How subsidy distorts economy, by NNPC

THE Nigerian National Petroleum Corporation (NNPC) has painted the picture of how the implementation of the subsidy regime is distorting the economy and make spending planning almost impossible.

The Group Coordinator, Corporate Planning and Strategy of the Corporation, Dr. Tim Okon, who disclosed this in Abuja at the Oloibiri lecture series and energy forum by the Society of Petroleum Engineers (SPE), explained that since Nigeria does not control how much crude oil is sold in the international market, the task of economic planning is made cumbersome.

This comes as Nigeria may lose N2 trillion or $10 million in the current year if the price of crude oil fall below $53 per barrel. The Managing Director and Chief Executive Officer of Total Upstream Companies in Nigeria, Elizabeth Proust, stated this while speaking at the event on a topic titled ‘global oil price dynamics: Impact and strategic solution for Nigeria, perspectives of the International Oil Companies (IOCs).’ Okon added that since subsidy payment is on the first line charge, it behooves on Federal Government to ensure payment from the federation account on an equal basis among all the states of the federation, which creates distortion and uneven distribution of resources.

He further explained that subsidy creates deficit that is difficult to manage. Okon stressed the need for subsidy removal to boost economy planning, enhance transparency and halt the distortions in economy.

Proust posited that the low price is affecting both oil producing countries as well as producers. She said: “Unfortunately, Nigeria is not immune to this revenue squeeze. We estimate that if crude oil prices average $53 per barrel in 2015, compared to $77.5 in 2014, the Federal Government of Nigeria’s oil and gas revenue will decline by $10 billion this year, or a gut-wrenching 30 per cent.

Total allocation to state governments was N620 billion in the last quarter of 2014, as the oil price was sliding – 15% lower than in the same quarter of 2013.

This is resulting I the slowing or cancelling of many infrastructure projects that Nigeria desperately needs.” She stressed that in response to the unhealthy development, businesses are adding more rigour to cost optimization programmes to boost the bottom line.

She was however quick to observe that most of the cost drivers in the oil and gas industry in Nigeria are relatively inelastic in the short term which she put at one or two years due to existing contract commitments, which then means there is a time lag between movements in crude prices and costs.

“Thus, we cannot expect near-term costs relief. Additionally, in Nigeria, long contract approval times and other bureaucracy further slow any gains from cost adjustments to low crude oil prices.

While calling on Nigeria to move swiftly and unlock its latent oil and gas potentials, the Total Chief in Nigeria declared that with 37 billion barrels oil reserves, which is 11th largest in the world and 179 trillion cubic feet of discovered natural gas, the 9th in the world, Nigeria clearly has the natural resources for its oil and gas industry to be globally competitive.

She further stated that the downward slide in the price of oil calls for innovation and adoption of technology to drive down costs especially for Nigeria in view of the strategic position of earnings from oil and gas is to the economy.

He words: “Especially for Nigeria, advancements in subsea technology and floating (FLNG) will help unlock deepwater oil and gas. For onshore and shallow water production, use of fiber optic technologies for monitoring pipelines will help in integrity surveillance and security issues.

There are three fundamental enablers for unlocking industry’s potential and ensuring Nigeria is globally positioned to attract the required investment. These are: a conducive business environment; adequate funding of the Joint Venture with NNPC; and globally competitive fiscals coupled with enabling domestic gas prices. Unlocking the industry’s potential could add about 1.5million barrels of oil equivalent production per day by 2020”