By John Joseph
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Nigeria’s oil subsidy regime has been a significant burden on the country’s economy since the year 2000. The Nigerian National Petroleum Corporation (NNPC) has shouldered the brunt of this burden, with the subsidy payments straining its balance sheet and increasing its debt liability.
In 2005, NNPC took a drastic step to address its growing debt. The corporation decided to mortgage 20,000 barrels per day of oil production from the Offshore Mining Lease 119 (OML 119) as debt repayment. OML 119 is a valuable offshore asset, comprising the Okono and Okpoho fields. NNPC chose this asset because it has 100% equity in it, making it one of eight Offshore Mining Leases where the corporation has complete ownership.
Since 2005, the sales from OML 119 have not been remitted to the federation account. Instead, the revenue has been used to offset various debts, including subsidy payments, incurred by NNPC. This arrangement has continued to the present day.
By 2012, NNPC’s debt had ballooned to $8.5 billion. To address this, the corporation used $5 billion in dividends from the Nigerian Liquefied Natural Gas (NLNG) as part payment. The remaining $3.5 billion was tied to the 20,000 daily production from OML 119 for 12 years. This agreement was structured under two Special Purpose Vehicles (SPVs): PXF1 for 5 years and PXF2 for 7 years.
Fast-forward to 2020, when the COVID-19 pandemic ravaged the global economy, leading to a significant revenue shortfall for Nigeria. NNPC was forced to seek a pre-payment plan of $1.5 billion with Matrix and Vitol, two international oil companies. The repayment terms stipulated that 30,000 barrels of crude oil per day from another OML, where NNPC has 100% equity, would be used to settle the debt over a 5-year period. This agreement was structured under an SPV called Project Eagle.
The 30,000 barrels of crude oil allocated to Matrix and Vitol, for the “loan” during the COVID-19 pandemic are taken to Malta, refined and blended to make them cheaper, and then sold back to Nigerians. This cycle perpetuates the subsidy cycle, further straining the economy.
There is a glimmer of hope, however. By the end of 2024, the 12-year deal to repay $3.5 billion will expire. Similarly, the 5-year deal to repay Matrix and Vitol their $1.5 billion will also end by the end of 2025. These developments may provide an opportunity for Nigeria to reassess its oil subsidy regime and explore more sustainable options to support its citizens.
This highlights the complexities of Nigeria’s oil subsidy regime and its far-reaching consequences for the economy. As the country navigates the challenges of the global energy landscape, it is essential to address the subsidy issue and explore more efficient ways to support the citizens.