Benefits of oil rally elude Nigeria as NNPC losses mount

by | February 1, 2018 2:00 am

The inability of the Nigerian National Petroleum Corporation (NNPC) to operate as a fully integrated oil company is taking a toll on its revenue as it recorded mounting losses largely from its downstream operations at a time oil prices have risen to a three-year high.
Finance Minister, Kemi Adeosun said on Wednesday that the NNPC is presently under recovering costs as it is the sole importer of Petroleum products into Nigeria, which it sells below the cost price.
Adeosun explained that the Corporation loses huge amount of money to defray the extra cost of importing the product and that the effect of this is the current downward trend in accruals into the Federation account which is being borne by all tiers of government and by extension ordinary Nigerians.
“On the question of subsidy, the price of oil for Nigeria today is a double edge sword. So every dollar that goes up we get more revenue but also because we are importing refined petroleum it increases the landing cost of fuel,” Adeosun said.
“So for every time we get excited that the oil price is going up, there is also a knock on effect on the price of imported PMS and that is a function of us not having refining capacity, it is one of the unfortunate impact of that.”
Oil prices rallied to a two-year high in 2017. Brent for April settlement slipped 32 cents to $68.20 on the London-based ICE Futures Europe exchange. The global benchmark crude traded at a premium of $4.58 to WTI.
Modest gains of N194.7 million made NNPCs upstream and gas processing subsidiaries such as the Nigerian Petroleum Development Company (NPDC) and Nigerian Gas Processing and Transportation Company Limited, were wiped off largely by its downstream subsidiary operations which recorded deficits north of N346million according to figures from the organisation’s operations and financial report for November.
This compares poorly with Norway’s Statoil, which recorded better performance due to the recent oil rally.
“With an oil price below 52 dollars per barrel, we have generated 3.6 billion dollars in free cash flow so far this year, based on good contributions from all business segments. This has further strengthened our financial position,” says Eldar Sætre, Statoil’s CEO in a statement posted on the company’s website announcing the release of its 2017 third quarter & first nine months results.
Sætre said the company realised efficiency improvements reducing its organic capital expenditure in 2017 by 1 billion dollars, to around 10 billion dollars.
Integrated oil companies net off losses incurred when crude prices dip with better refining margins and conversely during an oil rally.
But this gain eludes the NNPC which has recorded deficit for the fifth successive month due to poor refining operation and subsidy on local consumption of petrol.
The combined value of output by the three refineries (at import parity price) for the month of November 2017 amounted to N13.08 billion while the associated Crude plus freight costs and operational expenses were N15.21billion and N9.02billion respectively; resulting to an operating deficit of N11.15billion.
Speaking on the budget benchmark and excess crude account (ECA), the Finance minister said, “Let me explain how the price is structured. The budget is a function of price and quantity. Excess crude kicks in when both price and quantity is exceeded. Now if you look at the oil price for last year and most of this year and quantity, the quantity has frequently been below the target and so you don’t necessarily get the straight credit into exceed crude as a result of oil price.
“Having said that, with the oil price consistently higher now we should begin to start seeing some accruals into our excess crude going forward because we are starting to see some recovery in quantity. But remember that the quantity estimate is 2.5 million barrels per day and it must be consistent every day and the price above the benchmark before you get automatic credit into excess crude.
“Having said that what we do expect this year will begin to accumulate funds into the excess crude.”
NNPC’s group operating revenue for November 2017, dropped by 23.52 per cent to N270.8 billion, from N354.08 billion recorded in October. The NNPC attributed this to increased cost in upstream activities as well as the reduced revenue in the downstream value chain occasioned by high crude oil inventory in refineries due to unplanned operational shutdown of its three refineries.
Yesterday, the Port Harcourt Refinery the most viable of the three refineries, which recorded surplus of N25.6million in November, was shut down because of a damaged rotor which has affected it operations, shutting in three to five million litres of refined petrol capacity per day.
Also, during the period under review, the three refineries (Warri/Kaduna and PH) combined capacity utilization was barely 5.92 percent.
“There are people working in these refineries that are being paid and promoted for not doing anything but yet receive hefty salaries, so the refineries are loss centres and not profit oriented compared to other oil producing countries which is a shame, but we hope the Petroleum Industry Governance Bill (PIGB) will help address all of these lapses,” Adenikiju said.
NNPCs situation is worsened by crude oil theft and over 1,005 vandalized points recorded between November 2016 and November 2017.
BusinessDay gathered that the shutdown of the Port Harcourt Refinery is worse than the NNPC is making Nigerians believe as the rotor of the plant has been badly damaged and efforts to source the part locally is yet to yield result. The problem was attributed to the lack of prompt attention to the incident by the NNPC headquarters in terms of releasing funds to procure the necessary equipment.