CRISIS in the Oil sector which has caused prices to drop significantly, is contributing to the level of Non-Performing Loans (NPLs) in the banking sector as the companies the banks lent to, are having liquidity challenges and could not pay.
This view was recently expressed by Ms. Aderonke Onadeko, during a virtual conference organized by the Facility for Oil Sector Transformation (FOSTER) in partnership with the Finance Correspondents Association of Nigeria (FICAN) in Lagos, with the theme: “Financial Impact of the Crashing Oil Price on Nigeria.”
Crude oil price dipped bellowed $15 per barrel in March due to trade war between Saudi Arabia and Russia and the coronavirus pandemic.
Onadeko, argued that investments in the local refining capacity would eliminate costs that accrue from the export of crude and the importation of refined petroleum products back to Nigeria with attendant associate costs like demurrages, taxes, shipping, among others. She said it would also lessen the pressure on the forex market as well as preserve the external reserves and create more jobs in the country.
She said as a result of this, some of the states are finding it challenging to meet their obligations as the revenue they get from the Federation Account has shrunk significantly.
Onadeko noted that reforms are eminent in the Nigerian oil and gas sector, which would make it more competitive and attractive to foreign investors. According to her, there would be a lot of policy changes in the sector, which will lead to players embracing mergers and acquisitions.
Other benefits that would come out of the deregulation, according to her, include the passage of the overdue Petroleum Industry Bill (PIB), improved policy and governance in the oil and gas sector as well as enunciation of better policies that would enthrone transparency in the industry.
“The downstream segment is going to become more competitive and more liquid. We are going to see more deepening in its value chain. We will see international and local companies coming together to invest in refineries. If we had had adequate local refining capacity in Nigeria, now that the price of crude oil has dropped internationally, Nigeria will switch to refining more petroleum products locally and supplying them to the rest of West Africa sub-region and Africa at large,” she added.
Onadeko, pointed out that the implication of the government’s announcement that the downstream segment would be deregulated is that it should hands off the importation and the pricing of the sale of petroleum products in the country.
She, however, noted that in spite of the announcement, the Petroleum Products Pricing Regulatory Agency (PPPRA) is still the one setting at the beginning of every month what the price the petroleum products would be.
“My view is that we are going towards a deregulation but what we have right now is a liberalisation that has relaxed the rules. So, we expect the government to tell us when it will quit completely within the next 12 months,” Onadeko said.
She also debunked the fear that a full deregulation would force a cartel on Nigerians that would come together to increase prices on Nigeria and recommended the strengthening of the petroleum pipeline networks in the country for cheaper and faster transportation of products rather than relying on trucks.
According to her, the time has come for Nigeria to terminate the increasingly unsustainable petroleum subsidy, especially now that the crude oil revenue is at its lowest ebb and the country is reeling under the crushing impact of COVID-19 on the economy.
She said: “Nigeria spent more than N462 billion on subsidies and under-recovery of petroleum product in 2019 with a projection to spend N417 billion in 2020. However, the ongoing COVID-19 pandemic has had an adverse effect on crude oil prices, which account for 90 per cent of the country’s source of foreign exchange and 60 per cent of government revenue.
“Nigeria’s crude value is benchmarked against the Brent crude. Presently, a barrel of Brent crude is $25 while Nigeria’s Bonny light grade is selling between $13 and $15 per barrel. This makes it significantly impossible to fund the 2020 budget without borrowing.”
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