Downstream deregulation could speed up with Dangote Refinery entry

A complete deregulation of the downstream sector of the oil and gas industry might be inevitable in the next few years, and analysts see the coming on stream of the Dangote Refinery as a key influencer and determinant on this much debated issue.

A ranging debate on the deregulation of the downstream sector of the oil and gas industry has on for more than five years. The debate has often centred on whether or not deregulation should take place at all; and if it should, then when was the right time to deregulate; or whether it should happen in phases or at once.

However, recently a new piece was thrown into the jigsaw; the piece being the $12 billion Dangote Refinery project which, when completed, would have profound impact on the Nigerian economy, especially the downstream sub-sector.

The Nigerian downstream sub-sector of the oil and gas industry has been operating at sub optimal levels because of an opaque subsidy payments regime to oil marketers as a result of the regulation of the price at which petrol is sold at the pump. Currently, a body representing oil marketers, the Major Oil Marketers Association of Nigeria (MOMAN), says a total of N720 billion ($2 billion) is owed to marketers for the importation of petroleum products and the accrued interests on bank loans. The non-payment of this debt, the marketers say, has made them unable to import products, and as a result, NNPC has become the only importer of petrol into the country.

Local refining has been described as the solution to the endless problems plaguing the downstream sector and business a.m. spoke with analysts on how much of an impact the Dangote refinery would have on speeding up the deregulation process and they all gave different views.

Odion Omofoman, an energy expert and chief executive officer of New Hamsphire Capital Ltd. in a phone conversation with business a.m. said that local refining, which is what Aliko Dangote is trying to do, is the crucial step needed to achieve deregulation.

“Whenever Dangote refinery comes on board, it would definitely hasten the complete deregulation of the downstream subsector, because what is missing for any government that has to deregulate the market is supply problem, because we basically import. So, when Dangote refinery comes on board, we would be importing from it at Lekki and then the landing cost of petrol is a lot less than it would have been if you import from Europe, or China or somewhere else. I don’t see an immediate deregulation but it is the critical step needed to achieve complete deregulation of the sector, which is local refining,” he explained.

Jubril Kareem, head of energy research at Ecobank Transnational Incorporated, in an emailed response to business a.m. questions also said that, “the most important effect of the Dangote Refinery will be the change in movement of petroleum products to the country, as petroleum products will now be sourced locally as against being imported.”

“However, we do not see any significant changes to the foreign exchange transaction in that space; the refinery pays for its feedstock, equipment and even some personnel in foreign currency and will seek to match its revenue to its expenses, therefore, the company will most likely sell its products in US dollars also,” he explained.

On the landing cost of petrol, Temilade Aduroja, an analyst with Renaissance Capital in a monitored broadcast said the investment bank had carried out an analysis on the landing cost of petrol from the Dangote refinery and found out that it would come to N169 per litre using their forecast of $61 per barrel in 2021, which is already higher than the regulated pump price of N145 per litre.

When asked about this, Omofoman said that “the reality is that it is easier for government to move the price to N160 or even to the landing cost of petrol from the Dangote refinery unlike the international landing cost.”

“That is why I’m saying a local refining of petrol is the critical component that is required to achieve the deregulation but it would not be immediate; it might be in phases or government might decide to take it out completely, depending on what approach government adopts, but the cost that would be passed down to Nigerians would not be as much as the cost if it was imported from overseas.”

Kareem noted that the refinery cannot independently push for deregulation, because “it does not necessarily require deregulation to survive, however, if the industry remains regulated until then, it is most likely the refinery will be selling directly to the government who can then resell at a subsidized price.”

Aduroja also shared Omofoman’s views about deregulation coming soon after the Dangote refinery comes on stream. She said that subsidy payments or “under recovery” as it is called is not economical. “Our base case, I think is that the government is going to have to deregulate especially with high oil prices, the government has already spent $1.3 billion in the first half of the year and that could increase.”

Kareem also commented that “nevertheless, deregulation of the downstream sector before the refinery comes online will foster seamless direct transaction between marketers and the refinery.”

Omofoman also explained that another benefit of the Dangote refinery is the barrels of crude oil Nigerian National Petroleum Corporation (NNPC) gets would be allotted to the refinery on a naira basis, which would reduce the pressure on the country’s foreign reserves.

“The other thing to note is that NNPC basically takes 450,000 barrels of crude, refines it abroad and does whatever it wants to do with it but those barrels can be allotted to Dangote on a naira basis, so in other words, it would reduce the foreign exchange impact on our reserves. Those are the critical things that the Dangote refinery would do for us and it would ultimately lead to an easier market to deregulate than how it is now,” Omofoma further explained.

He then said that anyone that tries to deregulate now just wants to push people in a manner that would be harmful to the economy. “So whilst it is good to deregulate, one also needs to look at the bigger picture, and you might be saving money deregulating but what you would need to offset the cost of deregulating might be more than the deregulation itself, the cost of cushing the deregulation and also the social cost, might be more than what we bargained for,” he pointed out.

Aduroja adds that the consumers will adjust to the deregulated price once it is carried out. “Remember a couple of years ago, when we increased to N145, after a while, everyone adjusted and got used to it, and according to National Bureau of Statistics (NBS), apart from Lagos and Abuja, some states are already paying higher.”