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Will more and efficient refineries reduce fuel prices?

By Les Leba

The increasing length of queues lately in petrol stations nationwide may suggest that the erstwhile liberal availability of petrol may be threatened.  Consequently, many car owners now inevitably patronise the ‘black market’ in spite of the higher prices on offer, rather than wait endlessly in frustration at petrol stations!

Invariably, marketers have blamed their inability to meet demand on shortage of supply; indeed, Major Marketers Association had earlier warned that they were yet to receive imports licences this year.  Additionally, the ability of oil majors to import seems to be adversely affected by extended delays in the payment of subsidy refunds on their fuel imports.

The marketers have argued that delayed payment threatens the sustainability of their business, as the already thin margins become critically whittled down by heavy interest payments on bank loans obtained for fuel imports.  Indeed, a combination of the preceding factors has always induced fuel scarcity over the years.

In the above event, there have been several calls for the urgent turnaround maintenance of the four existing federal government refineries and the need for additional refineries to be built by both the private and the public sectors. Nonetheless, in keeping with this administration’s policy to promote higher efficiency and reduce wastage, by privatizing erstwhile corruption-laden and inefficient public utilities, government has refrained from contemplating direct funding or involvement in the establishment of new refineries, and has instead, encouraged investors to establish private plants.  Incidentally, by 2008, over 18 licences had been issued to investors who had expressed interest in building new refineries.  For example, in April 2008, a Guardian newspaper editorial reported NNPC’s Alhaji Abubakar Yar’Adua’s allegation that “16 out of 18 companies that were licensed in 2008… merely used the licences as a launch pad to seek contract for crude oil exports; they were not committed to building refineries”.  

 

Later in May 2011, the federal government and some Chinese investors also undertook to build additional refineries in Kogi, Lagos and Bayelsa States respectively.  Regrettably, so far, there is no apparent progress on this project. Later still, in July 2012, the Minister for Trade and Investment, Segun Aganga, endorsed a Memorandum of Understanding (MOU) between a partnership of private United States and Nigeria companies with the federal government.

Under this MOU, six refineries were to be constructed in modular forms within 30 months, at a cost of $4.5bn; each refinery would process 30,000 barrels of crude oil daily, with expected total output of about 30m litres of fuel every day.  (See our article “Six New Refineries, But Not Yet Uhuru” of 13/7/2012).

Regrettably, once again, almost 24 months after the said MOU, there is nothing on the ground to indicate that the project has actually commenced. Observers of this development have suggested that the prevailing regime of subsidized fuel prices was actually the major impediment to these private investors’ aspirations, as the usual delayed payments of subsidy would inevitably cripple the sustainability of the project.

In view of the foregoing, therefore, it came as a surprise to most Nigerians that in spite of the perceived immovable hurdle of subsidies, Africa’s richest man, Alhaji Aliko Dangote, announced plans to establish a fertilizer and petrochemical plant with a complement of refineries in Ogun and Ondo states with the princely cost of about $9bn.

The ensuing question on everybody’s lips was why the evidently business-savvy Aliko Dangote would stake so much on a project where others have feared to thread, because of the spectre of subsidized fuel prices.  See our article “Refineries: Dangote to the Rescue?” of June 10, 2013 www.lesleba.com.

In an interview with ThisDay’s Simon Kolawole in September 2013, Dangote however,  noted that “With or without deregulation, there is nothing stopping anyone from building a refinery; I am not a marketer.  All I will do is buy crude oil at the market price, refine and sell to marketers at the market price. 

It is marketers that will deal with subsidy!  If government continues to subsidize, marketers can buy products from us and then collect the subsidy from government….  Don’t forget that when they go to foreign refineries to import petrol, they buy at the market prices before coming home to claim subsidy payments!”  Indeed, in view of the attraction of the obvious potential of this strategy, Dangote earlier this month, also announced another plan to build additional refineries within the Lekki free trade zone in Lagos State.

Ultimately, we would certainly have increasingly more refineries that would more than cater for local consumption, with ample surplus for export to other African countries and elsewhere worldwide.

The critical question, however, is whether or not more and efficient refineries would mean lower fuel prices without subsidy component domestically?  The answer is a clarion no!  At least, not with the existing framework where a depreciating naira rate of exchange would automatically translate into higher fuel prices.

Thus, ultimately, domestic fuel price levels may only fall by a small margin of about 10%, from the imported brand as a result of savings from sea freight cost of imports.  This may not be welcome news to most Nigerians, particularly the trade associations, who canvass for more government refineries because of their perception that fuel prices would be much cheaper with local production.

Certainly, a 10 percent reduction on locally produced fuel will not make significant difference to current subsidized prices; besides, with the awareness of the public’s sensitivity to any increase in fuel prices government may be reluctant to revive the social tensions caused by almost 100 percent fuel price hike in January 2012.

In reality, additional private refineries may not drastically reduce the current alleged annual subsidy payments in excess of N2 trillion.

However,  I have consistently argued for many years that fuel subsidy payments will only be eliminated with a stronger naira, which can become possible, if the CBN’s exchange rate strategy loyally defends the naira, by reducing the self-inflicted burden of surplus cash on the economy, whenever the apex bank increases money supply, when it substitutes fresh naira supply for monthly distributable dollar revenue.

 


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