As per a report by Bloomberg, it is noted that there has been a significant accumulation of unsold Nigerian oil, creating an excess supply situation where nearly half of July’s output is still awaiting potential buyers.
According to the report, oil traders have partly attributed this situation to the government’s demand for back taxes from shipping companies. It is noted that this development has instilled caution among certain shipping companies, leading them to hesitate in dispatching their vessels to procure barrels from Nigeria. Even though the government clarified that there would be a six-month grace period for complying with the tax request, traders have pointed out that the ongoing lack of sales indicates that Nigeria should take further steps to address the matter effectively.
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The existence of the surplus signifies that the efforts by major oil-producing nations to decrease oil supply are not yet yielding the desired effect. Traders of the West African Crude noted that approximately 20 to 22 cargoes, equivalent to about half of the total, remain unsold for July. Typically, these shipments consist of approximately one million barrels each.
In recent weeks, Bloomberg reported a reluctance among shipowners to engage with Nigeria due to substantial tax bills issued to recover unpaid duties from 2010 to 2019. However, the FIRS has granted a grace period and established a committee comprising shippers and regulators to address the outstanding tax backlog.
As of Thursday, 22nd of June, 2023, data from the Baltic Exchange reveals that the daily cost of shipping oil from Nigeria amounted to $53,463, surpassing the year-to-date average. The freight charges for vessels transporting approximately 1 million barrels of crude oil from Nigeria to Europe experienced the most significant surge in over a year, primarily attributed to the tax matter.
According to the Bloomberg report, Nigeria is experiencing sluggish sales in contrast to a more positive scenario in Angola. According to sources, crude supplies in Angola have been completely sold out for July, and price differentials are gradually increasing. Similarly, supplies from Gabon and Chad have mostly been sold for July as well.
A few weeks ago, many shipping companies were notified by FIRS about back tax claims, amounting to several million dollars. TradeWinds, a global shipping news website, reported that a Greek shipowner has been requested to pay $18 million in taxes that are claimed to have accrued between 2011 and 2019.
According to reports, the Tinubu administration is making efforts to enforce legislation from 2004 that has been previously overlooked. This legislation specifically pertains to non-residents. The 2004 law imposes a tax on freight rate income and profit earned transporting Nigerian oil. According to the letters sent out, the FIRS determined the owed amounts by using past ship voyage data they obtained. They then increased the overall sum by adding penalty charges of 20% for each year of alleged non-compliance.
Effect on Nigeria’s Economy
Based on the actions taken by the new government, it appears that there is a strong effort to address the precarious revenue situation that was inherited from the previous government.
The government has implemented several challenging measures, including the removal of the subsidy on PMS, the introduction of a 7.5% VAT on diesel, and the planned increase in electricity tariffs. Additionally, they have adopted a managed floating exchange rate system for the Naira. However, no measures have been taken to address the potential economic fluctuations that may arise as a result of these actions.
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There is a fear that this new move by the administration towards shipping companies may affect Nigeria’s place in the global oil trade. Considering that Nigeria has been unable to meet its OPEC quota since 2020, while other African countries are increasing their oil production. For the Nigerian economy, any move that threatens Nigeria’s income from crude oil is tantamount to critical upheavals so it is expected that the Federal Government through its agencies would remedy this situation, maybe through a tax relief initiative or an instalment payment plan for the shippers.
