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Tuesday, September 26, 2023

The Curious Case of Nigeria’s Shrinking Dollar Reserves as Oil Surges

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In a reversal of the event from April 2020, when WTI oil briefly hit a negative $40 per barrel the shortage of everything has translated into record price of virtually all commodities.

The Bloomberg Commodity Spot Index, which tracks 23 energy, metals and crop futures, has touched a record high this year.

That has been driven in part by surging oil prices, which have hit their highest level since 2014 and earlier yesterday Brent rose as high as $94, per barrel.

Central Bank of Nigeria (CBN) reserves are own about $1 billion in 2 months however despite the increase in oil prices so what gives?

Analysts MoneyCentral talked to say 3 things are largely responsible. Lower oil production due to shut-ins, Production Sharing Contracts (PSCs) pumping more oil, backlogs of dollar demand in the country that the CBN has to manage.

Lower Oil Production

While Nigeria’s Gross Domestic Product (GDP) expanded by 4.03%(year-on-year) in real terms in the third quarter of 2021, there was persistent weakness in the oil sector, which contracted (-10.73%) for a sixth consecutive quarter.

“We link the negative oil sector outturn to weaker domestic oil production, which continues to be hampered by the slowdown in drilling activities and pipeline sabotages. Specifically, we note that operational challenges in August 2021 led to a Force majeure on one of the country’s key oil export terminals – the TransForcados Pipeline (TFP),” analysts at Cardinal Stone Partners said.

PSCs pumping more oil

As more oil majors move operations into deep waters, and offshore oil production surpasses joint venture arrangement, Nigeria’s crude oil earnings is being impacted negatively because Production Sharing Contracts (PSCs) fiscal terms are less favourable.

The PSC is a form of joint agreement for exploration, development and production of oil resources, that makes extractive companies bear the cost of production, unlike the joint venture agreement where government is indebted with cash calls.

Under Nigeria’s PSCs terms, the Federal Government owns concession areas through the NNPC but the operator has funding obligations for cost of exploration, drilling, development and production if it finds oil in commercial quantity.

Royalty applicable to PSCs range from zero for the deep offshore fields to a high of 16.67 percent for water depth up to 200 meters but the irony is that oil majors have been finding crude in waters with depths over 1,200 meters which means zero royalty to government.

Backlogs of dollar demand

The Central Bank of Nigeria (CBN) has been rationing dollars in the economy since the first quarter of 2020 when the impact of the coronavirus pandemic first began to affect oil prices.

Analysts say with oil prices now at the $90 per barrel level, the CBN has more firepower and has been quietly working to clear all legitimate backlogs of FX demands especially from foreign investors.

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