BusinessDay

Coming on stream of Dangote, other refineries won’t crash price

Contrary to speculations, the expected commencement of Dangote Refinery in the third quarter (Q3) of this year as well as other refineries will not lead to a significant reduction in the price of petrol in Nigeria.

The reason is that they will be buying crude oil at the international market price and sell refined petrol to consumers at the same market-determined price.

The Federal Government recently announced the suspension of the planned removal of petrol subsidy with a proposal to extend the period for the implementation of the removal by 18 months.

Timipre Sylva, minister of state for petroleum resources, who announced this while briefing State House correspondents in Abuja, said the government had concluded plans to approach the National Assembly to amend the Petroleum Industry Act (PIA).

“We would approve an 18-month extension and then it is up to the National Assembly to look at it and pass the amendment as they see it,” he said.

The minister believes that other measures such as the Dangote Refinery, the Port Harcourt refinery, and other modular refineries would have significantly come on stream by the end of the year and possibly reduce the price of petrol in the market. But available data suggest otherwise.

It would be recalled that in April 2020, the Federal Government announced an end to the petrol subsidy regime as full deregulation of the downstream sector of the petroleum industry was expected to take off by the end of February 2022, based on the provisions of the new Petroleum Industry Act (PIA).

The impact of the policy on Nigerians was not felt at that time due to the crash in global oil prices. However, with the increase in oil prices, fuel prices rose sharply with the attendant protest by Nigerians and organized labour unions and the subsidy removal policy was subsequently postponed. Thus, bringing about a return to the payment of subsidy.

The fact is, there have been multiple (a number) of refineries that have been licensed for several years. None of them is willing to start refining under the current regime where fuel (pricing) is being controlled.

The Dangote Refinery is sitting within an Export Processing Zone, so it is insulated from that.

When Dangote Refinery or any of the refineries buy crude oil from the NNPC Limited (a fully commercialized, private firm, going by the provisions of the PIA), they will buy at the international market price. How then would they sell at a price lower than the prevailing market price?

Similarly, when petroleum marketers buy petrol from Dangote Refinery, they will be buying at the international market price. However, the only savings that would be made is savings on freight.

Even at that, we will still have landing costs, labour costs and the marketers will still have to put a margin. These refineries, being refineries that are supposed to have come to operate, can now come in because they are assured that when they produce, they can sell at the market rate and recover their investments and make some reasonable profits.

The deregulation of the sector, which led to the increase in petrol price, was good for the economy as it would encourage investments in refineries.

However, many people are of the opinion that the only option that could bring about a reduction in the petrol price is the rehabilitation and operationalization of the government-owned refineries located in Kaduna, Warri and Port Harcourt. But here again, is the problem.

The NNPC would not be able to rehabilitate the government-owned refineries completely, because the refineries are old and there is a need to encourage private investments in the refineries.

Even Zainab Ahmed, the finance minister, admitted this fact last year when she stated: “Those refineries are old and even if we turn them around, we will not be able to operate them at optimal capacity; so, while the NNPC is trying to rehabilitate them, we also need to encourage the private sector refineries to come on stream and even state governments that have the capacity.”

Read also: Dangote’s giant Oil Refinery to Begin Production in Third Quarter of 2022

Simply put: The pump price of petrol would not drop significantly even if Nigeria was to refine crude oil locally. This is because the major determinant of the cost of petrol is crude oil and as long as it remained high (currently about $87bpd), the cost of petrol would not drop.

Indeed, when the refineries start operation the only thing that can make local production cheaper is the absence of shipping cost because the cost of labour will not be too different from the international standard since local refineries will be paying the expatriates.

Another option is for the government to sell crude to local refineries at a discounted rate for local production and consumption only. But even that would lead to huge revenue loss to the government, which may amount to another form of subsidy.