President Bola Tinubu has approved a measure allowing the Nigerian National Petroleum Company (NNPC) Ltd to allocate the 2023 final dividends due to the federation to cover petrol subsidy expenses.

To bolster NNPC’s cash flow, the president has also sanctioned the suspension of 2024 interim dividend payments.

Additionally, NNPC has notified the president of its inability to remit taxes and royalties to the federation account due to the financial strain caused by the subsidy payments, which it has termed “subsidy shortfall/FX differential.”

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Forecasts from NNPC suggest that the cumulative petrol subsidy bill, which started in August 2023, could reach N6.884 trillion by December 2024. This would result in a deficit of N3.987 trillion in taxes and royalties owed to the federation account.

The total amount of dividends to be withheld or suspended has not been disclosed. NNPC plans to pause interim dividend payments from May to December this year.

Interim dividends, based on monthly inflow projections, are typically shared among the three tiers of government, while final dividends are settled at year-end following reconciliation.

Under the Petroleum Industry Act (PIA), NNPC is required to remit taxes, royalties, and dividends to the federation, its sole shareholder.

However, in June 2024, NNPC alerted President Bola Tinubu that its cash flow was under severe pressure due to the burden of subsidy payments, which threatened the company’s financial stability.

NNPC expressed concerns that it might be unable to sustain petrol imports as the rising subsidy costs, driven by “forex pressure,” continued to escalate.

TheCable reports that Mele Kyari, NNPC’s Group CEO, informed the president that the removal of the subsidy in June 2023 resulted in monthly savings of N400 billion for the federation.

This enabled NNPC to deposit N2.032 trillion in taxes and royalties into a secured account at the Central Bank of Nigeria (CBN) by January 2024.

Kyari explained that the situation worsened following the naira’s devaluation, leading to a continuous rise in the NAFEX exchange rate.

By August 2023, NNPC’s fuel importation costs had shifted from surplus to deficit, resulting in a subsidy bill of N52.73 billion.

This figure rose to N57.59 billion in September, N212.28 billion in October, and surged to N665.60 billion in November as the exchange rate more than doubled from when the subsidy was initially removed.

The subsidy bill slightly decreased to N537.66 billion in December but spiked again to N693.67 billion by January 2024.

In February, the bill dropped to N592.09 billion and further declined to N497.39 billion in March.

However, it surged once more to N833.68 billion in April, prompting Kyari to issue an urgent appeal to the president.

He stated that the mounting costs have placed “undue pressure” on NNPC, preventing it from remitting taxes and royalties to the federation account.

Kyari also warned that the country’s energy security is at risk, as NNPC may struggle to maintain petrol imports “beyond July 2024.”

In presenting his case to the president, Kyari highlighted that NNPC had implemented various strategies between August 2023 and April 2024, but the situation remained dire.

The measures included enhancing oil production by tackling theft and vandalism, rescheduling debts and initiating forward sales, deferring payments to suppliers and contractors, postponing non-essential projects, and intensifying debt recovery efforts.

Despite these interventions, projections indicated a worsening cash flow deficit driven primarily by the exchange rate fluctuations.

According to NNPC, while an estimated N3.987 trillion in taxes and royalties is expected to be owed to the federation account by December 2024, the company would still face an outstanding N2.897 trillion after reconciling its obligations and subsidy shortfalls.

Kyari urged President Tinubu to approve the use of the 2023 final dividends due to the federation and to delay the 2024 interim dividends to offset the subsidy costs.

It was understood that Tinubu granted Kyari’s request on June 6, 2024.

Recall that in August 2023,  when President Tinubu was considering reintroducing the petrol subsidy, his spokesman, Ajuri Ngelale, promptly denied the claim, insisting there was no reversal on the new policy.

However, internal communications between NNPC and the president now frequently reference the term “subsidy.”

It is believed that the All Progressives Congress (APC) government prefers to avoid the term due to its historical use as a key argument against the Peoples Democratic Party (PDP) during the 2015 election campaign, when the “subsidy scam” narrative helped dislodge the PDP from power.

During the Muhammadu Buhari administration, the term “under recovery” was used as a substitute for “subsidy,” although the word “subsidy” eventually reappeared in official discourse later on.

The Tinubu administration’s official stance is that “subsidy is gone.” Despite this, NNPC projects that over N5 trillion will be spent on subsidy payments this year alone.

When the subsidy was initially removed in June 2023, the exchange rate stood at N463/$, but it has since surged to approximately N1,500/$. Combined with high crude oil prices, this has created a “double whammy” for NNPC in managing fuel import costs.

NNPC utilizes a “derived FX rate” to keep petrol prices between N600 and N700 per litre. The gap between this derived rate and the official exchange rate represents the subsidy or FX differential.