Friday, 7 June 2013

From Crude Oil to Revenue

During the fuel subsidy removal protest of January 2012, amazing and conflicting revenue figures were pulled out from the records of various agencies which at some point became too intriguing for the average Nigerian to make sense of.  There was a general consensus though that something was not right and everyone quickly jumped on the corruption wagon and called foul play in the corridors of power. This all led to the House of Representatives Committee on Fuel Subsidy payment and the controversies that followed.
One thing was crystal clear during the debates that trailed the whole subsidy removal “wahala” – We had no idea what Nigeria actually makes from the sale of crude oil on a daily basis. Agreed the system riddled with corruption, lets shift the focus to a good starting point. At the very least, lets begin to understand the crude oil value chain and how the country obtains revenue from it. 

What is the Crude Oil Value Chain? 

The crude oil value chain is generally divided into three - upstream activities, where exploration and production happens, the midstream, which deals with processing and transportation, and the downstream where refining and marketing of petroleum products occurs.
value chain 
The players in the upstream sector are mostly foreign oil companies with few indigenous ones. The oil companies produce the crude oil and fill up the barrels to be transported either as export crude on to sea vessels, or domestic crude to be transported through pipelines to the local refineries within Nigeria. Export crude is marketed and sold to various countries that buy Nigerian crude oil. The crude oil that is for domestic use is refined and sold as petroleum products within and outside the country by oil marketers. The NNPC as the national oil company is a major player and regulator in the whole industry value chain.  
The bulk of the crude oil produced is allocated according to the agreements between the NNPC on behalf of the Nigerian government and the oil companies. In most cases the standard operating system is for the NNPC to hold 60% within any of these arrangements. The shares of crude oil are termed government equity oil under Joint Venture Agreement, royalty, tax and profit oil under Production Sharing Contracts. The Nigerian share of the crude oil is then divided into domestic and export crude. 

As Nigerians would say- "So where the money"? 
When domestic crude is sold, the money goes into CBN/NNPC Naira Account. Then deductions are made for subsidy payments and the rest goes into the federation account. When export crude is sold, the money goes into the CBN/NNPC JP Morgan Chase Dollar Account. Deductions are also made for what is called the JV cash calls before the remainder goes to the Federation Account.  The CBN maintains the accounts on behalf of the Federation. The Auditor General of the Federation serves as the country’s accountant and manager of the account with the CBN. 

How is the money shared?
In simplistic terms the pool of oil money in the Federation Account is further split to remove 13% oil derivation which the oil producing states get, before the remaining 87% is shared between the Federal Government, the 36 States and the 774 Local Government Areas. The infographic below captures this description
oil money sharing

So how much Nigeria gets seemingly depends on how much crude oil is produced?
Yes and No.
The yes argument implies taking the simple calculation of multiplying our daily production, with the daily spot price to determine what revenue is. Whereas the other side of the coin is; multiply our daily output, by the daily spot price, then minus all the deductions. This may provide a clearer picture of what the actual revenue is. However, different agencies, report different figures as highlighted in NEITI Reports.
So for example if we assume the production figure is 2.5million barrels per day according to OPEC production quota, the country owns only 60% of that figure. Out of that figure, an estimated 500,000 barrels per day, supposedly goes to local refineries, refined into by-products (PMSAGODPK etc.), to satisfy local demand.