Following persistent volatility in the oil market, the federal government is considering lowering the oil price benchmark in the 2020 Budget from $57 to $20, the Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, said yesterday.
She spoke at a web conference on Citizens’ Dialogue Session on Government Fiscal Policy Decisions on the fall in Oil Prices and the COVID-19 pandemic.
She added that the federal government would slash the benchmark to $20 per barrel to reflect the new price level.
The minister spoke just as news came that the International Monetary Fund (IMF) had disbursed the $3.4 billion emergency assistance fund it had approved for Nigeria to the Central Bank of Nigeria (CBN).
The web conference was organised by the Ministry of Finance, Budget and National Development in collaboration with Partnership to Engage, Reform and Learn (PERL) and the UK Department for International Development (DFID).
Following the grave impact of COVID-19 and a spat between Russia and Saudi Arabia, oil price had plummeted, forcing the federal government to propose a downward review of its $57 oil price benchmark to $30 in an amendment discussed with the National Assembly leadership a month ago.
It also reviewed its proposed production volumes from 2.18 million barrels per day to 1.70 million barrels.
This effectively necessitated the shaving off of the total sum of N312.820 billion, representing 15 per cent of its N10.59 trillion budget passed in December last year.
The federal government has also decided not to hold bidding rounds for major oilfields until crude prices recover while some upstream projects will be completed much later than originally planned as a result of the crash in the price of crude oil.
Nigeria is grappling with a significant drop in oil prices and a collapse in global fuel demand caused by lockdown measures aimed at containing COVID-19.
Therefore, it has projected the country’s economy to contract by 3.4 per cent, as dwindling oil revenues and the pandemic forced the country to cut the budget plans for a second time to assume a lower petroleum price of $20 per barrel.
However, as Italy, Spain, Nigeria, and India, together with Ohio and other states in the United States began allowing some people to go back to work and also opened up construction sites, parks, and libraries, oil price jumped again yesterday on hopes of a recovery in fuel demand.
“We are in the process of an amendment that is bringing down the revenue indicator to $20 per barrel,” Ahmed said at the web conference.
She added that Nigeria was having trouble selling some of its oil cargoes and would have to cut production to below what it originally expected in the budget. The country, as part of an agreement with OPEC and other producing nations, agreed to trim output to help balance the global market.
As a result of the cuts and lower prices, the budget office director said projected oil and gas revenues would drop by over 80 per cent this year.
Ahmed and the Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Malam Mele Kyari, said at the conference that the delay in some licensing rounds cut the country’s projected revenue from signature bonuses to N350 billion ($972.22 million) this year from N939 billion originally expected.
They said most of the anticipated revenue would come from licence renewals.
The minister said some upstream oil and gas projects would be delivered “much later than originally planned” due to scaled back government investments.
“Where you require foreign investment…this is not a good time,” Kyari said of the licensing rounds, adding that “the appetite would be very low.”
The federal government is, however, accelerating bidding rounds for so-called “marginal” fields, which Kyari said were less impacted by low oil prices because they would likely be taken up by local producers and would require less capital to develop.
Budget Office Director-General, Mr. Ben Akabueze, according to Reuters, emphasised that oil revenues were expected to fall by more than 80 per cent.
He said the government had revised its projections and expected the economy to contract by 3.4 per cent this year compared with its previous expectation that it would grow by 2.9 per cent.
Nigeria would speed up marginal field licensing and oil mining licence renewals to try to raise revenues, Akabueze said.
The government officials also discussed the issue of Nigeria’s debt servicing costs.
The finance minister said Nigeria was in talks to defer debt service obligations to “2021 and beyond.”
“It’s not debt forgiveness, it’s just rescheduling of our obligations,” she added.
She, however, did not provide details of the lenders with whom talks were held.
Ahmed explained that Nigeria was spending around 58 per cent to 60 per cent of revenues to service debt, which was responsible for the request.
And the budget office director-general said debt servicing costs were expected to rise by N200 billion in 2020.
Meanwhile, as Italy, Spain, Nigeria and India, together with Ohio and other states in the United States, began allowing some people to go back to work and also opened up construction sites, parks and libraries, oil price jumped again yesterday on hopes of a recovery in fuel demand.
Reuters reported that some European and Asian countries along with several US states began to ease lockdown measures put in place to curb the spread of COVID-19 pandemic.
Following this development, which has raised the hope for oil demand, West Texas Intermediate (WTI) crude futures were up 11.2 per cent, or $2.29, at $22.68 per barrel, while the global benchmark, Brent crude futures were up 7.2 per cent, or $1.97, at $29.17.
It had earlier gained $2.96 to trade at $30.16 per barrel.
Vehicle traffic in most of the United States, including those yet to lift shelter-in-place orders has also rebounded
Swiss bank UBS said the easing of restrictions would help lead to a balance in supply and demand for the oil market in the third quarter and even projected an undersupply by the fourth, forecasting an end-2020 recovery of Brent to $43 per barrel and $55 per barrel by mid-2021.
Reflecting hopes that the oil industry may have passed the worst of coronavirus-induced lockdowns, hedge funds and money managers were buyers of petroleum derivatives for a fifth straight week in the week ended April 28.
Morgan Stanley said the peak of oversupply in global markets had likely been reached and a storage crunch was abating.
Still, global oil demand and prices suffered historic losses in April and recovery is likely to be slow with air traffic not expected to rebound any time soon.
With Saudi Arabia, Russia other major producers and companies slashing output, the market shrugged off a decision by a Texas energy regulator to abandon a proposal for a 20 per cent output cut in the United States’ biggest oil-producing state.
With the trend in the global oil market, crude oil price is set to end the nightmare of producers following the decreasing United States’ inventories, coupled with expectations that the gradual relaxation of lockdowns by countries would improve demand.
Apart from easing of the lockdowns by countries, the price is also being lifted by signs that the United States crude glut is not growing as quickly as expected after the COVID-19 pandemic had caused it to slump to a two-decade low.
The increases are, however, a modest but marked recovery from the nosedive of US crude futures for May to as much as $40 into the negative on April 20 – an unprecedented plunge below zero that traders had not previously believed was possible.