THE entrance of Dangote Petrochemical Refinery into Nigeria’s downstream Petroleum sector has come with lots of expectations, one of which is the possible lowering of Premium Motor Spirit (PMS) costs as a result of local refining.
This is currently not so, as most Nigerians seek answers to why the price keeps surging higher despite the local refining heroics of Dangote Petrochemical Refinery.
In the wake of the accusations and counter-accusations over the sale of crude oil to the Dangote Refinery and the pricing of refined petrol (popularly referred to as fuel in Nigeria) from the refinery, Nigerian President Bola Tinubu appointed the technical committee headed by the Minister of Finance and Coordinating Minister of the Economy, Wale Edun.
A few days ago, THE ICIR reported how an ardent supporter of President Bola Tinubu, Joe Igbokwe, accused The Nigerian National Petroleum Company Limited (NNPCL) and Dangote Refinery of playing politics with Nigerians over recent dramas surrounding fuel supply.
Igbokwe lamented that the more he tried to comprehend the intrigues surrounding the controversies, the more confused he became.
Notably, local refining has the advantage of excluding some fundamental costs normally captured while calculating the ‘landing costs’ of PMS.
These costs include but are not limited to Freight costs, insurance costs, lightering costs, Jetty depot fees, storage fees, financing costs, foreign currency exchange costs, Nigeria Ports Authority (NPA) costs, Nigeria Maritime Administration and Safety Agency (NIMASA) charges and customs duties.
Most of these costs don’t have a direct bearing on locally refined crude oil and would have triggered downward adjustments of the price of PMS, however, it wasn’t so.
Without proper competition, prices will keep going up despite the NNPCL – Dangote alliance
Currently, the approach between the NNPCL and the Dangote is disrupting the market, in terms of market-reflective price because of a lack of transparency on how price is determined.
Already, the federal government said it perfected all agreements and modalities for the sale of crude to Dangote Petrochemical Refinery and other local refineries in Naira, with the NNPCL as the sole off-taker of refined petrol from Dangote Petrochemical Refinery.
The coordinating Minister of the Economy, Wale Edun had confirmed the partnership in a statement, but analysts gave different views, noting that the process could scuttle competition and still lacks transparency.
Experts are concerned about an improperly deregulated market
Commenting on the development, the former chairman of the Major Oil Marketers Association of Nigeria (MOMAN), Tunji Oyebanji said a good competitive market as fundamentals of economics is what ensures the best possible price.
“When it’s one or two people dominating the market landscape, competition is not encouraged.
“Dangote is now telling us that we should wait for the Presidential Committee for the price to announce the price on the first of October. This is not a good development. The announcement of one fixed price creates anxiety and distortion of the deregulated market,” he noted.
He disclosed that Nigeria must get away from price announcements if proper market liberation is to be achieved.
He questioned the process further saying, “Who announces the price of beans, rice and Air ticket? The market naturally announces the price, not the government.The government announcement of price as Dangote has said would not open up the market as a properly deregulated sector.”
In a similar submission, a professor of Energy Economics, Adeola Adenikinju, told The ICIR that the NNPCL-Dangote pricing model is still shrouded in secrecy.
According to the Adenikinju, the hallmark of deregulation is competition.
“If the government allows only Dangote to sell with the arrangement currently with NNPCL, then we’re building a monopoly again and the price will keep going up since he’s not Father Christmas,” he said.
He stressed that Dangote refinery being the only major seller now in terms of price determination cannot sell below market price to sustain his business.
He added that the government encourage more domestic production and encourage more refining.
The subsidy reality
With the NNPCL buying Dangote petrol at N898/litre and selling at N765.99/litre, it mathematically means that the national oil company paid at least N132 subsidy for a litre of petrol.
Nigerians consume 50 million litres of petrol each day and N1.5 billion litres per month. In one year, the nation consumes N18 billion litres.
If this trend continues, the NNPC will be paying N6.6 billion daily and N198 billion monthly on petrol subsidies. This equates to N2.38 trillion in petrol subsidies annually.
“The NNPC may not be able to continue in this path as it will erode its earnings and create confusion in the downstream petroleum sector,” said a petroleum economist, Anne Nwazie.
“If they continue paying petrol subsidies, there will be uncertainties in the market. This is because what will determine Nigeria’s petrol prices from now on will be the exchange rate and the global petrol prices. What then happens if the global Brent price jumps to $100 per litre or the naira weakens to N2,500? It means they may have to pay much, much higher,” she said.
Nigerians won’t pay the same price for petrol every month
Nigerians may no longer pay the same amount of money for a litre of petrol each month. Going forward, the price of petrol will be determined by the international demand and supply dynamics, Dangote Refinery’s production cost and the exchange rate.
Dangote refinery will fix its price at the international rate going forward, economists say. Marketers will also import to fill the gaps in the local market, which shows that the exchange rate of naira will still influence the price of petrol.
This is irrespective of the NNPC’s petrol subsidies. If the consumers do not pay for the differential, the NNPCL will.
“What Dangote Refinery is assuring the country is quality and quantity. That pricing is not necessarily in the hands of Dangote Refinery but in the hands of the market,” Managing Director of Financial Derivatives Company (FDC) Limited, Bismarck Rewane, said recently on Channels TV.
“The market determines the price including the global crude price, guaranteed margin and the cost of processing. It’s as simple as that. Nobody goes into business to sell below its cost price, that is suicide.
“I think we should get that, rather than be carried away by false expectations. Yes, it’s good to know that the petrol is being lifted, it is a milestone from our own.
Harrison Edeh is a journalist with the International Centre for Investigative Reporting, always determined to drive advocacy for good governance through holding public officials and businesses accountable.