March 1, 2022

How FAAC lost 89% of oil revenue to subsidy, operational issues

How FAAC lost 89% of oil revenue to subsidy, operational issues

•As FG lists constraints to oil revenue optimisation

By Obas Esiedesa

Revenue accruable to the Federation  Accounts Allocation Committee, FAAC from oil revenue suffered about 89 percent erosion due to deductions for subsidy on petrol pump price as well as sundry operational issues at the Nigerian National Petroleum Corporation, NNPC.

Meanwhile, Nigeria’s revenues from the petroleum industry are unlikely to improve despite crude oil hitting above the $100 per barrel mark in the international market, going by latest data from the NNPC.

The NNPC report to the FAAC in January 2022 shows that despite crude oil trading above $80 per barrel, the Corporation remitted just N20.1 billion.

According to the data presented to FAAC, gross revenue from oil and gas sales was N438.42 billion but this was depleted to N49.75 billion following deductions for petrol subsidy, product losses, pipelines maintenance and repairs cost amongst others.

The N49.75 billion was further depleted by N29.66 billion deduction for government priority projects, leaving just N20.1 billion for the Federation Account.

With rising price of crude oil, the import bill for petrol which is wholly imported by the Federal Government, is expected to rise leading to higher subsidy deduction by the NNPC.

READ ALSO: Petrol subsidy depletes NNPC contribution to FAAC by 44%

Despite being one of the world’s leading crude oil exporting countries, Nigeria imports almost 100 percent of its petroleum product needs, often swapping crude oil for products.

Nigeria’s crude oil production has also failed to improve with the country unable to meet its Organisation of Petroleum Exporting Countries (OPEC) imposed quota for the seven consecutive month to January 2022.

Speaking on the impact of rising crude oil price on Nigeria’s revenue, the Minister of State Petroleum Resources, Chief Timipre Sylva expressed concern that it would not lead to revenue windfall for the government.

The Minister said the country would prefer oil trading between $70 and $80 per barrel.

Chief Sylva blamed the country’s low oil production on its inability activate oil wells shut down on the directives of OPEC during low oil price.

He pointed at the lack of investment in the upstream sector as a major challenge in the industry.

He said at an interview with Bloomberg: “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 to 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.”

He explained to journalists in Abuja that ”It is not something (oil price rise) to celebrate too much because when prices go high, it means that there are other competing productions that will also start coming up.

For example, the shale producers in America will also now find it profitable. Whereas, if the price is at a certain level, it won’t be profitable for them to produce their shale. 

“So once oil prices go up to a certain point, we are encouraging a lot of production that would otherwise not be in the market. So we are not happy when prices go to a certain level. We believe that prices should be at a certain point, which will be optimal for us, but suboptimal for the shale producers”. 

He explained that Nigeria as a net importer of petrol would also face increased cost. 

“You know that we are right now a net importer. For now, a net importer of petroleum products and when the price of crude goes up, it also affects the price of petroleum product. So for us we are the net importers it’s is also not very good for us. But of course, in a way what we are saying is if we are going to produce more and you get more dollars from your production they gives you more money for your inputs. 

“But if you are now producing less and then you still have to make sure the Nigeria market supplied fully. Then you see there is a shortfall.

“That’s why we will rather like to have our production now to be at the point where we’ll be at least gaining enough to be able to do the imports but our production at this point is not very optimal. 

“That’s why I said that we’d like to have the production and take advantage of the high prices, not as if we’re very happy with the prices being where they are because you are taking from this side and you are giving away from this side. 

“So at the end of the day, we are not necessarily making a lot of gains because we are taking from the high prices and we are also importing higher priced petroleum product.

“And on the other side we are also encouraging producers which should not be producing to also produce and of course neutralize the market for us”, he added.

He bemoaned waning foreign investment in the oil and gas sector, and reiterated the need to float an African Energy Bank to curb the continent’s dependence on Europe, Asia and America for funding.

He reiterated the need to float an African Energy Bank to curb the continent’s dependence on Europe, Asia and America for funding.

Vanguard News