Nigeria’s Quest to Start Local Oil Refining and its Implications

It is no news that the richest man in Africa, Aliko Dangote, is building a multi-billion-dollar refinery in the Lekki area of Lagos to start local crude oil refining with an estimated refining capacity of 650,000 barrels per day. The refining activity is expected to commence in Q3’22. That said, the Federal Government of Nigeria (FGN) is also on the same track to begin local refining after years of dormancy of the four oil refineries in the country.

The Federal Government had on the 17^th of March 2021, signed an agreement with an Italian company, Tecnimort spA, for the rehabilitation of the Porthcourt refinery, making proceed payment of $333million to the company for the commencement of the rehabilitation of the refinery. The rehabilitation is expected to cost $1.6bn, and a daily output of 11 million litres of Premium Motor Spirit (PMS) is expected from the refinery amounting to 3.9billion litres annually.

Overview of Nigeria’s Petroleum Products Importation

Although about 75% of Nigeria’s export earnings come from crude oil sales, a chunk of this earning is spent on importing the refined products of this crude oil. Thus, the preceding negates the positives from exports and lead to pressure on the external reserves.

According to data from NBS, Nigeria imported 18.8bn litres of Premium Motor Spirit (PMS), 4.8bn litres of Automotive Gas Oil (AGO) and 713.7m litres of household kerosene (HHK) in FY2016. With an average monthly landing price of N66.4, N64.0 and N61.9, respectively, the total cost of each item amounted to N2.01trn for PMS, N505.8bn for AGO and N70.7bn for HHK – all valued at N2.596trn.

In FY2019, the country imported 20.89bn litres of PMS, 5.15bn litres of AGO and 128.11m litres of HHK. Compared to FY2016 volume in liters of petroleum products imported, PMS import increased by 11%, AGO by 5%, and HHK decreased by 82%. We attribute the decrease in HHK import to the increase in Liquefied Petroleum Gas (LPG) consumption over the years. Indeed, data from the NBS showed that the country did not import LPG in 2016 compared to 2019, where 526.06 litres of LPG was imported and 135.14 litres imported in Q1’20. Given the enormous amount spent on PMS subsidy annually, we highlight that the Federal Government’s expenditure has always been on a high pedal. Besides, we think this trend would continue over the medium term, even as the FGN has started to feel the real impact of these expenses on its fiscal framework.

Curbing of Petroleum Products Importation Can Reduce the Strain on the External Reserve

According to the balance of payment data from CBN, oil imports were value at $11.6bn (or 28% of total import value) in 2018. Similarly, oil imports contributed 18% and 14% to total imports in FY2019 and FY2020, respectively. The foregoing suggests that a significant percentage of the external reserves could still be saved when local oil refining starts and lesser volume of refined petroleum products is imported.

Will Local Refineries Save Nigeria’s Forex?

Given the expected (1) rehabilitation of the Port Harcourt refinery and (2) refined petrol output from Dangote’s refinery once it comes on board, we expect that pressure on the external reserves will be reduced. Furthermore, even if PMS and other petroleum products are sold at the international price quoted in “dollars”, the naira equivalence is paid rather than the nominal dollar, thus putting lesser pressure on the external reserves. Accordingly, the fact that a significant quantity of petroleum products produced locally would not have to be imported means that the scarce foreign exchange would be saved. Therefore, the preceding would support the CBN’s ability to supply forex for other beneficial uses.

Will Dangote Refinery Lead to Reduction in PMS Prices?

Let us first consider the cost associated with PMS importation and see which cost line items would be saved.

Using the PMS pricing template from the Petroleum Products Pricing Regulatory Agency (PPPRA), the Ex-coastal price of PMS was N244.25 as of Sep’21; which comprises the Average PMS price (i.e the international price of PMS in naira terms) valued at N 237.74 and the Average Freight rate valued at N 6.51. To get the coastal cost, we summed up the Average Lightering Expense (N4.81), Nigeria Port Authority (NPA) Charges (N 2.49), Nigeria Maritime Administration and Safety Agency (NIMASA) Charge (N 0.23), Jetty Throughput Charge (JTC) (N 1.61), Storage Charge (N 2.50) and Average Financing Cost (N 2.17) to the Ex-coastal price (N244.25). The addition of the ex-coastal price and coastal cost gives the Landing Cost of N 258.14 as of Sep’21.

Furthermore, the addition of non-importation costs which include wholesalers’ margin (N4.30), Administrative charge (N1.23), Transporters’ allowance (N 3.89), Bridging fund (N 7.51), Marine Transport Average (N0.15) and Retailers’ margin (N6.19) together with the Average Landing Cost (N258.14) brought the Open Market Price of PMS to N281.14 as of September 2021.

Now, given that the petroleum products would be refined locally, the freight charges (N 6.51) and the coastal cost (N13.80) (i.e sum of the Average Lightering Expense, NPA Charge, NIMASA, JTC, Storage Charge and Average Financing Cost) can be exempted. Thus, bringing the average landing cost of PMS to N237.74 as of Sep’21 compared to N 258.14 if the PMS are imported to the country.

Although costs due to importation should be exempted when considering the price of PMS once local refining starts, other costs which are not associated with importation would be added to get the expected open market price of PMS. The costs include wholesalers’ margin, Administrative charges, bridging fund, and retailer’s margin which amounted to N22.85 as of Sep’19. Adding the preceding to the Average PMS landing cost (N237.74) brings the Open Market Price of PMS to N260.59 (expected PMS price when local refining starts). This represents a 7.3% decrease when compared to the Open Market Price of N281.14 recorded in Sept’21 due to importation of PMS.

Consequently, without subsidy payments, the decline in the expected open market price of PMS will be marginal even with the full operation of the Dangote refinery. This is given that coastal cost and freight charges only constitute about 7% of the open market prices. Thus, we do not expect the coming on board of the Dangote refinery to lead to a significant reduction in PMS prices.