Nigeria: Dangote Refinery and Deregulation – Unpacking the Confusion

In recent times, the press has been inundated with claims and counter claims about PMS sales and pricing between the Dangote Refinery, the regulator, NNPCL and the marketing companies. These interactions are becoming rather an embarrassment to our nation.

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 may be 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. Dangote Refinery is a critical component of Nigerian energy security. So, its continued operation is in our national interest.

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 the Nigerian market. This informed the decision to produce to a high emission standard (Euro 5) and Performance standard (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 (2) 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 is a low margin, high volume business. On the African continent, about 20 percent 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 cut-throat, globally connected business.

Dangote Refinery has been designed 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 utilization (Above 96%) to hit peak efficiency and profitability. Dangote Refinery is still ramping up; it’s at about 70% 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 seller, 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 aren’t as with high performance vehicles. Anyone claiming Premium is better than Regular is akin to saying a Ferrari is better than a Land Cruiser. While the Ferrari is faster on tarred road, it would be interesting to see it off road. So, also grades of fuels meet different needs: period.

The other myth is around the word “blending”. Some analysts have turned that word into a terrible dark art that spews out toxic fuels that are designed to destroy engines. It’s a very sad attempt at subterfuge, meant in part to hoodwink most uninformed Nigerians. Let’s be clear, all refineries blend. They blend crude to maximize output and minimize cost. They blend fuels to meet performance and emission targets. Refining is no more than organic chemistry on a grand scale. Mixing, combining, blending is integral to organic chemistry and by extension every single refinery in the world.

Fuel categories such as diesel, PMS, kerosene are only groupings of organic compounds that meet performance and emission characteristics of those groupings.

The organic molecules can be sourced from petroleum or even organic sources. The very first diesel engines ran on groundnut oil and today all petrol in America are blended with organic fuel sourced primarily from corn. So there is absolutely nothing wrong with blending fuels to meet regulatory standards.

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 5/ Afri 5. China and India did not adopt strict environmental standards until their society had reach a high level of development to afford the costs of stricter standards.

It’s important Nigerians appreciate our station in the order of things. We are an under-developed nation. Aspiring for Euro 5/ Afri 5 fuel standards when 95% of cars on our roads lack basic catalytic converters. Many engine are burning oil almost as much as petrol/diesel and polluting the environment is silly. The benefits of these high quality fuels are lost in the standard of vehicles on our roads. They are meant for societies with a prevalence of high performing engines with emission control capacities, which are monitored annually. So, it makes sense for the regulator to adopt a less stringent yet safe standard that appreciates our particular circumstances.

Finally on emission, Nigeria emits an estimated 3 kg of SO2 (Sulfur related emission) per person; United States is 10 kg person while China is 20 kg per person. Hence, our atmosphere is 3 times less polluted with SO2 than the United States. It is estimated that $16 billion in refinery upgrades will be required by refineries in African nations to meet the Afri 5 standard proposed in the PIA. That’s 16 billion USD not spent on health, roads and other vital needs to meet a standard for the least polluting continent in the world. It defies rational thinking to pursue Afri 5. In fact the Port Harcout Refinery, if successfully revamped is designed to produce 300-ppm fuel, which wont meet the 50-ppm Afri 5 standard.

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So, this is the main challenge one see. Dangote Refinery is producing Premium petrol to Euro 5 standard, which is of higher cost. The regulator is enforcing importation of Regular grade Petrol which is plentiful and of 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 time 320,000 bbls for example) would have enabled the refinery produce regular, higher emission lower cost petrol to compete for the Nigerian market and Euro 5, 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 long-suffering Nigerian consumer not to get the best value petrol. Also the arguments about foreign exchange use is moot if as designed Dangote Refinery exports it’s output, the net effect on foreign exchange flows will actually be positive.

In conclusion, it is critical the markets are allowed to work and that deregulation plays out as designed. The regulator must enforce a reasonable standard 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 & gas industry veteran

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