How Oil Dollars Gush Became a Trickle

Postscript by Waziri Adio

The recent disclosure by the Governor of the Central Bank of Nigeria, Mr. Godwin Emefiele, about the drying up of Nigeria’s oil dollar inflows has generated different kinds of reactions, ranging from surprise to recriminations. According to Emefiele, monthly receipt from crude oil sales has dwindled from an average of $3 billion in 2014 to ‘an absolute zero dollars presently.’

This appears counterintuitive, unbelievable even, in a year when oil prices have touched historical heights. But the disclosure will not be a total surprise to those who have been paying close attention to Nigeria’s oil sector. There has been, expectedly, a lot of finger-pointing. And to be sure, there is enough blame to go round.

But before and beyond dishing out blames, it is important to understand how and why Nigeria has landed in this terrible patch.

Some commentators have harped on a single reason. But while one or two factors may have played major roles, the simple fact is that there are many factors at play and they act in concert. Some have been around for a while and some are recent. What we have now is a perfect storm. And unfortunately, a perfect storm at a time when we should be reaping massive windfalls from historically high oil prices, and which should translate not just to increased revenue for all tiers of government but also to improved savings and greater accretion to our foreign reserves. None of these is happening.

A few quick clarifications will be necessary before we delve into the reasons why oil dollar inflows have almost dried up. This is not the first time that the CBN will be saying this. In July this year, the CBN issued a report titled ‘the Forex Question in Nigeria: Factsheet’ where it claimed that “domestically, there has been zero dollar remittance to the country’s foreign reserve by the NNPC”. NNPC quickly rebutted with a half-clever claim that it had indeed remitted $2.7 billion into its CBN account in the first half of 2022. The national oil company provided monthly breakdown and the categories of remittances to its CBN account. Lost in the claim and counter-claim is the tragedy that has befallen crude oil sales, which used to account to a significant portion of revenue from the oil and gas sector and of forex inflows into the country.

It is important to also clarify that total revenue to government from the oil and gas sector has not diminished to zero, even with the fact that NNPC has not made remittances to the Federation Account for some time now. Revenue flows to the Federation Account from the sector include royalties, fees and fines, concession rentals, signature bonuses, NLNG dividends, Petroleum Profit Tax (PPT) and sale of crude oil and gas. Save for crude oil sales, the other sources of revenue have not disappeared, even if they are shrinking too because they are mostly tied to volume produced. The claim by the CBN governor is about inflows from sales of crude oil.  

While CBN’s claim is an attempt to extricate itself from being held accountable for the plunge in the supply of dollars and can be seen as self-serving because some of its actions also negatively impact forex inflows from other sources, available facts back up the claim by the CBN governor on oil sector forex inflows. A dataset compiled from CBN’s Statistical Bulletins from 2008 shows that oil inflows through the CBN have been moving in tandem with oil prices, until very recently. This means that oil inflows through the CBN are usually high when oil prices are high and usually head south when oil prices plummet. But consistently, oil sector inflows used to account for more than 70% of total forex inflows through the CBN.

In June 2008, for example, oil forex inflows amounted to $3.16 billion or 96.04% of the $3.29 billion total forex inflows through the CBN.  The oil inflows crashed to $1.99 billion or 86.52% of the total CBN forex inflows of $2.30 billion in January 2010. A highpoint was in March 2014 when oil inflows hit $4.79 billion or 98.15% of the total $4.88 billion CBN forex inflows. However, the precipitous decline started in February 2015 when both the quantum and proportion of oil inflows began a downward spiral. Oil inflows came to $1.52 billion or 59.6% of total CBN inflows that month, then plunged to $574 million or 30% of CBN inflows in June 2016.

But the datapoint that should focus minds and should serve as a segue to the topic at hand is that as at June 2022, oil inflows plunged to $755 million or a mere 18.06% of total forex inflows through the CBN. Even when we make allowance for time lag in remittance of oil revenue, how come oil inflows through CBN were $4.79 billion in March 2014 when average price for Brent crude was $107.48 per barrel and just $755 million in June 2022 when Brent crude sold for $122.71 per barrel?

As said earlier, many factors are at play. I will highlight three inter-linked factors that have impacted revenue and forex inflows from the sale of Nigeria’s crude oil. The first is the precipitous decline in our oil production. From a peak of 2.5 million barrels of oil per day in 2005, we are now struggling to produce one million barrels per day. Many people, including those in government, are eager to blame oil theft for the decline. This is not the full picture. Oil theft has been a feature of the sector for a while. It is only more noticeable now because overall production has shrunk by more than 50%. The reason why we are struggling to meet our OPEC goes beyond oil theft. The humbling fact is that our oil industry has been on a slow but steady decline overtime on account of under-investment, aging infrastructure, policy flip-flops, incessant vandalism, and fiscal uncertainties. Focusing on only oil theft will necessarily dispose decision-makers to awarding pipeline protection contracts and increasing security budgets while leaving other important issues unattended to.

The second factor is that the share of oil that goes to the Federation has also been falling both as an absolute number and as a percentage. It is worth saying that not all the oil produced in the country goes to the government because there are different production arrangements. Apart from the Joint Ventures (JVs) under which the government gets equity share in oil produced and the Production Sharing Contracts (PSCs) under which government may receive profit oil and gets PPT and royalties in oil (called in-kind payments), companies operating under other production arrangements keep their oil. Under these arrangements, companies’ obligations to government are taxes, royalties and other fees which they pay in cash. This should be pretty obvious, but I have encountered not a few highly placed Nigerians who think the country keeps and sells all the oil produced here.

Federation’s share of oil produced in Nigeria has been adversely affected by two developments. The first is the changing structure of oil production in the country. Most of our production used to come from the JVs, which gives government more share of oil produced, as the country owns between 55% and 60% of the JVs. The production balance has shifted from JVs to the PSCs, which favour the companies more. According to a 2019 analysis by the Nigeria Extractive Industries Transparency Initiative (NEITI), JVs accounted for 98% of oil produced in Nigeria in 1998 but only 32% in 2018.

The second related development is that over the time, some substantial and prolific Federation assets have been divested to the Nigerian Petroleum Development Company (NPDC), the upstream arm of NNPC. NPDC has a curious ownership structure: it is owned 100% by NNPC, and not by the Federation. What this means is that even when the assets are not fully paid for, the oil produced from them belongs to NPDC and not to the Federation. Ordinarily, this should be a moot point since NPDC is owned by NNPC which in turn is owned by the Federation. But there is a Chinese wall here that doesn’t allow for a Pareto equilibrium: NNPC’s gain is the Federation’s loss.

These two factors have combined to slice Federation’s share of oil produced in the country from 56% of the 828 million barrels produced in 2000 to 28.2% of the 682 million barrels produced, according to NNPC figures, between July 2020 and July 2021. This shows that the Federation received 465 million barrels of the share of oil produced in 2000 but only 192 million barrels produced in the thirteen months between 2020 and 2021, a decline of almost 60% in Federation’s share.

But the decline in quantum and share of oil production doesn’t explain zero or near zero revenue and inflow from oil sales. The rub is in the significant change in how we allocate whatever the Federation receives. The oil belonging to the Federation is typically split into two: Domestic Crude Allocation (DCA) and Federation Export. The DCA is intended for local petrol needs. NNPC pays for this in Naira since the petrol is sold in Naira, and makes upfront deductions for subsidy, repairs/maintenance and crude losses. As the name implies, Federation Export is exported, and sold and paid for in dollars. The Federation used to receive full value in dollars through its account with CBN.

DCA accounted for only 7% of Federation oil in 2000. In 2005, the government decided to allocate the 445,000 barrels per day, the installed capacity of the four government refineries, as DCA. This increased DCA’s share of Federation oil to 35%. In short order, the allocation to DCA and Federation Exports were about 50:50. At some point, some portion of DCA used to be exported and paid for in dollars too. The increase in allocation for domestic consumption created a perverse incentive and laid the ground for the current mess.

With the introduction of the Direct Sale and Direct Purchase (DSDP) arrangement to bring in refined products and the massive decline in government’s share of oil, Federation Export started the journey to oblivion. Currently, all the oil the Federation receives as its share (and sometimes plus PPT and royalties paid in oil) now goes to the barter arrangement to bring in petrol, which is sold locally beneath landing cost. This means that even in the best of circumstances, we can only receive Naira and not dollars from crude sales as everything now goes to DCA.

The cessation of federation oil export is a double whammy: no accretion to foreign reserves from a major source of forex inflows and no remittances to the Federation from a major source of income. Ordinarily, the Federation should earn more money from high oil prices. But we now barter all our oil for petrol and petrol is sold at a subsidised price. The higher the price of oil, the higher the subsidy, and the more NNPC will deduct for subsidy and sundry costs. FAAC records show something more interesting than the well-known fact that NNPC has not made remittances to the Federation for some time: the Federation is actually owning NNPC subsidy arrears. Amazing stuff!