Production OF confectioneries to the consumption of petrol, the decision of Russian forces to launch its long-feared attack on Ukraine is having a far-reaching impact for families in Africa’s biggest economy.
Russia’s attack on Ukraine and retaliatory sanctions from the West may signal good news to petrol-dollar economies like Nigeria as Brent, the gauge of Nigeria’s crude oil, surged past $100 a barrel for the first time since 2014.
The conflict threatens to Africa’s biggest economy through higher subsidy pain, higher gas prices, and increasing cost of pasta foods, given Russia’s role as the world’s second-largest producer of natural gas, largest exporter of wheat and one of the world’s largest oil-producing nations.
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These developments could mean an increase in the cost of living among Nigeria’s 200 million population and further expose the country’s persistent inability to swing oil fortunes to economic realities, despite its energy wealth.
Measures forcing Russia to supply less crude or natural gas would have “substantial implications” on oil prices and Nigeria’s economy, said Sue Trinh of Manulife Investment Management.
Oil
Nigeria’s Minister of State for Petroleum, Timipre Sylva has disclosed that Nigeria and its OPEC partners are not comfortable with high prices of oil, which have been triggered by ongoing Ukraine-Russia tensions. He disclosed that a much more comfortable price range for Nigeria would be between $70-$80.
Sylva disclosed this in an interview with Bloomberg on Wednesday morning.
He also revealed that Nigeria should be able to meet its OPEC production quota fully later in the year and that Nigeria is looking for more African sources of funding to improve production capacity.
The Honourable Minister stated that at OPEC level, he is hopeful that prices will hover around $70-$80, which will be sustainable for Nigeria till end of the year.
He said, “We are not comfortable with very high prices. We would be comfortable with prices between $70 and $80, at this point the tensions are not being created by us that have affected prices.
“I don’t know what will get us to change our plans, but we are watching the situation. Right now, things are not really clear for us to now make major decisions because the tension in Europe can just go away tomorrow”
“And now there are discussions going on with Iran. If they have a nuclear deal with Iran, there would be more volume in the market, but for now, it’s best to sit and watch before taking any decisions.”
On meeting OPEC quota numbers, Sylva said Nigeria is working hard on that, adding that what happened was Nigeria had to cut back. He said, “You can’t really cut back mathematically. At the end of the day we over complied. In trying to cut down, we cut down too much and now to come back has not been too easy for us. We need investments.”
He added that Nigeria is working hard to ensure it meets up with its production quota, stating “with the kind of prices we are seeing, we are not happy, we should be back on track later this year.”
On plans to attract investments, he said, “Africans cannot be completely dependent on foreign investments for energy investment and is looking at setting up an investment bank that will investment through multilateral funding for investments.”
Brent Crude prices are currently $96.37 as at 1:30 pm West African time, on Wednesday, February 23, 2022.
Gas
For several months, Russia has been accused of intentionally disrupting gas supplies to leverage its role as a major energy supplier to Europe amid an escalating dispute with Ukraine.
The development was a subject of rare public rebuke from the International Energy Agency (IEA), which called on Russia to increase gas availability to Europe and ensure storage levels were filled to adequate levels during a period of high winter demand.
Kateryna Filippenko, principal analyst for Europe gas research at Wood Mackenzie, said, “Things could obviously get a lot worse” if Russian exports to Europe were disrupted.”
Findings by BusinessDay show the global natural gas price has soared to an eight-year high to an average of $4.53 per cubic feet, highest since the close of 2014.
This high price would provide unique prospects for countries like Australia or Qatar to increase their market share, which could have been the case for Nigeria if the government had not abandoned the $20 billion Brass LNG project in Bayelsa State and the $9.8 billion Olokola LNG project located on the border town between Ogun and Ondo states, Victor Eromosele, former general manager, finance, and chief financial officer of Nigeria LNG Limited, said.
“This would have been an ideal time for Nigeria to gain more market share in the global market,” he said.
Petrol
With the current price of crude oil higher than the $62 per barrel oil benchmark in the 2022 budget, Nigeria is expected to earn an extra $42 on every barrel of crude sold but the country’s subsidy shortfall payments will erode the gains.
President Muhammadu Buhari, who touted subsidy as ‘a scam’ before coming to power in 2015, is preparing to spend $2.6 billion on the scheme in 18 months, and analysts say it may not be unconnected with the imminent 2023 general elections.
BusinessDay’s calculations show Nigeria’s petrol subsidy bill of N3 trillion could rise higher than Nigeria’s total revenue of N5.09 trillion as of November 2021.
The country’s rising fiscal deficit makes a mockery of the government’s continued petrol subsidy regime that gulps over a trillion naira per annum.
“In the face of this dilemma, we recommend that the removal is phased and with a complement of heavy investment in critical infrastructure that supports production in the economy,” the director-general of the Lagos Chamber of Commerce and Industry (LCCI), Chinyere Almona, said.
Findings show Nigeria spent a total of N270.83 billion to cater for the cost of petroleum shortfall in December 2021. This was the highest cost for the petrol shortfall in 2021.
Wheat
The development between Russia (largest exporter of wheat) and Ukraine is also a huge concern for consumers of wheat in Nigeria.
In Nigeria, wheat is one of the most consumed grains in the world for the production of noodles, pasta, cakes and other confectioneries.
According to the Food and Agriculture Organisation of the United Nations, the price of a bushel of wheat rose by 5.7 percent Thursday to $9.347 following the escalation of the conflict.
The ripple effect will be faced by Nigerian firms operating in the food industry that are currently facing an uptick in production costs from exchange range volatility and supply chain disruptions.
In the last 12 months, wheat-based products such as the popular pre-packed wheat flour and bread (sliced and unsliced) have witnessed steady price increase across the country.
In January 2022, a 500g sliced bread was sold for N418.65, representing 28 percent increase on a year-on-year basis. The 500g unsliced bread rose by 25 percent from N306.74 in January 2021 to N383.51 in January 2022.
Wheat flour pre-packaged Golden Penny 2kg, which was sold for N757.97 as of January 2021, rose by 29 percent to N974.87 in January 2022.
According to Nigeria’s data agency, the National Bureau of Statistics (NBS), Nigeria imported N898.2 billion worth of wheat in nine months that ended September 2021. The top origins of wheat into Nigeria in 2021 included USA, N194.2 billion; Canada, N136.4 billion, Russia, N124 billion, Lithuania, N122.3 billion, and Latvia, N115.9 billion.
In 2020, Nigeria’s total wheat imports amounted to N756.9 billion of which N186 billion was sourced from the United States; N144 billion from Russia; N132.3 billion from Canada; N110.6 billion from Lithuania, and N101.9 billion from Latvia.
In 2019, N349 billion worth of wheat was imported into the country of which N127.7 billion came from the United States; N73.5 billion from Canada; N35.9 billion from Russia; N32.3 billion from Latvia, as well as N30.7 billion from Argentina.
