels the monetary authorities to take brutal short term measures to tighten money supply and mitigate inflation that currency devaluation can provoke, each time crude oil income is threatened.”
Also speaking, Mr. Patrick Okigbo, Principal Partner, Nextier Capital Limited, said, “We have always advocated the removal of fuel subsidy, especially as it has become evident that it is a source of corruption and leakage to the economy.
“The reality, however, is that the drop in international oil prices should translate to lower fuel pump prices. The fact that we have not seen a downward adjustment in fuel pump prices is an indication of the inefficiencies in the market.”
He, however, allayed fears that the removal of subsidy will have a negative impact on the country, noting that the drop in international oil prices is expected to make up for the increase in price from the subsidy removal.
Commenting on the austerity measures introduced by the Federal Government in light of the oil price slump, Okigbo said, “It is a shame that we did not save up for the rainy days and we are now facing the perfect storm.
“We should have restructured the economy during the oil boom years and developed new engines of growth for the economy. We should have also cut back on recurrent expenditure during those years. Now, we have no option but to swallow the bitter pill of economic restructuring.
“We know what to do. They are amply documented in many policy documents of the government. What we lack is the political will to drive the desired reforms. May be this economic malaise will provide the impetus to make those changes.”
In a presentation titled, “Institutional and Legal Arrangements for Fuel Subsidy Regime,” Dr. Fatima Waziri-Azi, Head of Department of Public Law at the Nigerian Institute of Advanced Legal Studies, NIALS, explained that the subsidy programme has revealed a new trend of corruption in Nigeria.
According to her, it has witnessed situations whereby people collect subsidy payments for not supplying petrol, whilst they collect foreign exchange for the purpose.
Waziri-Azi said corruption in fuel subsidy ensures that the society loses in two ways, “First, some of the subsidies do not reach the intended beneficiaries, and second, the misused subsidy feeds the black economy.”
However, providing suggestion on ways to safeguard the economy against the shock of falling crude oil price, irrespective of fuel subsidy removal or not, Kate Isabota, an analyst at Dunn Loren Merrifield Asset Management and Research Company said, “Nigeria’s economic and political administrators should strongly consider evolving the current system into one that stimulates healthy competition, provides incentive compatibility to states to create their own revenues and increase the overall wealth of the nation.”
According to the analyst, the multiplier effect of such a development on employment and other economic activities will subsequently result in an improvement in the state’s revenue profile, adding that the foregoing indicates a critical need to move Nigeria towards sustainable economic development.
“Unfortunately, we believe this may never be achieved with Nigeria’s current revenue sharing mechanism due to the low incentive it creates for states to want to seek other revenue generating options to improve their respective IGRs.
“The country therefore needs to develop a structure that incentivises and supports states to generate revenues. This is critical to the development of infrastructure in Nigeria, before the oil runs dry,” he said.
Making a strong case for subsidy removal, finance commissioners from the 36 states of the federation, had in one of their monthly Federation Accounts Allocation Committee, FAAC, meeting in Abuja, passed a resolution asking President Goodluck Jonathan to withdraw subsidy of petroleum products.
Speaking on behalf of the group, Ebonyi State Commissioner for Finance, who is also the Chairman of the Finance Commissioners Forum, Mr. Timothy Odaah, stated that fuel subsidy had failed to achieve its objectives and had become a source of massive fraud which must be discontinued in the interest of the Nigerian public.
He said, “We looked at subsidy on oil and see that it is more or less a solution worse than the problem you intend to solve. Looking at it, you discover that it is not solving the problem it is meant to solve.
“But you discover now that it is the average poor man that suffers. For example, stand by the street, most of the transporters are not applying any benefit from subsidy in what they charge. We know of course that the Federal Government had a good intention to subsidise transportation so that it will be to the absolute benefit of the poor man and every Nigerian.”
In its response, the Federal Government hinted that plans to review petroleum prices have been put on hold until after crude oil price stabilises in the international market.
Okonjo-Iweala disclosed that the Federal Government is consulting with the PPPRA on the issue and hopes that it will be provided with the best way to address the issue.
She said, “With declining crude oil prices, soon there will no longer be subsidy on petroleum products. But government is not going to take a decision till after the current volatility in crude oil prices has stabilised.
“We do not want to reduce fuel price today, only for crude oil price to rise tomorrow, and we resort to adjusting the pump price again.”
However, it is expected that President Goodluck Jonathan will remove petroleum subsidy if he is eventually re-elected, but, what is not known, is the reaction the removal will elicit from Nigerians.
- See more at: http://www.vanguardngr.com/2015/01/nigeria-brink-price-slump-subsidy-debacle/#sthash.mDMEQ1pz.dpuf
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