April 13, 2023/United Capital
Historically Nigeria’s revenue has fallen short of budgeted amounts by an average of 22.3% in the past seven years, placing additional reliance on debt. Global economic constraints and legacy debt sustainability issues have increased Nigeria’s risk premium and, in tandem, the overall cost of debt. Hence the Government must eliminate shortfalls in budgeted revenue. Examining the 2023 budget, oil revenues will account for c. 21.2% of budgeted government revenues. Critical assumptions are an average oil production of 1.7mbpd and an average oil price of $75.0/bbl. Oil prices have remained elevated above the $80.0 mark, and we estimate oil prices would average around $87.9/bbl. in FY-2022 as OPEC+ remains committed to price stability in combination with other market conditions. The recent efforts by the FG led to improvement in oil production; nonetheless, the oil production remains below the target averaging 1.3mbpd in Q1-2023.
Another downside risk to oil revenues is that in the near term, Nigeria’s oil export capacity may now exceed market demand, given the recent uptick in Nigeria’s oil production. Current global events highlighted this risk. The recent strike in French refineries (which resulted in a c.50.0% decline in French crude imports from Nigeria) and ongoing maintenance at refineries across Europe made Nigeria struggle to find buyers for more than 20 shipments of crude for April, according to Bloomberg reports. Although the strike has been called off, we envisage a delayed return to full refinery utilisation. In addition, Mediterranean refiners still favour cheaper North African Oil, which also ships faster, and Asian refiners prefer discounted Russian oil and Angolan crude.
Depressed demand would result in shortfalls in expected oil revenues and leave sellers with limited options. Cargo holders would bear demurrage charges and look to sell supplies at discounts or hold volumes in floating storages for extended periods or long haul to far regions in the Asian Pacific. With the global decline in freight rates (the Baltic dirty tanker index -25.1% y/y), the Federal Government is encouraged to look for alternative outlets for Nigerian crude, in addition to its continued effort to improve oil production.
