Budget 2009 and downstream oil sector

No Comments » January 12th, 2009 posted by // Categories: Energy Development Project



Budget 2009 and downstream oil sector

 

There are a few disturbing  omissions to be  observed in the 2009  federal budget presented to the two chambers of Nigeria’s National Assembly (NASS) by President Umaru Musa Yar’Adua (UMYA) on Tuesday, December 02, 2008. For example, one of such omissions is the absence of capital expenditure (‘capex’) allocation to the downstream petroleum sector. For instance, only about 50% of the needed capex or ‘Cash-Call’ required by the upstream sector for joint venture (JV) oil production activities was provided for in the 2009 budget in the sum of $5bn (N590bn) in place of $10.87bn (N692bn). 

 

The petroleum sector has been allocated a paltry sum of N26.5billion from the 91% of the capital vote (N361.2billion for Critical Infrastructure) allocated to five key priority sectors. In addition, the international and domestic gas projects are very lucky garnering allocations ranging from N903.9million for the Trans-Sahara Gas Pipeline, N6.7billion for the Calabar-Umuahia-Ajaokuta Gas Pipeline, N10.3billion for the Ajaokuta-Abuja-Kano pipeline and N1.1billion for the Gas Supply Pipeline to PHCN Delta IV. Nevertheless, there is nothing for example, budgeted for the expansion, revamping and modernisation of the nation’s refineries, crude oil and petroleum products pipelines, depot and jetties etc.

 

This omission has great implications for security of uninterrupted domestic fuel supplies from the nation’s aged, decayed and dilapidated four refineries and associated production, transportation, distribution and marketing infrastructure and facilities. Unless the government has settled for permanent importation of petroleum products, something should be done to correct this serious omission.

The second observation is that the federal government has wittingly introduced a petroleum products consumption indirect tax albeit through the back door. This indirect fuel consumption tax arises from maintaining the present government approved domestic prices for petrol and kerosene. For example, the total estimated amount of this indirect tax for the next 12 months will be over N1.5trillion in revenue to be realised by the federal government. Moreover, this amount is more than the projected deficit of N1.09 trillion contained in the 2009 federal budget! Ironically however, this huge chunk of revenue has not been captured in the revenue profile of the 2009 federal budget. 

This figure came about from the differences in the current import landing costs of petrol and kerosene and the existing government approved prices for these products. For example, the present landing cost plus all other sundry charges per litre of petrol is about N40.81 as compared to the government approved retail/pump-head price of N70 per litre. This fact was obtained from the Petroleum Products Pricing Regulatory Agency (PPPRA) pricing template dated Friday, 26 December 2008. The PPPRA’s recommended retail/pump-head price for petrol is N54.01 instead of the going N70 per litre.

Therefore there is an indirect tax of N15.99 for every litre of petrol consumed bearing any change in the existing domestic prices for petrol throughout next year (i.e. 2009). This figure may go up or down depending on the vagaries of international fuel prices in the coming year. Moreover, the federal government insists that the existing prices for these two products will continue to prevail in the market despite the huge fall in their import landing costs! 

I would therefore recommend that this huge indirect tax (i.e. over N1.5trillion) from consumption of petrol and kerosene should be captured and reflected in the 2009 budget revenue profile if it has not already been done. In addition, the amount should be allocated to the downstream petroleum sector to rescue it from imminent total collapse. The three tiers of government are contributing a total sum of $5.87bn for the power sector emergency rescue.

The downstream petroleum sector deserves a similar help and the source for funding a rescue mission for the downstream petroleum sector can be from the existing implicit petrol and kerosene consumption tax; unless the government makes a u-turn and decides to pass on the dividend of lower international fuel prices to the Nigerian consumers.

The 2009 federal budget is made up of a substantial deficit in the sum of N1.09 trillion or 37 per cent of the budget that must be financed by borrowing, spending cuts and other fiscal restraints or austerity measures. This further reminds the country that its over reliance on primary product (oil) revenue makes it to continue to face the risk of commodity price volatility, which will continue to have a dramatic impact on public revenues, as witnessed by the country and by other similar oil-producing and exporting countries over the years.

Again, another ‘gone with the wind’ oil windfall which Nigeria and other major oil exporters enjoy since 2002 is no more for now. But this should not be of any surprise to any farsighted individual with modicum knowledge of the history of oil price volatility effects. For instance, the writings and warnings have been on the wall for all to see that the spiralling international crude oil price bubble was not sustainable and could burst at any time as it did in similar fashions in the previous decades; especially in the 1970s, 1986 and early 1990s. This time around, crude oil price tumbled from its all time high of $147 per barrel in July 2008 and crashed down to a mere $47 per barrel in less than six months by November 2008 and is still gyrating around $35-$45 per barrel price band.

 

 

Abubakar Atiku Nuhu-Koko

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