Despite Drop in Oil Price, FG Sets 2015 Budget Benchmark at $78/bbl

By Chika Amanze-Nwachuku in Lagos and Omololu Ogunmade in Abuja

In spite of falling oil prices, the federal government has proposed an oil benchmark of  $78 per barrel for the 2015 budget, 0.50 cents higher than the $77.50 per barrel approved by the National Assembly in the 2014 budget.

The federal government’s rather optimistic oil benchmark is bound to raise eyebrows, as market analysts are predicting that the price of crude would fall below $80 a barrel due to slowing global demand and the rise in US shale oil production.
The 2015 oil benchmark was reflected in the Medium Term Expenditure Framework (MTEF) and Fiscal Strategy Paper (FSP) sent by President Goodluck Jonathan to the National Assembly on Monday and read on the floor of the Senate yesterday.

In the MTEF/FSP, the federal government has also proposed a budget of N4.817 trillion for the 2015 fiscal year that will be predicated on the oil benchmark of $78 per barrel and an exchange rate of N160.00 to a dollar.

The proposed 2015 expenditure plan translates to almost a N100 billion increase from the N4.724 trillion appropriated by the National Assembly in 2014.

The MTEF and FSP are also proposing a reduction in capital expenditure and a rise in recurrent expenditure in 2015. Capital expenditure has been pegged at N1.436 trillion as against N1.552 trillion in 2014 budget, while recurrent expenditure was pegged at N2.622 trillion as against N2.40 trillion in the 2014 budget.

The government also projected N4.896 trillion and N5.028 trillion as expenditure for 2016 and 2017 respectively. Also, recurrent expenditure was pegged at N2.657 trillion in 2016 and the same amount in 2017, while capital expenditure including Sure-P was pegged at N1.531 trillion in 2016 and N1.662 trillion in 2017.

It also projected N3.867 trillion as its revenue target for 2015, against N3.731 trillion targeted in 2014, while it equally projected N4.016 trillion and N4.279 trillion targets for N2016 and 2017 respectively.

The document also put oil production in 2015 at 2.2782 million barrels per day. This figure is lower than the 2.3883 million barrels per day target for the current 2014 budget. It as well projected 2.3271 million barrels per day and 2.4067 million barrels per day for 2016 and 2017 respectively.

Explaining the reason for pegging the oil benchmark at $78 per barrel in 2015, the document said: “Our proposal is also driven by the need to be cautious in our revenue projections given the volatile nature of oil prices and the need to rebuild our fiscal buffers which have been very useful in periods of revenue shocks. It should be recalled that the country has had painful experiences with regards to crude oil price swings.”

The government said with prudent management of the 2014 budget, the Excess Crude Account (ECA) now stands at $4.09 billion, adding that Nigeria's public debt stock as at March 31 this year stood at about $65.26 billion.  A breakdown of the debt was put at $9.17 billion and $56.09 billion as external and domestic debt stock, respectively.

Of the debt profile, the document said the federal government owes about 80 per cent of the stock while 20 per cent is owed by the 36 state governments and the Federal Capital Territory (FCT).

According to it, this implies a debt to gross domestic product (GDP) ratio of 12.8 per cent.

The government also lamented the rampaging activities of crude oil thieves as the major threat to oil production, noting that “the activities of crude oil thieves and oil pipeline vandals remain the main risks to oil production”.

It added: “The potential implications of their activities are a reduction in government revenue with further impact on government revenue, with further impact on government debts and fiscal deficits, as well as pressures on the exchange rate."

The government added that whereas the 2014 budget had a revenue projection of N3.731 billion and an expenditure outlay of N4.724 billion, as at June, “the prorated revenue inflow was N1.552 billion or 83.23 per cent of the target, relative to the N1.8655 budgeted as oil and non-oil revenue sources fell short of their budget targets”.

It added: "Oil production averaged 2.25 million barrels per day due to pockets of setbacks in the industry.”

The federal government also pledged to maintain the development strategy it has applied in recent times by focusing expenditure on the completion of ongoing projects in the next fiscal year and limiting the introduction of new capital investments in the 2015 budget.

Meanwhile, with Saudi Arabia, which has long been a swing producer of crude oil, showing no signs of intervening in the oil market in the near term, Libya and Nigeria have emerged as nations that could alleviate recent downward pressure on prices, reported the Financial Post yesterday.

Both countries posted large output gains during the summer, amid a backdrop of softening demand and accelerating US shale oil production.

Ms. Helima Croft, head of commodity strategy at RBC Capital Markets, pointed out that the unanticipated return of Libyan exports was the initial catalyst for the downward move in oil.

She also noted that Libya and Nigeria contributed nearly one million additional barrels per day to the market over the three-month period.

“In both cases, production has increased in an environment where the overall security situation has deteriorated, seemingly placing them at risk for a sudden reversal in export volumes that could help lessen the burden on the other big producers to turn off the spigots,” Croft said in a report.

Despite the remarkable recovery in Libyan exports, the security situation has significantly worsened since the summer as regional leaders warn that the country is at risk of becoming a failed state.

“For now, though, oil has been spared from the rising unrest,” the strategist said, noting that the elected government has managed to keep control of oil infrastructure and oil accounts at the central bank.
“How long they can maintain this advantage, however, is very much in question.”

Nigeria’s oil surge was primarily attributed to a decline in crude theft and force majeures by companies operating in the volatile Niger Delta. However, Croft warned that the oil region will likely become more difficult to control as national elections set for February 2015 approach.

“The Nigerian military, underfunded and overextended by the virulent Boko Haram insurgency in the north, will be hard pressed to deal with any uptick in election-related unrest and criminal activities in the oil region,” she said. “In our view, the recent gains in output could quickly become a casualty of Nigeria’s looming game of thrones.”

Oil prices continued to sink in yesterday’s trading, with Brent light crude selling at $82 a barrel while US’ WTI fell to $80 a barrel.

The boom in US oil output has sharply cut the amount of crude the US imports from leading petroleum producers, freeing up more oil for overseas markets and putting pressure on prices.

In July, the US imported no oil from Nigeria for the first time since 1973.

“There’s no reason for it now, because we have more light oil from the Bakken, Eagle Ford and the Permian Basin,” said James Williams, energy economist for WTRG Economics. “We have too much light oil.”

According to AFP, the boom has also spawned calls from oil industry players to ease the US embargo on crude exports, which has been in place since the 1970s oil shocks.

Some manufacturers also endorse the move. A report Tuesday by the Aspen Institute said lifting the ban would boost durable goods production by some $8 billion by 2017, in part due to greater sales of mining and construction equipment.

Even as the crude exports ban remains in place, US regulators have shown leniency in allowing more oil-based exports. Exports of diesel and other petroleum products have soared over the last five years.

The International Energy Agency (IEA) has projected that US oil production will continue to increase through 2020, but will level off soon thereafter.

However, continued growth depends heavily on commodity prices and US output could suffer disproportionately from a big retreat in prices.

Surging US production has been a major factor in the 20 per cent decline in oil prices since June, even though political tensions have remained high through many parts of the oil-rich Middle East and North Africa region.

Analysts note that high expenses for key shale technologies like horizontal drilling and hydraulic fracturing, or fracking, mean the cost of production in major shale stands at three to four times the level in the Middle East.

“If crude oil prices continue to drop, it won’t be economical to produce oil out of the Bakken and Eagle Ford,” Williams said.

“If they were to drop another $10 or $15 a barrel, our production growth would come to a stop.”

 

Culled from thisdaylive.com