Dangote Refinery: Petrol prices unlikely to drop – Experts

Experts have said that the commencement of operations at Dangote Refinery will not lead to a significant drop in petrol prices in Nigeria.

The experts, who spoke to PREMIUM TIMES in an interview on Thursday, said the refinery’s operations will lead to a more stable and predictable supply of petroleum products, reducing the volatility in prices caused by importation and supply chain disruptions.

However, they cautioned Nigerians against expecting a sudden and drastic drop in pump prices.

Last Monday, Devakumar Edwin, vice president at Dangote Industries Limited, said the 650,000 barrels per day Dangote Refinery has begun the processing of petrol.

Mr Edwin explained that the Nigerian National Petroleum Company Limited (NNPC Ltd), Nigeria’s sole importer, would buy its product exclusively.

Speaking to reporters, the President of Dangote Group, Aliko Dangote, said the petrol refined from the refinery would hit filling stations across the country within 48 hours, depending on the NNPC Ltd.

Speaking on the latest development with PREMIUM TIMES on Thursday, Dan Kunle, an energy expert, emphasised that the narrative of price crashing is “wrong”, noting that the pricing of petroleum products will still be determined by global market forces and other factors.

“This narrative of price crashing is a wrong narrative. Let me take you back to basic economics. Production capacity and supply capacity are the most important aspects of any goods or commodity or services that citizens enjoy. If the production capacity and the supply system is weak, you can never enjoy steady supply and steady price.

“The circumstance in which this country is today, the first thing Nigerians should look out for is the production capacity of petroleum products and the supply chain guarantee; it is then you can begin to see whether price can be stable and not be jumping every day and then you can begin to say, since the production capacity have scaled up so much, prices may begin to fall or to remain stable,” Mr Kunle said.

He explained that the stability of supply and production capacity will lead to a stable price, not necessarily a cheap one.

“So, when MTN came to market, MTN and Airtel, was the price of the telephone cheap? No it wasn’t because it was at an entry level, it was a take off period, so for now, people should not carry this wrong narrative that because Dangote is refining crude oil locally, it means the price will be cheap. No, the price can be stable because there is something we call production capacity and supply capacity,” he said.

Mr Kunle said if Dangote refinery has production capacity but does not have guaranteed supply of crude, the raw material, at a reasonable price, the output will hardly translate to cheaper petrol.

“It’s not possible in pragmatic economics,” he said.

According to him, if the cost of the crude is very high, the output of the products from crude will also be relatively high.

“If Dangote gets crude at international price and they translate it to naira, sufficient crude, 700,000 barrels per day and they translate it to naira, and they give him every day unfailingly, and he refines it, that gives Nigeria a stable source of supply of Premium Motor Spirit (PMS) and if that continues like that, you can now say, supply of PMS locally is now more than even excess, then the price may adjust reasonably down, depending on the cost of production of the crude, so the cost of PMS is a derivative of the cost of the crude.

“If crude oil is $100 per barrel and it costs Nigeria $48 to produce, that means when you give that crude oil to Dangote to refine, or to any refinery to refine, $100 multiplied by the exchange rate, because you’re selling to him in naira, so when he adds his refining cost and everything, so how can the petrol per litre be cheaper than what it is now? It will be high. But if crude oil is $50 multiplied by the exchange rate you give it to him, plus his refining cost, the price again also will reflect the cost input of crude,” he said.

He said what Nigerians should be looking at henceforth, is that for the first time in history, the nation is going to have steady supply of petroleum products.

“That steady supply and stability will make you and me to plan because we will no longer go and spend one hour, two hours in petrol station, so you can now adjust your income, what we call income allocation, you can reallocate your income and say oh, this week, I will not spend more than N2,000 on petrol, this is what I will spend. Why? You could now plan. So the one hour you used to waste in the petrol station, you could now go and use it to do other things productively,” he added.

Also speaking, Muda Yusuf, director of the Centre for the Promotion of Private Enterprise (CPPE), noted that the pricing issue will depend on various factors, including the cost at which Dangote gets the crude.

He stated that if the cost of crude is low, there may be a reduction in price, but if the cost is high, the price of the product will also be high.

“The pricing issue will depend on a number of factors. First it depends on the cost Dangote gets the crude. If the cost at which Dangote refinery get the crude is low, may be by virtue of concession given by NNPC or the condition given by the government then we are likely to see a reduction in price as a result of the coming on board of Dangote.

“That’s the principal factor because if crude oil is selling at $80 and Dangote has to buy crude at that maybe $80 or more, there is no way that can bring down the price of his product. Even the social environment at which we are, the NNPC at the current prices still subsidise fuel. So, unless the government is trying to subsidise the product for Dangote as well,” Mr Yusuf said.

He explained that the fact around Dangote is not enough to change the price; it depends on the condition under which he is able to get the crude.

“Government has offered NNPC to sell the crude in Naira, but we don’t know at what exchange rate they are using, we don’t know how much they are going to sell it per barrel. So, the major determinant will be the cost of the crude that will determine what will happen,” he said.

On Friday, the Nigerian government announced that loading of petrol from Dangote Refinery will begin on Sunday.