Dangote Refinery to curb petrol import, subsidy impact muted

What is expected of Dangote Refinery can be likened to betting on Moses Simon to win the Africa Cup of Nations for Nigeria.

The great expectation of the government and many Nigerians is that the world’s biggest single-train refinery will somehow contribute to the resolution of the country’s petrol subsidy woes and boost economic growth. It will not be that simple, according to estimates by local and international economists surveyed by BusinessDay.

Official estimates of the what the refinery will add to economic growth — 0.6 percent in 2022 and 2.2 percent in 2023 — assume it will start producing at once all the petrol that Nigeria consumes.

After years delays, Dangote Refinery, will to start with a processing capacity of 540,000 barrels per day between August and September 2022, and hit full capacity at the beginning of 2023.

Economists who spoke to BusinessDay are, however, more conservative when it comes to the prospects of whether the refinery can put Nigeria out its subsidy misery which cost the economy over N12 trillion in the last ten years.

The estimates of economic impact by a leading multilateral agency assume that if the refinery starts this year it will produce only 10 percent of its capacity, and 20 percent next year. It will only achieve full capacity after 2025. Under these assumptions, the refinery’s addition to growth measured by GDP is more likely to be 0.1 and 0.4 percent in 2022 and 2023 respectively.

Economists at the agency add that the impact of domestic refining of petrol will have muted effect on the cost of the petrol consumed in Nigeria given that only the cost of freight will be eliminated.

This appears to dampen the message being put out by senior government officials about the $15 billion Refinery complex which is designed to produce about 50 million litres of petrol.

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While it the refinery will reverse the huge petrol import trend, it’s coming on stream while boosting economic growth will be insufficient to plug Nigeria’s foreign exchange hole by itself.

“It is expected that the coming on stream of the Dangote refinery in 2022 will impact positively on the downstream sector of the economy”, said Muda Yusuf, the former director-general of the Lagos Chamber of Commerce and Industry (LCCI), one of Nigeria’s oldest private sector advocacy group.

The Centre for the Promotion of Private Enterprise (CPPE), an economic advocacy group, believes this development will solve Nigeria’s constant back and forth with petrol importation most especially and opaque subsidy regime which has blindfolded the federal government from channelling more money into other critical sectors like healthcare and education.

The economists BusinessDay surveyed say there are two ways to supplying the market with petrol. Nigeria can either sell crude oil to the highest bidder and import petrol from the lowest-price bidder or refine locally.

In each of the two cases, what government earns as oil revenue in either case should be the same; the refinery abroad or at home buy crude oil, the basic raw material, at the prevailing international price.

Economists calculate that the shipping cost saved from refining locally will range between $0.01 to 0.015 per litre. Benchmark petrol prices, however, are set in major global refining hubs where economies of scale and other efficiencies keep costs low, possibly offsetting shipping costs.

Therefore, unless the market price of petrol produced by the a local refinery is the same as the current subsidised price, the government will continue subsidising petrol.

What if the federal government insist crude oil be sold at below market prices, just enough to cover the cost of production and delivery to local refineries, so as to protect Nigerians from the volatility of global oil prices?

It will entail an enormous economic and fiscal cost, say economists that spoke to BusinessDay. It will discourage investment in new oil production, cause oil production to drop (Nigeria’s oilfields have a natural production decline rate of about 10– 15 percent a year) and government revenue, from taxes levied on oil profits, will plunge.

And above all, they say keeping petrol prices artificially low will fuel a vicious cycle of smuggling and over-consumption.

Biodun Adedipe, an economist and chief consultant, BAA Consult, thinks the refinery’s impact will be huge but insists it won’t fix every Nigerian problem.

“The Dangote Refinery will not solve the myriad of challenges bedevilling Nigeria’s downstream sector such as lack of transparency, accountability, the domineering stature,” he says.

For Adedipe, the Dangote Refinery is built on dollar-denominated financing, which means the project would focus on speedily generating the dollars to service and repay those loans rather than sell cheap petrol.

“The pump price of petrol from Dangote Refinery will reflect the market price of crude and cost of production, which will not be static at any point,” Adedipe notes.

Israel Aye, the managing partner of the Commercial and Energy Law Practice (CELP) believes that “the only difference that would happen if Nigeria’s supply was coming from in-country would have been the freight price.

But whether it is coming from outside or coming from within, it will be about the same cost because when you import, the only difference is that you will have to pay the freight.”

As of February 1, 2022, upturn in the price of Brent Crude pushed the landing cost of Premium Motor Spirit (petrol) imported into Nigeria to over N282 per litre, thanks to a freight cost of $26.77 per MT (N8.31 per litre), according to Platts, a global energy and commodities data provider.

“There is nothing like an opportunity for buying things at a cheaper price, it will be based on the international standard,” Bello Rabiu, formerly the chief operating officer, Upstream at Nigerian National Petroleum Corporation (NNPC), states.

Other cost elements that make up the landing cost include lightering expenses (N4.81), Nigerian Ports Authority charge (N2.49), Nigerian Maritime Administration and Safety Agency charge (N0.23), jetty throughput charge (N1.61), storage charge (N2.58), and financing (N2.17).

In Africa’s biggest oil producer, the pump price is the sum of the landing cost, wholesaler margin (N4.03), admin charge (N1.23), transporters allowance (N3.89), bridging fund (N7.51), marine transport average (N0.15), and retailer margin (N6.19).

“The hope the Dangote Refinery brings is refreshing but relying on a single project to rescue the oil and gas sector of the world’s 13th-largest crude producer points to the years of neglect that has riddled the sector and its damming frailty,” Joe Nwakwue, former chairman of the Society of Petroleum Engineers (SPE), says.

Other experts are unanimous in their views that full deregulation would, in the long run, benefit ordinary Nigerians, and positively change the industry’s fortunes forever if the government put the right structures in place.

“Without full deregulation in Nigeria’s downstream sector, we shouldn’t expect any miracle,” Nwakwue states.

At a recent foreign investors’ meeting in New York, the Central Bank of Nigeria governor, Godwin Emefiele, stated that Nigeria’s import of petroleum products that accounted for 30 percent of its forex could be reversed by the successful commencement of operations at the Dangote Refinery.

“The Dangote Refinery once it begins production would be a major FX saving source for Nigeria,” the governor said, adding that “if the 650,000” daily barrels that will be produced from the refinery will “be sold in naira it would be a major FX saver for Nigeria.”

The CEO of Financial Derivatives Company, Bismarck Rewane, is not as optimistic. He says whatever Nigeria gains in not using dollars to buy refined petrol is almost equivalent to what it will forfeit by giving up 650,000 barrels of crude daily that it can no longer sell and earn dollars from.

“That Dangote Refinery can be a silver bullet to solving Nigeria’s foreign exchange problem is a misunderstanding of the facts. It will help in reducing refining cost, it will help in reducing transportation cost but it is the oil that you are going to export that will give you a dollar,” Rewane said recently.