The recent developments surrounding the Dangote Refinery and the broader downstream petroleum industry in Nigeria signify a pivotal shift in market dynamics, particularly in the context of crude oil sales and petrol pricing. With the NNPCL’s shift to a “naira for crude” arrangement with domestic refiners, which is aimed at establishing a local currency transaction framework, and the discontinuation of its exclusive purchasing arrangement with the Dangote Refinery, the stage is seemingly set for a more competitive landscape. This transition signals a potential move towards full deregulation, where players can negotiate prices on a willing buyer-willing seller basis.

The “Naira for Crude” Arrangement

At this juncture, a bit of context is necessary. Dangote Refinery commenced petrol sales to the Nigerian market on September 15, 2024, supplying circa 25 million litres per day through NNPC Trading Limited, with plans in place to increase this output to potentially 30 million litres per day as operations scale up. At the same time, NNPCL imported over 800,000 metric tonnes of petrol to bolster domestic supply and address Nigeria’s average daily petrol demand – a highly contentious figure of 50 million litres. Given current production levels and potential shortfalls, we believe that Nigeria would likely continue importing petrol to satisfy its needs.

On July 29, 2024, the Federal Executive Council (FEC) approved President Bola Tinubu’s directive for NNPCL to sell crude oil to Dangote Refinery and other local refiners in naira. Starting October 1, 2024, NNPCL was expected to supply 385,000 barrels per day (bpd) of crude oil to Dangote Refinery in exchange for equivalent volumes of Premium Motor Spirit (PMS) and diesel sold in naira. While diesel can be sold to any interested buyer at naira prices, PMS was initially designated only for NNPCL distribution through various marketers. This middle-man role has since been removed, allowing other marketers direct access to purchase PMS from Dangote Refinery. Although the Minister of Finance and Coordinating Minister of the Economy, Wale Edun, announced the official commencement of crude oil and refined petroleum sales in naira, as of October 11, 2024, refiners had yet to confirm the implementation of the “naira-for-crude” arrangement. This delay raises concerns about the government’s capacity to deliver on its commitment to supply 385,000 barrels per day (bpd) of crude oil for the initial six-month period, subject to review.

The “naira-for-crude” arrangement aims to bolster domestic refining capabilities and enhance local supply security. It offers several advantages, including reducing foreign exchange (FX) demand for imported refined products and ensuring that the FX rate directly influences the naira price for crude oil. Consequently, changes in either the FX rate or crude oil prices would impact the price of petrol. It is essential to note that this arrangement does not guarantee a fixed naira price for petrol. Selling crude oil in naira enables NNPCL to utilise proceeds from crude exports after fulfilling royalty and tax obligations to the government. However, the reduction of FX demand through purchasing refined products from Dangote hinges on the refinery’s ability to offer competitive prices (lower than the price of imports).

While concerns about reduced export earnings are valid, especially as crude oil production has remained largely stagnant at around 1.4 mbpd (Q2 2024), we believe a significant short-term increase in crude oil output, of at least 300,000 bpd – 400,000 bpd, could mitigate these concerns. In the long term, Dangote Refinery is poised to scale up production of high-value derivatives for the export market, including kerosene/jet fuel, diesel, propane/LPG, polypropylene, and other value-added fuels. This expansion is expected to significantly boost export earnings and provide a valuable source of FX to service the company’s outstanding debt obligations.

Dangote Group’s imminent commencement of crude oil production from its Nigerian oil assets (OMLs 71 and 72) in Q4 2024 marks a significant milestone. This vertical integration will bolster its refining business by reducing reliance on external suppliers, ensuring a stable and cost-effective feedstock supply. This strategic move is expected to lower operational costs, improve profit margins, and increase refined product output, thereby addressing Nigeria’s dependence on imported fuels. Nonetheless, while the initial production target of 20,000 bpd is a promising start, with plans for further expansion in early 2025, it is likely insufficient to meet the Dangote Refinery’s full capacity needs. Consequently, the refinery will still need to rely on the NNPCL and imports to secure adequate crude oil supplies.

The Context of Deregulation

The decision to open market access for other players was accompanied by yet another announcement of an upward adjustment of petrol prices, by 16.73% to ₦998/litre (in Lagos), the third since the “subsidy is gone” speech of President Tinubu on May 29, 2023. NNPCL’s financial constraints and its huge debt burden of $6.8 billion to its suppliers mean the subsidy regime has ended and petrol price deregulation is in full sway.

Observing price fluctuations in fully deregulated petroleum products such as aviation fuel, kerosene, and diesel provides insight into free market dynamics that sharply contrast with current petrol pricing conditions. In a truly deregulated market for petrol, pump prices should reflect global crude oil prices, prevailing exchange rates, marketers’ margins, and other associated fees.

Transparency Concerns

Nonetheless, the NNPCL has been hit with criticism of a lack of transparency regarding pricing data from stakeholders such as the Independent Petroleum Marketers Association of Nigeria (IPMAN) and the Major Oil Marketers Association of Nigeria (MOMAN). The accusations appear to not be without merit and raise questions about why Dangote Refinery can provide detailed pricing and quotes for diesel and aviation fuel but is unable (or unwilling) to do so for petrol. This discrepancy goes against Section 206 of the Petroleum Industry Act (PIA), which empowers the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) to monitor bulk sales and publish market-based prices to ensure transparent transactions, suggesting potential regulatory restraint that is hindering full market transparency.

If Dangote Refinery is unable to disclose its petrol pricing data, it could suggest that a fully deregulated petrol market is still a distant reality. This would contradict the rhetoric surrounding the implementation of the Petroleum Industry Act (PIA), which explicitly states (Section 205) that unrestricted free market forces should determine petroleum prices.

Global Comparisons and Future Outlook

Globally, petrol prices are often benchmarked using the Platts pricing system, which reflects real-time market conditions. As at September 2024, the Platts gasoline price stood at around $690 per metric tonne, or approximately $0.52 per litre. Petrol from Dangote Refinery – reportedly high-grade at 10 parts per million (ppm) of sulphur – commands a premium of $0.03 per litre. This translates to ₦898.78/litre (using the average exchange rate of ₦1,629.30/$ in September 2024) before additional costs, rising to ₦950.22/litre afterward. This compares favourably with the estimated landing cost of around ₦1,050.95/litre for imported petrol as at August 2024. While domestic refining eliminates shipping costs, logistical challenges persist, particularly in the absence of efficient pipeline infrastructure. Nigeria remains reliant on diesel-powered trucks to transport petrol from Lagos to other regions, which adds to distribution costs and inefficiencies.

In the short term, the exchange rate will likely be the most significant factor influencing domestic PMS prices. For Dangote Refinery and other domestic refiners, buying crude feedstock in U.S. dollars while selling refined products in naira poses substantial risks, particularly without a functional forward market to hedge against currency fluctuations. The naira-for-crude arrangement, conducted at the Central Bank of Nigeria’s NAFEX closing rate, may mitigate these risks, though its sustainability, and even its feasibility, remain uncertain. Alternatively, adopting the global Platts pricing system, which factors in international supply-demand dynamics, could be an option, though it would place greater emphasis on exchange rate stability as a key determinant of domestic petrol prices.

Should the refiners all revert to the global Platts system for determining petrol prices based on supply-demand dynamics, the exchange rate would become the primary variable under Nigeria’s control regarding pricing strategies. Given the extensive ramifications higher petrol prices have on the Nigerian economy, the incentive for fostering a stronger and more stable naira is unprecedented.