… EU embargoes Russian crude oil as China eases anti –virus lockdown
The decision by the European Union to ban Russian crude oil as well as China easing anti-virus lockdowns have shut up the price of Brent crude past $120 and put Nigeria economy in a very precarious situation with the cost of fuel subsidy most likely to surpass N6 trillion.
It means more of the revenues the government gets from the sales of crude oil is now going to be diverted by the Nigerian National Petroleum Company NNPC Limited to buy refined fuel thereby causing dislocation in the economy
The country’s expenditure on subsidies has now hit N6 trillion already because of the price of crude oil which has remained above $100 per barrel. For the price to have jumped to $120 per barrel means the Nigerian economy is going to face a very serious challenge.
Recently a group of panelists that participated at the Centre for Petroleum Information (CPI) Oil & Gas Law Forum, titled “Implementing Petroleum Industry Act (PIA) 2021: Fixing arising legal issues,” expressed apprehension over the current price of the crude oil, especially at it has hovered around $100 for some time because of the Russian- Ukrainian war.
According to the speakers at the forum, the price of crude oil was between $55-$60 per barrel when the government raised the budgeted to N4 trillion. But now the price is over $100 per barrel the cost has hit N6 trillion.
The amount spent on subsidies between 2010 and 2020 was N1.4 trillion. The cost increased substantially in 2021 and in 2022 it has gone beyond one’s imagination.
Giving a five-year breakdown of the subsidy trajectory, Emeka Akabogu, one of the speakers at the forum, said the cost of fuel subsidy has increased by 890 percent between 2017 and 2021 with only 12 percent increase in the price of fuel.
Emeka Akabogu lamented that by paying subsidy the government has violated the petroleum Industry Act which it put in place. This situation, he opined, could bring about integrity challenges in respect of government policies, because investors’ confidence is being eroded.
He asked, what does removal of fuel subsidy entail? He answered by saying that it means the market is deregulated and that there is much more revenue for the government to divert to areas of need. It also means that operations or investment in the industry with regards to retail stations, storage tanks distribution net and haulage and the likes will increase significantly, with efficiency at its best. He said this was envisaged with the passage of the PIA.
“The government had said it was going remove subsidy by the middle of the year. But at the beginning of the year, the price of crude oil went up, and with an election year in sight, the government obviously capitulated to the sentiment that is being expressed by the general public and decided that it would continue with fuel subsidy.”
The PIA he said was unequivocal regarding the deregulations of pricing of petroleum products in Nigeria because the Act stated that the prices of petroleum products shall be based on market price or forces of demand and supply.
He said the federal government is breaking the law by its continuous payment of subsidy, adding that the PIA is enforced but essentially the free market regime is not in force.
He said the opportunities in implementing the PIA are huge and better than trying to maintain it at the expense of other sectors of the public service
Removal of subsidy he said, gives the operators more control over their profit, allowing them to set cost-reflective prices for their products, he said.
He added that the sovereign sanctity of the PIA is being eroded by the government’s refusal to allow full deregulation of the downstream sector of the petroleum industry.
Oil rose 1.9% to reach its highest closing price since March 8, extending last week’s 6% rally. China’s key commercial hub of Shanghai allowed all manufacturers to resume operations from June, while officials said Beijing’s coronavirus outbreak is under control. Trading in U.S. crude futures was muted due to the Memorial Day holiday.
The European Union leaders agreed to cut Russian crude oil imports by as much as 90 percent by the end of the year. The agreement is in principle, and details would still need to be clarified.
Per a Reuters report, some 65 percent of Russian oil exports to the European Union reach the continent by tankers, with the rest flowing via the Druzhba pipeline. By the end of the year, Germany and Poland have agreed to stop buying Russian crude from the Druzhba pipeline, which would bring the amount of embargoed Russian oil to 90 percent of the total.
The embargo seeks to first target tanker shipments, which will put those EU members who get their Russian oil this way in a difficult position. For the time being, there is no clarity as to how these EU members will be compensated.
Meanwhile, Hungary, the Czech Republic, and Slovakia will be exempt from the embargo, leaving 10 percent of usual Russian oil flows in place. There was no mention of Bulgaria in the Reuters report, but the southern European state was also part of the group of countries opposing any embargo that could threaten the security of its oil supply.
The European Commission proposed a full oil embargo against Russia in early May as part of its latest sanction package. Hungary, however, immediately and quite vocally opposed it, arguing it would need hundreds of millions of dollars to transform its pipeline and refinery industry. The Central European state relies on Russia for more than 80 percent of its oil.
The following weeks saw active discussions as more EU members heavily reliant on Russian oil followed Hungary’s example, with Bulgaria threatening a veto on any embargo proposal unless it received an extension to reduce and eventually eliminate Russian oil imports.
Following the news of the embargo agreement, Brent crude was trading at $122.63 per barrel, with West Texas Intermediate at $117.99 per barrel.