Nigeria has experienced a significant loss in its oil revenue, amounting to 70% between 2010 and 2022, due to the Domestic Crude Allocation (DCA) policy, according to a policy memo by Agora Policy. The report, titled ‘Cancelling domestic crude oil allocation is Nigeria’s surest path to easing the forex supply crunch’, indicates a drastic decline in oil and gas contributions to the Central Bank of Nigeria’s forex, from 94% in 2010 to just 24% by June 2022.
In a recent move, President Bola Tinubu has directed that all revenue from crude oil sales should be channelled to the apex bank, shifting the responsibility from the Nigerian National Petroleum Company Limited (NNPCL). This new arrangement requires NNPCL to submit receipts for crude oil to CBN for vetting and documentation, a move experts believe aligns with the current government’s new direction.
The report underscores the impact of the reduction in oil production and the shift from joint ventures (JVs) to Production Sharing Contracts (PSCs). Most of the federation’s share of produced crude oil is now channelled to DCA, which has significantly increased from below 10% in the early 2000s to nearly 100% by 2023. This practice has been detrimental to the country’s economic survival, especially in the current climate.
A key challenge identified in the report is that revenue from DCA sales is received in Naira, depriving the Central Bank of Nigeria (CBN) of a steady flow of foreign exchange from its previously dominant source: crude oil sales. This has contributed to the plummeting forex contributions from oil and gas and has likely decreased even further.
The report highlights the NNPCL’s tendency to make upfront deductions for various reasons from revenue accruing from the DCA. The President’s move to ensure all oil funds are domiciled in the CBN is seen as a potential solution to this issue.
According to a report by The Guardian, the document further alleges that the DCA is where the NNPCL conducts questionable activities. It questions the role of the DCA as a ‘mouthpiece’ for the NNPCL, especially when it fails to remit oil revenue to the Federation Account. The policy not only sheds light on the national oil company’s failure to make remittances but also explains the dwindling forex inflows and stagnation of the country’s external reserves during periods of high oil prices.
Additionally, the report discusses the insufficient supply of foreign exchange in the country, with a backlog of foreign exchange obligations estimated at between $4 billion and $7 billion. This backlog is attributed to the insufficient foreign currency in the country to meet demand, rather than solely to oil theft, as commonly believed.
To address this critical issue, the report strongly recommends discontinuing the DCA. It argues that selling the federation’s crude oil for exports, or if sold domestically to private refineries, should be done in dollars. This measure is expected to provide steady inflows of foreign exchange, address foreign exchange scarcity, and maintain some level of stability for the Naira.
The situation in Nigeria highlights the intricate relationship between domestic policies and their broader economic impact, particularly in critical sectors like oil and gas. The findings and recommendations of the Agora Policy Report present a compelling case for policy reform to enhance the country’s economic stability and growth.
