Monday, May 17, 2010

Why Nigeria’s reserves is not following oil price trend

•NNPC has first line control of all oil revenues
Sharp increases in international oil prices and Nigeria’s oil export volume have not translated into commensurate improvements in the country’s external reserves position because the Nigerian National Petroleum Corporation (NNPC) curiously now first receives all oil revenues into its own foreign bank accounts, BusinessDay can authoritatively report.

This development also means that the Federal Ministry of Finance, which traditionally is the treasurer to the country, does not know the exact amount of revenue being earned at any given time. In the past all oil sale proceeds went directly into foreign accounts held by the Central Bank of Nigeria and it showed promptly in external reserves, but at some point during the troubled last months of late President Umaru Yar’Adua, the CBN was surprisingly shut out, according to our investigations.

In its place the NNPC was given the mandate, supposedly by the President even though no one can say if he was in a position to do so at the time this was done, to first receive all oil sales proceeds and then pay to the CBN what ever it determines, usually based on the oil benchmark price sources told BusinessDay. Some have suggested that this might have been one of the intrigues that played out at the time the cabal virtually seized the reins of power.

Oil prices have continued to rise, reaching a peak of US $85 per barrel recently but during this same period, Nigeria’s reserves, managed by the Central Bank of Nigeria (CBN), has virtually remained flat, now hovering around US $40 billion.

BusinessDay has sought to investigate the conundrum for sometime now and the newspaper can now reveal that the reason reserves have not mirrored increases in the price of crude oil is that, the true position of what Nigeria earns from oil has become more opaque since NNPC was allowed to maintain its own accounts to first receive all sales proceeds from oil before paying what ever it likes into the CBN, in most cases, the equivalent of the oil price benchmark.
Obviously, the CBN pays the amount to government for onward distribution as federal allocations through the Federal Account Allocation Committee (FAAC).

Until recently, Nigeria’s crude oil revenues were paid directly into the CBN accounts. CBN was now obliged to make payment to the governments of the federation according to the stipulated oil price benchmark, and the rest usually reflects in increases in Nigeria’s reserves, especially if there are no significant changes in import levels, dividend payments abroad, and JV cash calls, the main influences of Nigeria’s external net flows.

BusinessDay investigations also reveal that, despite keeping most of the above oil price benchmark revenues, the NNPC is currently struggling to meet Joint Venture Cash calls, putting in jeopardy current investment plans in the oil industry.

Oil price benchmark in the last three years has been $59 in 2008, $45 in 2009 and the current 2010 budget is based on an oil price benchmark of $65.

Oil price peaked on July 3rd, 2008 at $145.85 per barrel. Since then, it has plummeted but started to rise again. In December 2008, oil price dropped below $50 per barrel. Between early 2009 and now, oil price has increased from a very low US $34 per barrel to US $85 per barrel, last week, an increase of about 145 percent. However, foreign reserves have moved from US $53 billion in January 2009, through US $43 in July 2009, and now at US $40 billion.

When allowed for the three months lag in payments for oil revenues, it is arguable that growth in reserves may not be significant, or also when it is considered that the excess crude account is now virtually empty. The only other possible explanation would have been if net outflows had been significantly higher than usual in the last year, but those who follow this closely say this has not been the case and that import levels have remained flat and dividend payments abroad have been very modest as the economy slowed.

In terms of oil volume, this has rebounded since the start of the amnesty programme last year. Only NNPC can explain the reasons why the oil revenues account was moved from the CBN to its account, and only it can explain what the oil revenues since last year have been used for. The change in payment and account arrangement was made under the former NNPC managing director, Muhammad Sanusi Barkindo and the Petroleum minister, Rilwan Lukman

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