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Dangote Refinery And The Petrol Subsidy Removal Conundrum

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2 years ago

May 20, 2023

Precious Okwa

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The Insight

By Lateef Adewole

Email: [email protected]

Whatsapp: +2348179512401

In the next two days, the much awaited Dangote Refinery and Petrochemical Company is billed to be commissioned by President Muhammadu Buhari. The refinery, which is located in the Free Trade Zone (FTZ) area, Ibeju Lekki, Lagos State, has become the pride of not only the owner, Alhaji Aliko Dangote, but so many others in public and private sector. And not just for Nigeria, but for Africa. The sheer enormity and complexity of that project alone is awesome. It has become a source of excitement to the business world, as well as the citizens.

Its case espouses the saying that success has many relatives while failure is an orphan. Since the public announcement that the refinery will be commissioned on Monday 22nd of May, 2023, every Nigerian has been looking forward to it as if it belongs to their country. Every government agency that has anything to do with its establishment, no matter how remotely connected, has “taken ownership” of it. The CBN governor, Godwin Emefiele, does not miss any opportunity to remind us of their involvement as a pillar of support to bring the project to fruition. Lagos State government has “automatic” bragging right for providing the enabling environment and continuous supports and encouragement for the gargantuan project.

Lagos Chamber of Commerce and Industry (LCCI), Abuja Chamber of Commerce and Industry (ACCI), Manufacturers Association of Nigeria (MAN), Nigerian Economic Summit Group (NESG) and all other organisations and associations involved in our economy have praised the giant stride. But, why all these? Is it the first refinery, especially privately owned that will be established? Why the rolling out of drums in its anticipation?

Well, different people have different reasons for such. However, one unifying reason is the possibility of reducing drastically or complete elimination of petroleum products importation into Nigeria, particularly the Premium Motor Spirit (PMS), known as petrol, which will lead to reduction in the monstrous subsidy payments on it. It is still the only petroleum product that is heavily subsidised by the Federal Government till date. All others; AGO, DPK, ATK and so on, have been completely deregulated.

Unfortunately, that single petrol subsidy is sinking Nigeria into bottomless pit of debts, in addition to other contributors. But, is it a given that subsidy will just end because Dangote refinery starts operating? That is far from it. However, there will be significant effect on the pricing template and many other things. I will get to that later.

The sight of that refinery alone, when viewed in pictures, videos or for those who have visited the site physically, is enough to make any Nigerian proud. To imagine that a single Nigerian pulled off such project has remained incredible to observers internationally. It is on record that only sovereign states have done such around the globe. There are too many firsts or world records that the refinery has set. It is the largest single train refinery in the world.

The complex has the world’s largest order of five Single Point Mooring (SPM) systems, which make it self-sufficient in marine facility requirements. In building the project, Dangote acquired the world’s largest granite quarry. The advanced technology and complexity of the refinery allows it to refine crude oil from multiple sources of different grades. The Nigerian light and sweet crude, crude oil from other African countries, Middle-East, and USA light crude. So, it can never run dry of feeder stocks.

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The refinery has a 650,000 barrel per day processing capacity. It is projected to meet 100% of our local consumption needs for petroleum products that stands at PMS 57m, AGO 27m, DPK 11m, ATK 9m (in litres) and export whatever is in excess. It is built on a 2,635 hectares of land, a size that is seven times the whole of Victoria Island in Lagos. There are 177 tank farms, with storage capacity of 4.742 billion litres. The loading facility can accommodate 2,900 trucks. It generates its own power through IPP to the tune of 435MW. This is more than power demand of Ibadan Distribution Company (IBDC), that serves five states of Ogun, Oyo, Osun, Ekiti in South West and Kwara in North Central.

It will also produce 900,000 tonnes per annum of polypropylene, and Naphtha, which are products used in cosmetic, plastic, textile and other industries in the value chain. The urea fertiliser plant (Phase 1) component of the complex was commissioned by President Buhari last year March. It has annual capacity of 3 million metric tonnes. While Nigeria’s current use is about 1.5 million MTPA. This alone made Nigeria to become net exporter of fertiliser.

In truth, I can’t stop talking about the Dangote refinery as someone involved in the sector myself. I am very excited by the expectations of what is possible when it starts working fully and the wider implications on Nigeria and Nigerians as a whole. In 2012, when former President Jonathan removed the petrol subsidy, I was a staunch supporter of it. I was still working in an oil company as an employee then. Such support and advocacy for that unpopular action earned me battering (literally) too.

That action set Jonathan on an unpopular political path which the opposition cashed-in on till he was ousted, democratically ofcourse. Sadly, all those who protested against it then, are now advocating for the same, 11 years after, after Nigeria has lost tens of trillions of Naira. In 2022 alone, Nigeria spent about N4.5 trillion on petrol subsidy. For the half year of 2023, the FG budgeted N3.36 trillion for petrol subsidy. Can anyone now imagine past eleven years when an attempt was made to stop this criminally humongous drainage on our financial resources?

These figures might mean little or nothing to the people until put in proper context. If N3.36 trillion is budgeted for 6 months, that will be N6.72 trillion per annum for 2023, assuming flat rate. What does this mean? It means that amount is about 31% of our total budget for 2023 which stands at N21.8 trillion. It is 61% of total revenue projected to be generated in the whole 2023, that is if we meet up with 100% collection. It is equivalent to 307% of our projected share of oil revenue for the year (N2.19 trn).

That amount is about 375.4% of budget allocation to Education (N1.79 trn), 584.3% of Health (N1.15 trn), 541.9% of Infrastructure (N1.24 trn) and 225.1% of Defence (N2.98 trn), for over 200 million people. The total budget for Education, Health, Infrastructure and Defence is N7.16 trn. The amount that will be spent on petrol subsidy alone is 94% of that total. Dangote refinery costs about $19 billion. At N460/$, that is N8.74 trillion. Petrol subsidy for 2022 and 2023 alone is N11.11 trillion. This amount will build this Dangote refinery project that we are all celebrating and there will be plenty change (N2.37 trillion) left. Is there any madness that could be more than that?

All the arguments against its removal over the decades remained the same. While anti-subsidy removal proponents justified it, it makes no economic sense at all. The popular one is the inflation that it will cause, leading to a jump in prices of goods and services, making life more difficult for the citizens and worsening the condition of an already impoverished people. These are valid arguments. However, to what extent has maintaining petrol subsidy help the same people? The truth is that there is no proportional benefit. Worse still, Nigeria continues to bleed through such monumental corruption-laddened scheme.

Its continuous existence only provides avenues for its beneficiaries to continue to rob us all. Otherwise, how could we be spending such amount on petrol subsidy alone? How could government agencies responsible for it tell us that we consume between 65 and 100 million litres of petrol daily? “Na drink we dey drink am?” Where are the cars using it? Where are the trucks loading and moving it across the country? Where… where… where..? The questions will never end because that figure does not make any sense.

The only plausible excuse has remained that it is smuggled across the borders. This make a little sense. But, how much of the 65-100 million litres per day is smuggled out? This is also another problem caused by the presence of subsidy. In the whole of West Africa, Nigeria’s petrol is the cheapest. Around the world, it is one of the cheapest. Even in Saudi Arabia, with the highest crude oil production quota in the world and efficiently refining of their crude oil through their own national oil company, Saudi Aramco, the price of a litre of petrol is $0.62. At official N460/$, that is N285/L. At black market rate of N750/$, that is N465/L. In USA, it is $1.011/L. That is N465.06/L. In UK, it is £1.44/L. That is N831.34/L. at official rate of 576/£. In Canada, it is $1.3/L (N598/L).

In our neighbouring countries, a litre of petrol is sold at naira equivalent in Benin Republic (N497), Togo (N535), Ghana (N510), Niger(N449), Chad (N390) and Cameroon (N558). While price range in Nigeria for a litre of petrol is between N180 and N250. Why won’t smuggling it boom? It is too lucrative and tempting a business to be ignored. However, that cannot explain the outrageous volume being quoted as our daily consumption. So, what can Dangote refinery do for us?

Like I said earlier, petrol won’t suddenly become cheap or subsidy disappears because Dangote refinery comes on stream. In the first place, it is a big shame and criminal that a whole country of over 200 million people has no single functional refinery of its own after 67 years of oil exploration in commercial quantities and only relying on a privately established one by an individual. The government only acquired 20% stake there after it has reached advanced stage.

Nigeria has four refineries that have become behemoths. They only swallow funds with no production output, constituting drain pipes and cesspit of corruption. The combined refining capacities of the four is 445,000 bpd, less than Dangote refinery’s by 205,000 bpd. So, in 58 years since the first refinery in Port Harcourt was established in 1965, this is where we are, with all the four producing nothing.

Dangote refinery will buy its crude oil from Nigeria at international price. So, its pricing will still be defined by that as the base price. However, the fact that it is localised here will eliminate many associated costs involved in transporting crude abroad, and impoting refined products. This is a reasonable cost reduction. So, it is expected that the landing cost from Dangote refinery will be far lower than that of imported product.

Another critical factor is the excange rate. The importations depend on dollar. With high exchange rate, the landing cost of imported products will be far higher than products obtained from “our backyard” here. However, that Dangote product’s cost will still be higher than the current controlled petrol prices across the country, which ranges between N180 and N250 per litre, due to subsidy. The question then is, do we still want to continue the wastages through that subsidy or not? That’s a hard decision that the incoming administration of Tinubu will have to make, since Buhari has decided to push forward, the doomsday.

In real sense, the coming on of Dangote refinery gives more reasons to be excited about beyond subsidy. It gives pride to Nigeria and will put us in position to become a global oil industry player again. The net export of petroleum products to the West African sub-region will earn the much needed forex for Nigeria. It is estimated that the refinery will save about $20 billion dollars for the country. That’s huge. That’s about 57% of our total Foreign Reserve ($35.29bn). Demand for dollars to import petroleum products is the highest in Nigeria. This will strengthen Naira over time.

The refinery will generate huge employment opportunities. Tens of thousands have been engaged directly or indirectly since the commencement of the construction. It is projected to provide over 1000 direct jobs and over 100,000 indirect jobs. The company is currently training over a thousand employees home and abroad. 900 Young Engineers in refinery operations abroad, 50 Process Engineers and 50 Management Trainees in Nigeria. This a boost to human capacity building in Nigeria.

More than 30,000 people are being housed within the complex all through construction period. As the operation begins, there will be further boost in real estate businesses around the refinery. Already, the once cheap lands in that area have suddenly skyrocketed in price due to increase in demands. Companies that deal in products from the refinery will soon begin establishing newly or their branches close to that facility. The economy of that axis will boom.

The overall contribution to the Nigerian economy cannot be overemphasised. Petroleum industry, fertiliser industry, plastic, textile and other industries that add value to the raw materials available from the refinery, are all going to contribute to the GDP. These are positive developments. The taxes that will accrue to the country from their operations are additional benefits. With Nigeria oil production at just 1.38mbpd, there will be a ready-made market for about 50% of that from the refinery. The cases where we start begging foreign buyers for our crude will be less. This can also encourage improved production towards our official OPEC quota of 1.8mbpd.

Nigeria needs to decide what to do about our moribund refineries too. Even if Nigeria has 20% stake in Dangote refinery, I doubt if they are under obligation to sell all their products to the country beyond the country’s equity share. This is a private business and located in a FTZ for that matter. From the earlier analysis, it is clear that subsidy needs to go. But, government needs to be sincere and transparent about it. Citizens need to see where that savings are going to and feel the impacts in sectors like education, health, infrastructure, security and so on.

I don’t buy the nebulous and corruption-proned “money sharing” ventures that this administration has embarked upon in the past 6 years. Where is the money? Who benefitted from it? How many has it lifted out of poverty? That huge amounts allocated annually for Social Intervention Programmes are like money down the drain. It is a waste. Nigerians are not lazy. They only need enabling environment to strive and succeed, not handouts like being done. Those are wastefulness.

I pray that God gives the incoming President Bola Ahmed Tinubu and his administration, the wisdom to manage the country effectively and begin to take us progressively to great heights. May God give him long life in good health.