How Oil Benchmarks Affect AKS November 28, 2007Posted by Ibompulpit in Economy.
1 comment so far
A Graph of AKS 13% Derivation per barrel at current and proposed benchmarks (@ royalty plus tax)
Blue – Current Derivation; Yellow – NASS proposals; Teal – Budget ’08 Proposal
One provision of Budget 2008 putting President Yar’Adua against the National Assembly relates to what crude oil benchmark is reasonable for the country. The federal government appears set for the first major showdown with the Senate.
The feds position is founded upon believe that the crude oil benchmark of $53.83 is realistically set from various economic indices, and is capable of absorbing crude oil price volatility in the global market.
At a UNDP retreat for the AKS governor, and other governors of Cross River, Kano, Lagos, and Ondo states, Finance Minister Shamsudeen Usman reiterated the federal government’s position. According to the TRIBUNE newspaper, he said “that the 2008 budget was based on a number of assumptions driven by the need to meet certain targets, such as a prudent benchmark price of $53.83 per barrels with a crude oil production of 2.45 million barrels per day.”
But the legislators (in the Senate and the House of Representatives) are not buying President Yar’Adua’s proposed crude oil benchmark. The Senate wants at least a $60/bbl benchmark. Few notable Senators believe that a primary reason in favor of increasing the benchmark is the global trend of rising price per barrel of crude oil, a trend that they (Senators) maintain has continued consistently over several months in a row and is not about to stop any time soon.
- Senator Nkechi Nwaogu (PDP, Abia Central) remarked: “the benchmark is very conservative. We as a legislature can increase it to US $60 per barrel because we all know that the price of oil in the international market is more than that”.
- Senator Ahmed Lawal (PDP, Yobe North) remarked: “Senate should lift the bench mark to $60 dollars per barrel and in doing that the FG is expected to generate additional N280 billion to finance the budget.”
- Senator George Akume (PDP, Benue NW) remarked: “the benchmark of $53.83 per barrel is very conservative and unrealistic. We can leave it at $60 per barrel”
- HOR Finance Committee Chairman, Hon. Festus Adegoke, remarked: “The House has not decided on the percentage increase. Recently there is an increase on the price of crude oil price on the international market, we’re trying to critically look at the increase and see how to adjust the crude oil price benchmark in the Appropriation Bill,”
Recently, the FEC approved N2.37 trillion for the 2008 Appropriations Bill using the feds proposed $53.83 crude oil benchmark. According to Finance Minister, Shamsudeen Usman, the budget proposal is based upon an estimated 1.55million barrels of crude oil per day, 0.25 million barrels less than last year’s estimate.
Current benchmark (Budget 2007 up to July) was set at $40.00, but economic experts generally agree that the increase will help Nigeria save much more in excess crude account. Excess crude account protects against budget shortfalls due to volatile oil prices.
Oil prices are generally volatile. The global price of crude oil per barrel inched close to the $100.00 mark last week, hitting an all time high of $98.20 per barrel. IMF experts, in a 2005 research, suggested that using a “moving-average” of historical oil prices protects against oil price volatility.
Results from poor forecasting based on recently set benchmarks are in:
Budget 2006 (to July)
Budget 2007 (to July)
What Does this Mean for the AKS?
More bucks from Derivation funds! What about the federal government? Who cares!!
Despite results from poor forecasting based on previous benchmarks, and price volatility, TIP sides with the Senators for a more reasonable increase to set between $60-70 benchmark, and recommends that the AKSG support lawmakers toward at least a $60/bbl benchmark at this time.
Why? For the following reasons:
- Additional funds will be generated to finance budget.
- Increased derivation for the AKS and other crude oil endowed states.
- Point of principle – South-South geo-political zone cannot advocate for increased revenue by way of increased derivation but shy away from any opportunity that increases their revenue bottom line.
- Point of principle – Current system gives too much fiscal strength to the federal government while working against the adoption of true federalism.
Tables 1 and 2 show the AKS 13% derivation at current and proposed benchmarks. See the OULC: Resource Control & Management Powerpoint Presentation for definitions and detailed explanation of the Derivation Principle.
Table Assumptions: Royalty = 18.5% (offshore oil above 200m water isobaths); Tax rate = 85%
|Roy + Tax||Roy only||Roy + Tax||Roy only||Roy + Tax||Roy only|
|AKS 13% DERIV.||$3.97||$0.96||$6.21||$1.44||$6.74||$1.56|
Table 1: AKS 13% derivation at the $40/bbl (current), $60/bbl, and $65/bbl benchmarks.
|Roy + Tax||Roy only||Roy + Tax||Roy only|
|AKS 13% DERIV||$7.33||$1.68||$5.51||$1.29|
Table 2: AKS 13% Derivation at $70/bbl, and $53.83/bbl proposed in Budget 2008.