Rising oil price puts more pressure on NNPC’s finances

Crude oil extended its gains at the weekend after closing at a six-week high with signs of strengthening demand in key markets, thereby piling more pressure on the ability of the Nigerian National Petroleum Corporation (NNPC) to contribute to the Federation Account.

However, the organised labour has suggested the adoption of production cost pricing method where the price of petrol will be based on the cost of domestic crude oil production and refining in the domestic market, as a way of reducing the burden of the price disparity between the market and pump prices of petrol on the federation.

NNPC has been shouldering the subsidy on the pump price of petrol which has on some occasions gulped as much as N120 billion monthly.

Last week, the corporation, in correspondence to the Accountant General of the Federation (AGF), Mr. Ahmed Idris, served a notice that it would be unable to contribute to the Federation Account in May after deducting about N112 billion subsidy funds from its April revenues.

In the official communication, the NNPC said the shortfall was due to the rising average landing cost of fuel, which jumped to N184 per litre in March as opposed to the existing N128 ex-coastal price.

However, after weeks of bearish run, crude prices have again started to pick up, portending a higher landing cost and by extension further rise in petrol subsidy payments by the NNPC.

Brent for June settlement gained 0.6 per cent to close at $66.7 after rising 1.3 per cent, while West Texas Intermediate (WTO) for June delivery also rose to $63.58 a barrel after climbing 1.5 per cent at the weekend.

Demand for the US petroleum products increased to the highest in more than two months, while distillate inventories, a category that includes diesel, dropped the most since early March.

There was a chorus of bullish voices on the outlook for crude during the week, including a prediction from Goldman Sachs Group Inc. that oil demand will post a record jump over the next six months as vaccination rates accelerate.

Added to that, the Organisation of Petroleum Exporting Countries (OPEC) also raised its estimates for growth this year, although the alliance warned that a worsening virus situation in India, Japan and Brazil could derail the recovery.

India, one of Nigeria’s crude oil buyers, has recently been hit hard by a second wave that has pummelled fuel consumption and stretched the health-care system beyond its limits.

In March last year, when the international crude oil price was at its lowest, the federal government announced that it had deregulated the downstream sector, noting that it would thenceforth be subjected to market forces.

But that policy collapsed a few months later when prices started to pick up, as the pump price rose from a low of N121 to N162 within months, resulting in public outrage and threats by the organised labour to embark on a strike.

Labour Canvasses Alternative Petrol Price Mechanism

The organised labour has suggested the adoption of a production cost pricing method where the price of petrol will be based on the cost of domestic crude oil production and refining in the domestic market.

It said it was opposed to the existing import-parity model, which it claimed has bled Nigeria of humungous forex and is a major singular source of Nigeria’s economic haemorrhage and instability.

“The production cost pricing model allows the government to manage the national petrol market in the interest of sustainable economic development. What is more, it would encourage the industrialisation of our country and would break Nigeria from its colonial past as a mere source of raw materials and a net importer of manufactured goods,” it said.

The Labour movement’s position was contained in a joint message by the Nigeria Labour Congress (NLC) and Trade Union Congress (TUC) to mark this year’s May Day celebration.

The organised labour described the import-parity pricing model as a ploy to service the neo-liberal and neo-colonial wishes of those who want to keep Nigeria economically subservient.

It said: “It is truly funny that we are even having the conversation of importing refined petroleum products simply because we cannot manage our national refineries. It does not just make sense that we are the only OPEC country that cannot refine her crude oil.”

Labour dismissed the fears of subsidy burden in the production-cost-pricing model, adding that even with functional refineries, many countries still subsidise energy for security reasons.

“It is crucial to point out that 159 nations are subsiding energy because of the security implications. In absolute terms, the top three subsidisers of petroleum prices across the world are the United States, spending about $502 billion; China spends $279 billion and Russia with $116 billion.

“The production cost-pricing method assumes that the petrol prices are based on the cost of domestic crude oil production and refining in the domestic market. This method implies that crude oil is produced and refined in the country. The production-cost-pricing method is used in the USA, Russia and Saudi Arabia, and others to determine petrol prices.

“While the structures of petrol prices may be different, the major determinant of petrol prices ranges from taxes in Russia, which made up 62.9 per cent of the petrol price; the cost of crude oil production in the USA is the major determinant, making up 59.4 per cent of the total petrol price. And in Saudi Arabia, expensive refining cost accounts for 43 per cent of the petrol price,” it stated.

NLC and TUC, which have been in negotiations with the federal government over fuel price and electricity tariff, said that each country chose the model that matched with its developmental level, unique resources, development strategies and nature of domestic energy markets.

The two labour centres urged Nigeria to moderate the production-cost-pricing model to fit into its developmental and market agglomeration goals.

According to them, Nigeria has a captive market for refined petroleum products, which serious refiner has no reason to worry about the market for the realisation of the products.

“What is more, the supply chain could be extended to neighbouring countries, which currently serve as the illicit destination of smugglers of even the imported products,” they added.

Labour also opposed the multi-year tariff order (MYTO) used for fixing electricity tariff, which is based on some strange assumptions.

It said the MYTO was based on the Nigerian inflation rate, the exchange rate of the naira to the UD dollar, the inflation rate in the United States, price of gas for generation at $2.50/MMBtu.

“Other items in the MYTO include generation cost of N4.646 per megawatt, average generation price between hydro and thermal stations put at N25.6, payment to Transmission Company of Nigeria (TCN) and sundry administrative charges of N7.80 per kilowatt. Then, there are the costs associated with the megawatt of electricity delivered to Discos and the aggregate Technical Commercial and Collection (ATC&C) Losses. The organised labour cannot accept these strange and fluid criteria in the electricity tariff regime,” it said.

The organised labour urged the government to make adjustments to the gas price for the power sector.
It suggested that gas price increases should be suspended for the next three years to support electricity tariff stability.

Labour said since gas supply for electricity generation accounted for 70 per cent of local gas consumption, there should be the security of supply.

“We support improved payment discipline – ensuring that gas supply companies are paid on a first-line charge from the revenue accruing to the electricity sector and in a timely manner. With the savings made, the cost of the electricity tariff could be reduced by N10.50 across the high price bands.

“Nigerian workers call on the government, in line with the agreement reached with labour on September 28, 2020, to take very reasonable measures to ensure that all the four public refineries are rehabilitated and brought back fully onstream in good time. We demand that such efforts should be on the basis of value for money.

“Nigeria has already lost huge sums of money to phoney contractors and their collaborators in government who had a huge meal importing refined products into Nigeria, feasting on the so-called subsidy and defaulted on their commitments for effective turn around maintenance of our refineries,” labour added