July 3, 2024/CSL Research
According to news reports, Aliko Dangote, Chairman of the Dangote Group has announced that Petroleum Motor Spirit (PMS) from the refinery would be available in the Nigerian market by the third week of July. Petroleum marketers are however concerned that the product’s price may be higher than expected. This worry stems from the refinery’s reliance on imported crude oil due to its inability to secure local feedstock from international oil companies (IOCs).
The Dangote Refinery, with a capacity of 650,000 barrels per day, has been importing crude oil from the United States and other countries at a higher cost. This has made its diesel and aviation fuel less attractive to some local marketers due to pricing issues.
Marketers fear that the high cost of importing crude oil will impact production costs and subsequently increase the ex-depot price of Dangote’s PMS.
On pricing, Hammed Fashola, National Vice President of the Independent Petroleum Marketers Association of Nigeria in an interview with the press, expressed hopes that the refinery will help close the price gap between major and independent marketers, including the Nigerian National Petroleum Company Limited (NNPC) retail outlets.
He anticipates a marginal price reduction if local crude becomes available. The refinery, which has one of the largest production capacities in the world, operating at full capacity would more than meet Nigeria’s domestic fuel requirements with excess capacity for exports. While we note that achieving self-sufficiency in local refining capacity might not reduce the cost of petrol significantly, sufficient local refining capacity would at least boost the availability of the product and bring a lasting end to the persistent issue of fuel scarcity in the country.
We envisage the impact of domestic refining of petrol on PMS pump price will not be too significant, given that only the freight cost is expected to reduce, in a situation where crude is locally supplied.
To jump-start operations, NNPC, which owns a 20% stake in the refinery had an agreement to supply 6 million barrels of crude oil as feedstock to the Dangote refinery in December.
Whilst there are positive expectations around the impact of achieving local refining capacity, we believe the availability of feedstock (crude) may present a major challenge to pricing. The
lack of crude has stalled the operations of several modular refineries, with many reported to be producing limited volumes due to inadequate feedstock. Nigeria currently has five operational modular refineries while several others are in various stages of development.
Beyond the availability of crude feed, another significant obstacle to the smooth operation of the Dangote Refinery will likely be centred around subsidies. As a commercial entity, the refinery’s operations will be adversely affected if it adopts the credit sales pattern necessitated by a subsidy regime, which the country has obviously reversed to, given its running costs and interest payments.
