Oil delta unrest, fuel subsidies cost Nigeria billions

ABUJA (Reuters) - Unrest in Nigeria's Niger Delta is costing $1 billion a month in lost oil revenues while the nation is spending a further tens of millions of dollars in unsustainable fuel subsidies, the central bank said on Tuesday.

Despite being the world's eighth biggest crude oil exporter, Nigeria is forced to import around 85 percent of its petroleum product needs because of the chaotic condition of its four state-owned refineries.

Vested interests in the powerful petroleum marketing firms which import and distribute refined fuel have long hampered efforts to change the system but it is a paradox which Nigeria's new central bank governor has pledged to resolve.

"We are losing one billion dollars per month of revenue from production because of the crisis in the Niger Delta and we are spending a trillion naira on subsidies, so we have to find a way to exit from this," Central Bank Governor Lamido Sanusi said.

Attacks on oil infrastructure by militants in the Niger Delta over the past three years have prevented Nigeria from pumping much above two thirds of its 3 million barrels per day (bpd) installed capacity.

The shortfall in output combined with lower world oil prices -- at around $70 a barrel, half the levels seen in July last year -- have further eroded foreign earnings in Africa's most populous nation making the subsidies even harder to sustain.

Sanusi said the country's National Economic Council (NEC) had agreed at a meeting on Tuesday that the subsidies must end.

"This year alone between January and May, the government spent about 150 billion naira ($1 billion) on subsidies. The budget for subsidies of over one trillion naira is more than the entire capital budget of the federal government," Sanusi said.

"This is clearly unsustainable."

CRACKING THE CARTEL

President Umaru Yar'Adua has said the fuel subsidies, which sub-Saharan Africa's second-biggest economy can ill afford, are benefiting a small cartel of fuel marketing tycoons rather than the average man in the street for whom they are intended.

But ending the subsidies is politically difficult in a country whose 140 million people, most of whom live on $2 a day or less according to U.N. statistics, see cheap petroleum as one of the few benefits of five decades of oil extraction.

The fuel marketing firms held the country to ransom for months earlier this year, causing the worst fuel shortages in years when they suspended imports saying that the government owed them hundreds of millions of dollars in unpaid subsidies.

"We agreed that we cannot continue to pay one trillion naira as subsidies any more. The modality and timing for the effective (start) of deregulation will soon be worked out," Sanusi, who took over as central bank governor in June, said.

Nigeria saves windfall oil savings above a benchmark price into an excess crude account (ECA), a pillar of IMF-backed reforms launched in 2003 meant to protect its finances against a sharp downturn in oil prices or production.

Under Nigeria's constitution, the savings belong to the federal, state and local governments. But there is no clear provision for how the profits should be shared, leaving a legal void which has fueled years of political wrangling.

"We have agreed that the three tiers of government will share $2 billion from the excess crude account (in August)," Bukola Saraki, governor of Kwara state and chairman of the governors' forum, told reporters after the NEC meeting.

He said the governors had previously agreed that one trillion naira would always be left in the ECA but said there was currently around $4.5 billion above that level, from which the $2 billion would be taken.

Yar'Adua's critics say he risks undermining Nigeria's hard-won reputation for fiscal discipline if he fails to keep cash-hungry state governors from squandering the savings.

(Writing by Nick Tattersall; Editing by Ron Askew)