RenCap: With Oil Prices above $100 Per Barrel, Impact on Budget will Be Negligible

Emmanuel Addeh in Abuja

A new report by Renaissance Capital (RenCap), a frontier market investment company, has stated that despite crude oil prices at over $100 per barrel, the impact on Nigeria’s fiscal position would remain negligible due to petrol subsidy payments and falling oil production by the country.

It also predicted that Nigeria would make a gross revenue of $25 billion from oil sales this year, although this would also have very insignificant impact on the country’s fiscal position.

 In the report titled, “Nigeria’s Budget: Does it benefit from high oil prices?” the firm, which also provides institutional research and financial advisory services,  noted that on the fiscal front, the petrol subsidy and falling oil production undermines gains on the government revenue side. It estimated that subsidy cost could increase by $1.5 billion to $2 billion for a $10 per barrel change in the oil price, while net oil revenue could rise between $4 billion and $5 billion, without factoring in other externalities.

“This implies that Nigeria has a $3 billion net benefit for every $10 per barrel change to the oil price (Brent),” it stated.

But explaining that Nigeria’s fiscal position would not benefit from high oil prices in 2022, the report noted that the swelling of the petrol subsidy as oil price increased and the fall in oil production due to theft and underinvestment would combine to hobble any gains from rising oil prices.

The federal government recently increased the 2022 subsidy budget from N443 billion to N4 trillion, after it shifted the planned removal of what it terms under-recovery by 18 months.

RenCap said in the report, “An 80 per cent increase in the oil price, from $41/bbl to $72/bbl, reduced the budget deficit by about 1 ppt only. 2021 was an outlier. We attribute the widening of the deficit in 2021, despite the high oil price, to the fall in production that countered the price effect.

“Our ‘trendline’ suggests that if we assume an average oil price of $100/bbl for 2022 and production at pre-2021 levels, then the FGN’s budget deficit would come in at about 3.5 per cent of Gross Domestic Product (GDP). We are forecasting a deficit of 4.7 per cent.”

At the year-to-date average Brent crude price of about $100 per barrel, the Nigerian government, the report stated, took 45 per cent to 50 per cent of gross oil sales in the form of taxes and royalties. The remainder, it added, went to the contractor as cost recovery and profits.

It stressed, “In 2022, at $100/bbl Brent, we estimate that gross oil revenues to the government, mostly taxes and royalties, will be $24.8 billion/N10.3 trillion, that is 4.9 per cent of GDP, assuming the current FX rate of NGN415/$1, and net oil revenues at $17 billion/N7.1 trillion (3.4 per cent of GDP).

“Of this, 80 per cent stems from onshore/shallow water oil fields and the remainder from deepwater oil fields.”
Still at $100 per barrel, in 2022, it also estimated petrol subsidy to be 34 per cent of the government’s gross oil revenue and 50 per cent of net oil revenues.

At the current N415 official rate of the naira to the dollar, on an accruals basis, RenCap estimated that the subsidy ranged between 23 per cent and 27 per cent of gross oil revenue for $60 110/bbl Brent.

But it added that the impact of a naira devaluation on the numbers at N500/$ and N600/$ and assuming that the pump price did not change, would raise subsidy to between $10 billion and $11.3 billion.

According to the organisation, that is based on the assumption that Nigeria consumes 23 billion litres of petrol a year (400kbpd), taken from the most recent 12-month consumption data, forecasting that subsidy would only be wiped off when oil prices are below $45-$50 per barrel.

“Below this price,” it stated, “the government’s take of oil proceeds is fully remitted and not undermined by petrol subsidy deductions. The reinstatement of the petrol subsidy in January partly explains the revision of the FY22 budget targets and assumptions, including the widening of the deficit target,”

In April, the federal government revised its budget deficit target to four per cent per cent of GDP in 2022, as against its initial target of 3.4 per cent, on the back of new developments, including the Russia/Ukraine situation.
President Muhammadu Buhari had written to the National Assembly calling for an amendment to the budget, to account for the wider deficit and increase in borrowing.

Buhari said the new developments included the reinstatement of the petrol subsidy, the sharp increase in oil prices, and significantly lower crude production, mainly due to production shut-ins because of massive crude theft between the production platforms and terminals.

The president also proposed adjusting the government’s budget assumptions to include the increase in the oil price benchmark to $73 per barrel, from $62/bbl previously, lower projected crude production to 1.60 mbd, from 1.88mbd previously, and an increase in the estimated provision for the petrol subsidy for 2022 to N4 trillion.
According to the report, “This is also an increase when compared to the N3 trillion that the NNPC called for in January, soon after it was announced that the subsidy would remain in place.

“Due to the adjustments, the federation account revenue pool for the three tiers of government is projected to fall by N2.4 trillion (1.1 per cent of GDP, by our estimate), and the FGN’s share by N1.2 trillion (0.6 per cent of GDP).”
The document projected Nigeria’s 2022 oil production to be within the 1.5 bpd to 1. 7 million bpd range, with 1.6 million bpd as midpoint, comprising one million onshore and shallow water production as well as 500k bpd for deepwater.

It explained that after deductions related to the oil and gas sector, including federally funded upstream capex, contributions to the 13 per cent derivation fund for the Niger Delta oil-producing states and other items, Nigeria’s net oil revenue could be $17 billion in 2022.