As of the time of this report, the world’s Crude Oil is soaring above $100.
This is largely ascribed to the rising tensions between Europe and Russia over Ukraine. Russia produces 17% of the world’s gas and 12% of the crude oil. Russia exports using pipelines that pass through Ukraine and at such tension or invasion of Ukraine will cause a cut in supply to Europe.
This could result in less supply to meet demand, therefore, driving up the global price of crude oil.
But what does the global rise in price mean for Nigeria, especially its excess crude account? And why should you know about the account?
When the N17 trillion 2022 budget was passed, the Oil benchmarked price stood at $62, it would mean that the Nigerian government intends to fund the year’s budget with the oil prices at an average of $62 per barrel.
The Excess Crude Account is meant to save up money when the price of crude oil exceeds the budgeted benchmark.
Despite Increased Prices, Nigeria’s Low Crude Oil Production Impacts ECA Gains
Our analysis has shown that despite increased prices of crude oil above Nigeria’s budgeted benchmark in many years since 2016, a corresponding low production rate has hampered what could have been the benefit of such increase in Crude Oil prices, especially for the excess crude account.
For instance, the review by Dataphyte shows that between 2016 and 2020, Nigeria has never been able to meet its benchmark production output for Crude Oil. The closest call was in 2020 when Nigeria’s actual production stood at 1.78 million barrels per day as against its budgeted figure of 1.8 million barrels per day. Although cuts in the year due to the COVID-19 pandemic may have been responsible for the country pegging its budgeted production at 1.8million barrels per day, still it did not meet the target.
In 2019 it estimated 2.3 million barrels per day crude oil production but had an actual production rate of 2.04 million barrels per day. In the nominal sense, the country had a negative revenue outcome when actual revenue is compared to budgeted revenue.
This is to say Nigeria did not meet its target revenue from Crude oil for the year. Nigeria had a $60/barrel oil benchmark and had an average actual price of $65.49, meaning that if it were just a factor of price, Nigeria would have excess revenue but the low production hampered such possibilities.
Despite increase in the crude oil price and the figure soaring higher than the benchmarked price for crude oil price in different budget years between 2016 and 2020, Nigeria only had excess revenue in three years of the five years period. Low production is majorly responsible for this metric, denying the country of better revenues that can lead to actual revenue being more than the budgeted revenue and swelling the excess crude account.
Nigeria May need to improve Production of Crude Oil, Implement Oil Reforms to Enjoy Gains of High Crude Oil Prices
Nigeria’s economy has been largely driven by the oil sector. With the ECA aimed at helping to save gains of high crude oil prices, the country may need to improve its production rate.
In February, 2021, it was reported that Nigeria loses 200,000 barrels of crude oil per day to theft, vandalism. This would mean that at a yearly average rate of $41.68/ barrel of crude oil in 2020, Nigeria lost $8.3 million dollars to theft daily, a loss that could have added to the country’s actual revenue and given hope of excess revenue than the excess revenue Nigeria made in 2020.
In the same 2020, Nigeria had a production shortfall of 200,000 barrels/day.
Issues bordering on community relations have also been cited for the reduction in production capacity of the country. Theft and vandalism sometimes affects the country enough that it fails to meet OPEC quota.
The country may need to implement oil sector reforms to maximise its potentials for crude oil production. The petroleum industry act may be a key tool to achieving the purpose of revitalising the sector, with host communities engagement being a central focus.
Although other factors such as global drop in demand affect production rate but generally, asides from occasion of such cuts, the issues above have played more role in Nigeria’s not cashing on the rising crude oil price for its Excess Crude Account, such that even when prices of Crude oil are at an all time high, Nigeria’s poor production leaves it not benefitting commensurate improved revenue.
Proper Accountability, Management Key to Effective Utilisation of the ECA Fund
Nigeria also need to prioritise the proper accountability and management processes of the fund even if it begins to record better excess crude revenue. The many histories of controversies on how the monies in the accounts are spent points to this.
For instance in 2015, the then Minister of Finance, Okonjo Iweala, was accused of unilaterally withdrawing $2 billion from the funds, a blame she put on the then President, Goodluck Jonathan.
Another $1 billion was alleged to have been withdrawn by the administration of President Buhari in 2019, although the Presidency stated that the money was used for security equipment purchase.
In 2017, there was a motion on the floor of the Nigerian Senate to scrap the Excess Crude Account on the basis that it is illegal and operates without checks and balances, a move that was later suspended.
The Centre for Studies for economies of Africa also noted the efforts of the country to replace funding the Excess Crude Account with the funding of Sovereign Wealth fund over issues of legality and proper management.
The allegations of corruption are despite the fact that only approval from the three tiers of government and the federal Executive council should lead to withdrawal from the account.
Oil Sector Reforms key not just for ECA, but also for Country’s revenue Drive
Nigeria has a high budget deficit, with 37% of the 2022 budget set to be borrowed.
This would mean that asides from better oil production met with commensurate demand creating room for funds in the excess crude account, it would also mean that the country will have more revenue to its coffers.