Uche Cecil Izuora
Operators in Nigeria’s mid and downstream sector of the oil and gas company have advocated for strong fiscal policies that will help to transform the sector and restore investors confidence.
They argued that Petroleum products pricing in Nigeria has remained uncompetitive due to retention of subsidy in various forms.
These were key points raised during the 2024 national conference of the Association of Energy Correspondents NAEC in Lagos on Thursday.
Leading the discourse, Robert Dickerman, the Chief Executive Officer of Pinnacle Oil and Gas, said government must take bold initiative to address the root problem, which is how to restore global confidence in
Nigeria’s economy and currency.
Dickerman, said effort should be tailored towards creating foreign investment, jobs and local production, increase tax revenue and achieve fiscal prudence which he argued is the only
way to lower petroleum products prices in Naira.
According to him, tere is tremendous anxiety and confusion about what’s happening in the petroleum space in Nigeria, particularly downstream.
The anxiety though justified,
but the confusion is preventable and
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.
Speaking on the issues around Dangote Refinery and crude supply in local currency, Dickerman said the Nigerian National Petroleum Company Limited (NNPCL) 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, as he notes that 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 petrol and electricity.
He explained that any crude oil sold to Dangote in Naira will displace the FX that would have been earned by selling that crude for USD, adding that 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 per cent of the equity, operating control clearly lies in private hands.”
He further added that all crude oil and petroleum products are priced in USD, all over the world and that 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.” he said.
According to him 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, adding, ‘This margin would consider the locational advantage and size of the plant, as there are economies of scale.:
He noted that since petrol 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 production will cause massive price reductions in Nigeria.”.
The underlying assumption that Dangote should sell below
market is not possible he said, and that the refinery can also export to vessels at
market price in USD ex-refinery or even deliver to other countries directly, adding, “So if you own a business that can sell 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.
“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.” Dickerman stated