Nigeria – Despite a crude oil reserve of over 36 billion barrels and a maximum crude oil production capacity of 2.5 million barrels per day, Nigeria still cannot meet its local demand for fuel.
Unfortunately, the importation of refined products further weighed on the demand for foreign exchange. In addition, the increase in the price of oil on the international market, which is reflected in the price at the pump of Petroleum Motor Spirit (PMS), is a major concern for the average Nigerian.
In terms of forex availability, oil traders still depend on the Nigerian National Petroleum Corporation (NNPC) for petroleum products as they cannot begin importing due to the scarcity of forex, leaving the company as the sole importer.
This is happening despite the industry’s acclaimed deregulation that allows market forces to determine fuel prices.
Yet the surge in PMS prices in recent times has continued to generate massive “bribes” from Nigerians, unions and other relevant industry players.
Amidst these controversies were also assurances that predict better times in the near future.
Nigeria’s inoperative refineries, losses
Despite their inoperative states, data showed that Nigeria’s four refineries – two in Port Harcourt, Warri and Kaduna combined – incurred a total of 109 billion naira in operating expenses in 2020.
According to figures obtained from the NNPC’s monthly finance and operations report from January to December 2020, the operating deficit for the year was estimated at just over 100 billion naira.
Kaduna Refining and Petrochemical Company (KRPC) suffered a loss of N34 billion, Port Harcourt Refining Company (PHRC) N33 billion while Warri Refining and Petrochemical Company (WRPC) also recorded a loss of N33 billion.
Unfortunately, the refineries did not produce any products during the period under review, but conveniently suffered huge losses to the tune of N100 billion. This despite the defective status of the installation over the years. To this day, the country still depends on imports to meet its demand for fuel.
The Dangote refinery to the rescue?
In 2013, Nigerian businessman Aliko Dangote announced plans to build a 650,000 barrels per day refinery. It is located in the Lekki Free Zone, in Lagos State.
The $ 15 billion project is an integrated refinery and petrochemical company expected to produce enough to meet local demand as well as a surplus for export.
No doubt Nigerians, among other stakeholders, are waiting to see how the project, which is touted as a solution to Nigeria’s oil import problems, would help revive the country’s stalled economy.
Already, with a current inflation rate of 18.7%, according to the Nigerian Bureau of Statistics, and a depleting foreign exchange reserve which, in March 2021, stood at $ 37.74 billion, the The country’s economy unquestionably needs a major turnaround to keep things within limits.
More importantly, it is widely believed that when the refinery comes upstream, it would facilitate foreign exchange demand and also reduce the pump price of the PMS.
During one of her visits to the refinery, Minister of Finance, Budget and National Planning, Ms. Zainab Ahmed, said the country would save around $ 10 billion in foreign exchange once the project is completed.
“And for us in government, it’s a savings of at least $ 10 billion that will stay in our reserves instead of flying off to pay for petroleum products,” she said.
But can the project save the forex challenge and Nigeria’s imports?
The SNB’s fourth quarter foreign trade statistics (2020), for example, revealed that of the total 5.9 trillion imports for the year, 9.68% went to PMS imports.
Financial analyst Paul Alaje said fuel imports consume more of the country’s foreign exchange reserves, followed by other commodities.
“When we export crude, people pay us in hard currency, the money that is paid even though it is for CIOs, because it is paid in hard currency, it goes into Nigeria’s foreign reserve.” , explains Alaje.
In his analysis, he said that although Nigeria’s foreign reserves tend to increase with the sale of crude oil to other countries, the continued import of refined oil depletes reserves, leading to a shortage of foreign exchange.
“What this means is that more pressure will be on the Naira, demand for the Naira will continue to drop in exchange for the dollar. All of these will reduce dramatically when we locally refine the oil, whether it is Dangote. or by some other means, whether governmental or private, ”Alaje concluded.
In March 2021, the Central Bank of Nigeria (CBN), in its fourth quarter 2020 report, also showed how petroleum product imports contributed to the $ 5.2 billion deficit recorded in the quarter.
“The merchandise account experienced a larger deficit of $ 5.26 billion, resulting from increased imports of petroleum and non-petroleum products.”
That said, it should be noted that due to changes in the demand and supply of oil in the international market, which in turn affect prices, an increase in the price of the raw material in an oil-importing economy tends to reduce economic growth, create an exchange rate shock, affect consumption, domestic investment and even cause the prices of other commodities to rise.
But with the new refinery, experts believe that due to its installed capacity, crude oil could then be refined and sold locally in Nigerian currency, which in turn reduces pressure on forex.
Should Nigerians expect a drop in the price of gasoline at the pump?
Between 2016 and 2020, the results showed that the price of PMS had been steadily increasing, except for the drop recorded between April and June 2020 which was mainly due to the impact of the COVID-19 pandemic which has lowers the price of oil on the international market.
In February 2015, during the administration of Goodluck Jonathan, the price of SPM increased from N97 to N87, but the administration led by Buhari on May 11, 2016, increased the price from N87 to N145, an increase of 66, 67%.
Since then, the price had remained static until early April 2020 when the price fell to N130.84 in April, N129.67 in May and N128 in June. This, however, was short-lived as the price rose to 143.63 N in July, 148.78 N in August, 161.06 N between September and October, 167.27 N in November and 165.7 N in December.
Meanwhile, an average Nigerian assumes that the Dangote refinery project is likely to lower the price of gasoline at the pump.
On the other hand, factors such as freight, taxes, demurrage, landing costs, Jetty-Depot throughput, among others, according to the model of the Petroleum Price Regulatory Agency (PPPRA) , contribute to pricing.
But if such money-swallowing factors are eliminated, a reduction could be predicted.
“By refining this product here in Nigeria, all the costs associated with import demurrage, the costs associated with freight will be totally eliminated,” said CBN Governor Godwin Emefiele.
Professor of economics at the University of Ibadan and energy expert, Professor Adeola Adenikinju also shared a similar position with the Nigerian Tribune.
Still, he speculated that the likelihood of a reduction in the price of gasoline at the pump might depend on the deal between Dangote and the federal government.
“It is likely to reduce the cost of the price of the fuel pump. I said probably because I don’t know the terms and conditions we’re going to buy with. Look at the price of cement, it is one of the highest in the world and yet it is produced locally by Dangote, ”explains Adenikinju.
“But some of the other costs like freight, taxes, transportation, insurance, that are associated with the price will not be there anymore. Overall, it’s a win-win situation if it works well Nigeria should benefit from the refineries. “
Bala Zakka, an energy expert for his part, said that currently, the pricing mechanism to be adopted by Dangote is still unknown, but noted that refining in Nigeria will reduce the price of gasoline at the pump.
“Because the refining is going to be in Nigeria, because it will buy the crude oil from Nigeria and the crude oil will be moved from the wellheads to its refinery in Nigeria, the price of gasoline from the Dangote refinery will be cheaper than what is imported from refineries abroad.
“The reason is that with any refinery that you are going to bring the refined product from overseas, you are going to pay for the ship, the cost of transportation, insurance, security and when the ship arrives in Nigeria, if it there is no space to anchor them, you will also pay while waiting to unload them and when you come and there is no place to unload and keep them you have to look for a private deposit and keep them there. All of these charges will be added to the overall cost per liter.
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