2 months ago
13 ARTICLE AD
THE commencement of petrol production at the Dangote Refining and Petrochemicals complex in Lagos is a defining moment for Nigeria. However, the excitement that came with the announcement has been dampened. It coincided with a 66 per cent spike in petrol prices shortly after the highly indebted national oil company, the NNPC Ltd., admitted that it could no longer accommodate subsidies on imported petrol.
On September 3, the NNPC adjusted petrol pump prices by 66 per cent from N568 and N617 per litre to N855 and N897/l across regions. Independent marketers adjusted to between N900 and N1,200/l.
This new price template suggests an agreement between the Dangote Refinery and the Federal Government, which has agreed to sell crude oil in naira to the refinery, factoring in the elimination of other costs associated with petrol imports such as freight, insurance, port charges and taxes that had combined to peg the landing cost at N1,117 as of June according to the Major Energy Marketers Association of Nigeria.
This is a bitter pill that Nigerians have been made to swallow. It has triggered a backlash, and explanations remain fuzzy. The timing of the refinery’s first petrol flows after weeks of petrol scarcity that had pushed prices up to N1,500/l in the black market.
The subsequent official price hike, and NNPC’s decision to come clean on its estimated $6 billion debt to fuel suppliers after initial denials, give room for suspicions that the entire scenario was contrived to set the stage to end fuel subsidies.
The refiner has presented a perfect opportunity for the Bola Tinubu administration to correct the blunder of its “subsidy is gone” declaration, followed by the naira devaluation, which ironically resulted in higher subsidy payments.
Confusing signals are emanating from both the government and the Dangote Refinery concerning pump prices. The NNPC said prices would be determined by forex rates, and Dangote will be allowed to set petrol prices starting in October.
The refinery is committed to supplying 25 million litres per day this September, which will be ramped up to 30 million litres a day in October. This is almost half of local consumption, estimated at 66 million litres per day.
Nigerians are pitted between fuel availability and higher costs. It is not the relief that was expected with Dangote’s entry into the petrol market.
While the government is facing a severe backlash from stakeholders, including labour unions and members of the organised private sector over fears of further petrol price-induced inflation, and worsening of the cost-of-living crisis, the longer-term prospects of reliable fuel supplies, energy security and price stability could be a worthwhile trade-off.
However, the government must be transparent in its actions to gain public trust. The downstream petroleum sector is a cesspool of intrigues, avarice and dubious activities promoted by vested interests. Nigerians are also not convinced that any savings from the stoppage or reduction of fuel imports will be properly accounted for.
There is evidence to support the possibility of petrol prices trending downwards eventually. The Dangote Refinery had crashed diesel price to N1,000/l in April, down from N1,200 initially offered to fuel marketers weeks after the refinery started diesel production in January. This is much lower than the average of N1,700/l a month earlier. It also reduced the price of aviation turbine kerosene from N980 per litre to N940 in April.
The petrol market should be subject to competition to ensure fair prices. While NNPC executives have claimed that the deregulation of the petroleum sector, as stipulated by the Petroleum Industry Act 2021, has taken effect and petrol prices will be determined by unrestricted free market forces, an exclusive deal between Dangote and the NNPC does not suggest a competitive environment. The illiquid forex market will give the NNPC as a retailer a huge advantage over independent marketers who have been clamouring for access to Dangote petrol. This should not be allowed to be the norm.
Whatever pains the still unfolding scenario represents, the big picture of Dangote refinery kick-starting a new era of industrialisation for Nigeria cannot be overlooked.
Situated on a site seven times the size of Victoria Island, the $20 billion complex is the largest single-train refinery in the world with a nameplate capacity of 650,000 bpd.
The superstructure is a testament to the vision and tenacity of Aliko Dangote, who has pulled off what the Federal Government has failed to do.
The refinery will end 28 years of fuel import dependency due to the grounding of the NNPC’s four refineries with a combined capacity of 445,000 bpd despite over $20 billion spent on maintenance. The country has a reprehensible distinction of being an oil producer that relies on fuel imports.
More significantly, its impact on the economy will be profound as Nigeria will save a significant portion of the $10 billion spent yearly on fuel imports. It will guarantee supplies that have been subject to frequent disruptions associated with importation by the NNPC.
On the macroeconomic level, the refinery’s potential contribution to Nigeria’s economic fortunes is significant. It provides huge opportunities for GDP growth, employment generation, technological advancements, and the creation of spin-off industries. The refinery has a Nelson complexity index of 10.5, meaning it is more complex than most refineries in the United States (average 9.5) or Europe (average 6.5).
Recent economic modelling suggests that the refinery could contribute approximately 2.5 per cent to Nigeria’s GDP. This estimation considers not only the direct revenues from the refinery’s operations but also the multiplier effects across the supply chain, including service providers, logistics, and other ancillary services that will see growth due to the refinery’s demands.
The refinery employs about 3,000 young Nigerian engineers who run its daily operations. It is estimated that the refinery will sustain 30,000 jobs from activities related to its operations and 100,000 more in spin-off industries and activities.
The refinery has opened a new vista of opportunities for the country’s industrial and manufacturing sectors with the production of a vast range of petrochemicals and raw materials including polypropylene, polyethene, base oil, and linear alkylbenzenes that will help boost many sectors, including agricultural, plastics, and packaging. Its fertiliser arm is already supplying urea to domestic and African markets.
It has effectively provided a high level of energy security for West Africa with the potential to deepen regional integration through common fuel markets.
This has the potential to stabilise the naira, rein in inflation and contain Nigeria’s need for continued borrowing.
Crucially, it provides proof of concept that Nigeria can be a destination for new large-scale, world-class, high-cost industrial projects, which could catalyse further foreign investment flows and open the space for more technology-driven industries.
Indeed, there are suggestions that by aligning economic policies to support the refinery and other similarly large projects coming up, the government could transform an industry-specific investment into a fulcrum for further economic development. It gives impetus for revamping Nigeria’s logistics infrastructure – rail, roads, and pipelines – to ease the movement of petroleum products.
The Tinubu administration should realise that Nigeria’s industrial future lies with private sector investors. Moribund projects such as Ajaokuta Steel and the Aluminium Smelter Company of Nigeria should be privatised with dispatch.
So, the NNPC must be privatised and run strictly as a profit-driven entity. This will provide an immediate cash injection into the economy, free the company from political encumbrances, guarantee transparency and efficiency in its operations, and significantly higher financial returns to the public treasury.
