Why Dangote Fuel May Not Come Cheaper To Nigerians
By Frederick Wright
As the Naira for crude oil arrangement of the Federal Government begins this month, there are indications that that the Dangote fuel may not come cheaper to Nigerians.
Experts in the fuel marketing value chain believed that as much as crude is sold at the international rate Dangote would rather opt for a more favourable pricing rather than selling its products to a market that would shrink its earnings.
The Chief Executive Officer, Pinnacle Oil and Gas, Robert Dickerman, among those that spoke at the NAEC Energy Conference 2024, said: “We must stop pretending that Dangote will cause massive price reduction in Nigeria. The underlying assumption that Dangote should sell below market is nonsensical. Bear in mind that the refinery can also export to vessels at market price in USD ex-refinery or even deliver to other countries directly.
“So, of you own a business that can sell a product at x all day to one customer, why would you sell it at a lower price to another customer? The only sensible strategy for Dangote is optimization, as it would be for any investor and operator,” he said.
Dickerman explained the scenario: “There is tremendous anxiety and confusion about what’s happening in the petroleum space in Nigeria, particularly downstream. The anxiety is justified, but the confusion is preventable. Everyone is entitled to his own opinion, but not his own facts.
“This confusion is unfortunate because, even though the market is dynamic with more changes underway, it isn’t complicated and can be understood by knowing the parties, their roles in the market and their incentives.
“Bear in mind that incentives always drive behavior, and the laws of economics cannot be repealed,” he stated.
He however, gave more fact such that: NNPC is wholly owned by the government, and while allowed to operate for profit, it also must execute national policy as the National Oil Company. This includes political policy.
“Available crude for sale by NNPC has been steadily declining due to production challenges and actions taken to raise short term cash such as crude forward sales and crude collateralized on international loans, but also because of the fiscal constraints of the government, its increasing debt and the need to fund large subsidies such as for PMS and electricity.
“Any crude oil sold to Dangote in Naira will displace the FX that would have been earned by selling that crude for USD. Products sold by Dangote in Naira locally will offset that loss, as an avoided cost benefit, avoiding dollar outflow for imports.
“Dangote Refinery and Petrochemical is a private business, funded with enormous risk capital, both equity and debt, with most of the debt in dollars. Although NNPC has approximately 7% of the equity, operating control clearly lies in private hands.
“All crude oil and petroleum products are priced in USD, all over the world. It has been this way since oil was first drilled in Pennsylvania in 1859.
“When we import products, whether the buyer is NTL or a private marketer, we must pay the global market price, adjusted for quality and location. That price is in dollars and must be paid in dollars. When it is re-sold in Naira by vessel, in bulk in a terminal, by truck at a gantry, or by pump at retail, the market price is the USD price, converted to Naira at the current FX exchange rate, which is currently about N1700.
“Any price below that is the result of Nigerian subsidy. The subsidy represents the difference between the market price and the selling price.
“The investors who made massive investment in the Dangote refinery had every expectation of realizing market price for their products, yielding a market return on the refining margin, called crack spread in the industry. This margin would consider the locational advantage and size of the plant, as there are economies of scale.
“Since PMS is still subsidized by the government using discounted FX through NNPC, prices at wholesale and retail are still considerably below market. That is why only NTL has been able to import (buy high, sell low) and why only NTL can buy Dangote’s gasoline and pay market price, while reselling at a subsidized price. No marketer would stay in business trying to copy this model.
“The speculation that this arrangement is the result of some dubious plot to benefit one party or another is all nonsense. It is simply one consequence of the subsidy. Other consequences of the subsidy are that there is no competitive market here at any class of trade, NNPC is in full control of national distribution, and Nigeria’s prices remain far lower than neighboring countries, creating smuggling incentives.
“And we must stop pretending that Dangote will cause massive price reduction in Nigeria. The underlying assumption that Dangote should sell below market is nonsensical. Bear in mind that the refinery can also export to vessels at market price in USD ex-refinery or even deliver to other countries directly. So, of you own a business that can sell a product at x all day to one customer, why would you sell it at a lower price to another customer? The only sensible strategy for Dangote is optimization, as it would be for any investor and operator.
“Finally, now that we all know the global market price for any oil commodity is dollar-based, and must be converted to Naira at the Naira/USD exchange rate, we also know that the large majority of price increases we have seen in the past year are not because of government policy, price gouging or product hoarding, nor are they due to an increase in the price of crude oil. They are due to the fall in value of the Naira. Every drop in the Naira raises the cost of anything imported or market priced, whether it is gasoline or manufactured goods or food.
“We must address the root problem, which is how to restore global confidence in Nigeria’s economy and currency, create foreign investment in jobs and local production, increase tax revenue and achieve fiscal prudency! That is the only way to lower petroleum products prices in Naira,” he said.
