A Crude Trade
Nigeria is an oil-rich country and the most populous state in the Organization of Petroleum Exporting Countries (OPEC) cartel. According to OPEC data (2021), Nigeria produces 1,323,000 barrels of crude oil per day (b/d) and exports 1,592,000 b/d. Based on this data, Nigeria is dwindling its crude oil stockpiles by 269,000 b/d. Nigeria’s oil demand is 495,000 b/d and has a refinery capacity of 486,000 b/d, leaving a theoretical deficiency of 9,000 b/d. Crude oil must first be refined into petroleum products such as gasoline to be of use to the public.
In 2021 OPEC reported that Nigeria’s oil refinery utilization rate stood at just 1%. The worst performance of any OPEC member. The refinery utilization rate is a metric that measures how much available capacity is actually used. The dismal rate of oil refining has forced the Nigerian government to import about 95% of all refined petroleum products to meet domestic demand. Refined gasoline costs more per barrel than crude oil incurring further costs on the federal government in a barrel-for-barrel trade.
The lack of Nigeria’s in-house refinery utilization pushed the trade imbalance between petroleum exports and imports to $43.56 billion in 2020. Chronic neglect of investments in new refineries and the underutilization of available capacity has left Nigeria’s federal government and society economically exposed and at a strategic disadvantage. The ongoing fuel crisis has exposed the need for domestic refineries to the general public.
Investing in new refineries and employing current capacity will provide job opportunities to the 1/3 of jobless Nigerians. Communities could participate in the construction of the sites promoting employment and opening new opportunities in the oil industry. In 2021, the federal government passed the Petroleum Industry Act (PIA) to kickstart the initiative. The PIA intends to remove the bureaucratic red tape that delays the licensing for refinery installations, particularly modular refineries.
Modular refineries are smaller-scale local sites situated near oil fields that can refine about 30,000 b/d of crude oil into final-use petroleum products. The initiative of modular refineries is to stimulate oil communities to provide essential products to their localities. This will reduce the import and transportation costs of refined products while meeting the demand. Reducing imports has a two-fold effect, lowering the subsidy burden of the federal government and alleviating foreign exchange rate pressures.
The Nigerian National Petroleum Corporation (NNPC) is a state-owned enterprise that is responsible for the lion’s share of government export revenues, more than 80%. The NNPC spent N4.39 trillion ($9.7 billion) on oil subsidies. The oil subsidies are primarily spent on refined products for end users. The pressure for Nigeria to import refined products on international markets requires the NNPC to sell the naira to buy US dollars. This results in inflationary pressure on the naira and a devaluation of the currency, further pushing up the price of imported goods.
On-shoring oil refining activities will benefit the Nigerian economy in the long run as it stimulates employment, and alleviates public spending pressures and currency devaluation. Additionally, once domestic demand for refined petroleum products is met, Nigeria can begin exporting to neighbouring countries or on the general international market. Producing refined products will add higher-margin (profit) products to Nigeria’s export portfolio and resulting in a more favourable net trade balance. Such measures however are not immediate and require long-term strategic planning.
By Michael Antonorsi