2 weeks Ago By David Meshioye
In recent times, the press has been inundated with claims and counter claims about PMS sales and pricing between the Dangote Refinery, regulator, NNPCL, and the marketing companies. These interactions are becoming rather an embarrassment to our nation-state. This is an attempt to unpack some of the underlying issues and debunk some of the myths.
The onset of the current administration ushered in a bold programme to deregulate the petroleum industry in line with the provisions of the Petroleum Industry Act PIA. This courageous decision happened to align with the commencement of commercial operations of the Dangote Refinery. The vision and resourcefulness of Chief Aliko Dangote to build the largest single-train refinery in the world is a remarkable achievement.
This is a feat many national governments have tried and failed to achieve, hence it deserves all the accolades it has received. The decision however, as with any engineering venture comes with risks and challenges. Single train means possibility of single point of failure of major components.
This is a risk that must be managed. The size and scope means the refinery maybe less nimble. So while probably the most cost-effective and efficient setup, two trains for example would have provided a bit more production resilience and versatility.
The Dangote Refinery located in a free trade zone in Lagos was so located to be able to participate seamlessly in the International markets as well as Nigerian market. This informed the decision to produce to a high emission standard (Euro 5) and Premium/Super Premium grade petrol, which could be sold internationally and domestically. This is a good point to introduce the concept of PMS grades.
There are several different PMS grades sold internationally. The major grades are Regular, Premium, Super and Super Plus. Most Petrol stations in developed countries offer two or more grades at different price points.
Higher grades of petrol cost more than lower grades to manufacture. So with that background, why is there seemingly so much friction between Dangote refinery and the Marketers? Well the first thing to understand about refining, it’s a low-margin, high-volume business. On the African continent, about 20 per cent of refineries are loss-making.
In the west a few refineries have shut down or are close to shutting down due to poor profitability. It is indeed a cutthroat, globally connected business. Dangote refinery has by design tried to maximise its chances of profitability with the single train approach as well as a Nelson Complexity Index of 10.
5, which is higher than most western refineries. In essence, the refinery is built to extract maximum value from every drop of crude oil that goes through it. This is essential to profitability.
Refineries also need to operate at maximum utilisation (Above 96 per cent) to hit peak efficiency and profitability. Dangote refinery is still ramping up; it’s at about 70 per cent now. So the refinery has yet to hit its peak production efficiency.
With the full deregulation of the Nigerian petroleum industry, and a market-based approach of willing buyer, willing sellers, Dangote is now exposed to the full effects of global competition. The final element that must be a source of some frustration to Dangote refinery is the Nigerian regulator who controls the minimum quality and grade of PMS imports has adopted a standard which is actually quite acceptable for the African continent that allows the importation of Regular grade Petrol. Regular grade petrol is less expensive internationally than the Premium or Super Premium grade Dangote Refinery makes.
One myth that has been circulated is lower grades are lower quality. Far from it, most petrol sold worldwide is the Regular grade. It’s best suited to normal-performance vehicles, which is the majority of vehicles on African roads.
Premium and Super Premium are best suited to high-performance vehicles with turbo chargers and fancy engine management. It will work on regular vehicles, but the benefits isn’t as with high-performance vehicles. With regards to the environmental standards, there is an argument that Nigeria is not economically developed enough to adopt the very stringent requirements of the Euro five standard, which adds cost to the petrol.
So this is the main challenge one sees. Dangote produces premium petrol to Euro five standard, which is higher cost. The regulator is enforcing importation of Regular grade Petrol which is plentiful and lower cost.
This is a competitive landscape Dangote Refinery probably did not bargain for in the Nigerian market. There is almost no price elasticity in Nigeria today, which highly constrains the refinery’s ability to extract maximum value for the premium product it produces. This is where nimbleness and versatility matter.
It is quite conceivable that two train refinery, (two times 320,000 bbls for example) would have enabled the refinery produce regular lower cost petrol to compete for the Nigerian market and Euro five, Premium petrol for the export market. The one-size-fits-all approach is now at the heart of the debate as to which is the cheapest product, Dangote or Imports. Interfering with deregulation on so-called patriotic or protective grounds is a slippery slope that should be discouraged.
It will be a bad deal for the Nigerian consumer not to get the best value petrol. Also, the arguments about foreign exchange use is moot if as designed Dangote refinery Exports its output, the net effect on foreign exchange flows will actually be slightly positive. In conclusion, it is critical the markets are allowed to work and the Deregulation plays out as designed.
The regulator must enforce the standards to ensure truly low-quality petrol does not distort our markets and damage engines. All players deserve a level playing field. Agenmonmen is a 29-year Oil and Gas industry Veteran.
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