$15bn Upfront Payment: Hope Rises For Nigerias Ailing Foreign Reserves

There are high expectations that the expected upfront payment of $15 billion by the Indian government for the supply of Nigerias crude oil will ameliorate the economic crisis Nigeria is currently facing.Analysts are particularly excited that the countrys ailing foreign reserve which has fallen down to $24 billion will get a breather.We view the agreement as positive for Nigeria on many fronts. First, the deal (if eventually consummated) will guarantee off-take of Nigerian crude in a market already oversupplied and with active explorations on-going in various regions set to add to supply, while the industry still faces competition from alternative energy sources.Secondly, with Nigerias external reserves at $24.0 billion (as at 18th October), an inflow of $15.0 billion in upfront payment for crude purchase will not only provide dollar earnings to shore up the external reserves, it will also provide the Federal/Sub-National Governments with the needed funds that the economy earnestly requires to stabilize domestic fiscal conditions and current account deficits. The impact of the upfront payment on the external reserves will result in additional three months of import cover (at the prevailing average import levels), which might also reduce speculative tendencies in the foreign exchange market, said analysts at FSDH Group.The analysts further said the proposed investments in the midstream sector by the Indian public sector companies (if harnessed properly) coupled with the coming on board of Dangote refineries has the potential to end the supply/demand gap for petroleum products in the country. At completion, the Dangote refineries, with a refining capacity of about 650,000 b/d (103.4m litres), will be able to cater for the daily Premium Motor Spirit (PMS) demand in the country with enough to spare for export given that daily PMS consumption is approximately 50.0 million litres. The investments by Indian companies in the refineries as well as the completion of Dangote refineries will further boost operations in the midstream sector and ultimately the supply of refined products.The snag however, is that, the militancy activities in the Niger Delta region which has impacted daily oil production numbers over the course of the year may be a bottleneck in the completion of the transaction as an upfront payment by India would be predicated by an assurance of crude supply when required.
Click here to read full news..