Preamble
About a year ago, specifically, in the June 2023 edition of this noble oil and gas Valuechain magazine, we espoused that the commissioning of the Dangote Refinery, a large-scale project, is a welcome development. We posited in that article that the potential benefits are substantial, and the regional governments should carefully explore how to harness these benefits expeditiously. Of course, in the article we also posited that the Dangote Cement Industry did not make the cement market in Nigeria a natural monopoly, but we did not dismiss the possibility of a dominant firm effects in the petroleum products market, in the short run, on petroleum downstream market dynamics in the region because of such a large refinery complex.
Interestingly, in my Op-ed of May 2023 in this magazine, while discussing the petroleum subsidy removal debacle, we argued that the differential between AGO and PMS prices is unusual. The government has indirectly agreed that such differential is a good indicator of an ongoing subsidy in the PMS market. Of course, in that Op-ed, we did not hesitate to state that it is mere fantasy to describe the petroleum market in Nigeria as a purely competitive market model, neither does it follow the pure natural monopoly market structure. Thus, we concluded that the market structure underlying the downstream market is still evolving towards a deregulated petroleum downstream market.
This Op-ed aims to critique the allegations that International Oil Companies (IOCs) in Nigeria are doing everything to frustrate the survival of Dangote Refinery Complex (DRC) in Nigeria according to Dangote Vice President for Oil and Gas. There is the contention that the Petroleum Authority seems to have been encouraging dirty fuel import by indiscreetly granting import licenses to marketers to import dirty refined products into Nigeria. The mantra, “where’s the beef,” flashes through an inquiry mind, like mine, within the context of the location of the Dangote Refinery, which is on the free trade zone in Nigeria. Another question of interest to a mind of inquiry is whether these allegations bordered on the realism and fantasy syndrome or the facts and alternative-facts fiasco. Permit me to paraphrase some assertions from the Op-eds I referenced earlier on facts and alternative facts.
Facts and myths
First, the petroleum value chain has three segments, upstream, midstream, and downstream. Each segment is a standalone business unit by itself but there is room for vertical integration. Operationally, fully vertically integrated petroleum business does not currently run in Nigeria, except, NNPC Limited, neither is the structure that describes the petroleum market in Nigeria a purely competitive market model, The monopoly market structure does not represent the downstream market in Nigeria, either. The market structure in Nigeria is still evolving and at best an oligopoly market structure with dominant firms. PIA 2021 provides provisions to accelerate the petroleum market system evolution to improve the domestic value addition in petroleum value chain in Nigeria. It is a fallacy to continue to function as if the petroleum market in Nigeria follows a purely competitive model. The roles of the PIA institutions are therefore overly critical and there is no room for institutional inefficacy, especially with regards to the Petroleum Authority.
Second, applying international competitive market framework to dictate the price signal for trading crude oil for domestic refining in Nigeria is really something to understand, appropriately. The crude oil market structure in Nigeria is not perfectly competitive. The barrier to entry is significantly high and there is no perfect information. Pricing mechanism for the domestic market that compromises the profit maximizing theory of the firm is going to lead to a sub optimal reward for both the upstream, midstream, and downstream businesses in Nigeria. There is no worldwide market structure for crude oil trading that fits every domestic economy.
Thus, pricing crude in a domestic economy at export price parity and petroleum products pricing without consideration for import price parity of products has repercussions in the domestic economy. Export parity price is a discount to the international benchmark price and import parity price is a premium to the international benchmark price. These are facts that informed Dangote Group to build the refinery complex in a free trade zone. It is also factual that a petroleum regulatory institution exists to enforce the provisions of PIA 2021 towards a competitive downstream petroleum market. That PMS from Dangote refinery will lead to lower petroleum products prices in the domestic market is a fantasy, more so, if crude oil to local refinery compares well with the international export price parity.
Third and drawing from my earlier published Op-eds on the subject matter, the petroleum products market structure in Nigeria is an oligopolistic competition at the retail end for PMS and diesel (AGO) with high concentration ratios for the top-four firms and top-eight firms. It is oligopolistic because the top four sellers/firms in the market exert considerable influence over the market behavior in that segment of the petroleum value chain. However, at the retail diesel product market for end-users, pricing using oligopolistic model exists with interdependency. Whereas in the PMS market, the dominant firms, especially NNPC Limited, tend to influence the market pricing dynamics. Thus, participants are conducting petroleum downstream business in a glaringly anti-competitive business environment, which needs proper attention of the regulator. Do they compete for regulatory benevolence that favors them even if it is suboptimal eventually? And does this look like a plausible “beef”? So, we can ask Dangote, petroleum marketers, and the Petroleum Authority, what’s the beef? Is it mythical to speculate that NNPC Limited and petroleum marketers are conflicted on this matter?
Like posited in my previous Op-eds, the influence of NNPC Limited, as the dominant firm in the PMS market occurs because of its near absolute monopoly market power in the PMS wholesale market. It is the sole importer of PMS, even if there are rooms for disagreement, which makes it a monopoly. This explains the ongoing debate on who pays and who receives PMS subsidy, and if there is no subsidy why is the price of PMS moving up erratically despite the crude oil price dynamics? Statistically, when the price of crude oil goes up, product prices go up as well. The landing cost of PMS in Nigeria has increased compared to when the dominant firm in the PMS market set the price of a liter at 500 naira in May 2023. Additionally, the price of a dollar in Naira is more than twice now than in May. What is the “beef” in this alleged frustration by IOC. Is NNPC-Limited importing dirty petroleum products too?
Allegations And Refutations
Let us quickly revisit the ongoing allegations and denials. Dangote Group (DG) has allegations against three groups of participants in the downstream packet. First, DG alleged that the International Oil Companies (IOC) is sabotaging and plotting for the failure of Dangote Refinery in Lagos. The reason given to prop this allegation centers around the demand for a premium price for Nigeria’s crude that is about six dollars above the global crude oil price. So far, IOCs have not responded to the pricing allegation collectively or individually. Quietening is, however, not an acceptance of guilt, one must quickly acknowledge.
However, it is difficult to imagine that Shell, Total, Chevron, and ExxonMobil would collude to derail Dangote investments by delimiting its ability to purchase local crude for its refinery. It is just inconceivable. Without necessarily holding forth for the IOCs, the one who knows the rules of law does not break them. Moreover, collusion is illegal. But for the mortgaging contemporaneous production for loans and the declining production capacity due to insecurity, diminishing E&P investments, and vandalism, the alleged anti-competitive pricing of crude for domestic market by IOCs would have been, more likely than not, inconceivable.
The second allegation of dirty fuels is against the regulatory institution, Petroleum Authority, because the institution issues import licenses indiscriminately to marketers. A review of the rebuttal by the Authority did not deny issuance of licenses, but that licensees do not import dirty fuels. It is important to note that PIA created the Authority to device regulations to curb any appearance of petroleum downstream market failures from anti-competitive behavior of players in the market. Even if the imported fuels are not dirty, it leaves much to desire that indiscreet licenses is the best option available to ameliorate market failure because of Dangote. This action is not surprising because the Buhari administration renewed exploration and production licenses knowingly, even though the Petroleum Industry Bill was about to become an Act.
This Op-ed does not advocate tolerance for plausible anticompetitive effect of Dangote refinery Complex. However, the Petroleum Authority needs to do due diligence on how ineffectual government interventions can enhance market failures with significant social welfare loss. For example, a logical question to ask is whether the impact of Dangote Refinery on the economy is greater than the value added to the economy from petroleum products import. This is not conjectural in terms of the employment of skill and unskilled workers apart from other positive macroeconomic indicators. In the short run, Dangote refinery when fully operational will more likely than not bring down the pressure on the forex market. The refinery will also bring a dent to the ongoing rising inflation, which emerged from the rising cost of petroleum products to consumers. The expectation of a more direct impact on the local economy than the upstream business is plausible, even if the direct contribution to government revenue is lower than the upstream. The “beef” is the monopoly fantasy in a market that is already fundamentally anti-competitive.
The allegation that petroleum marketers are importing dirty fuel through indiscreet issuance of import licenses is quite worrisome. The answer provided by the Petroleum Authority, however, seems authentic and reassuring. But what is in the papers is that they do not encourage it, but it could have happened especially when the conclusion came from expected sulfur value. There is no smoke without fire, but the Authority appears to have taken the dirty fuel allegation seriously by convening a meeting of all stakeholders. It was surprising and overwhelmingly alarming, however, the late ACE responses alleging that DRC calls for import ban of all petroleum products.
The Petroleum Regulatory Authority must watch the market trends as it evolves from being import dependent to the likelihood of a dominant firm player in the downstream wholesale market in Nigeria. But there is no need to anticipate a monopoly structure in the downstream market in Nigeria, at all, to the extent of issuing indiscreet licenses that bring dirty fuel to Nigeria for the sake of promoting stable market dynamics in the short run.
Concluding Remarks
Dangote Refinery is too big to fail in a nation where governments are the highest employers of labour. For any government to encourage its failure is suicidal. More so if it is purely because of arrogance of political power and transnationalism. It is just implausible. Thus, I am not really convinced that such an expressed sentiment stands alone or is enough as a plausible explanation of why NNPC Limited failed to honor its 20% investment pledge to the Dangote Refinery Complex during PMB administration. Perhaps, it could it be that NNPC has spread itself too thin to honor the pledge. Think about AKK, E&E commitments in Frontier Basins, every onshore and shallow water petroleum producing assets are on JV arrangements. The cash-cow myth remains a hanging cloud as well. Additionally, to the extent that one can articulate, the agency theory syndrome continues to render the articulated PIA ineffective in MHO.
The way out of this quandary is a call for disruption in the petroleum industry governance landscape in Nigeria. This was the original intent of the reform in 2000 under President Musa Yar’adua, which revolves around making the NNPC commercial with emphasis on the downstream operations. Unfortunately, what happened in 2008 happened again in 2020, which compromised the intentional core objectives of the industry reform! It is now three years of “tears” in the oil and gas industry in Nigeria since PIA became the law. Instead of the joyful exuberance expected from PIA that was supposed to rekindle the industry.
Here are seven steps to adopt in disrupting the diminishing oil and gas landscape in Nigeria. First, dissolve the NNPC Limited Board. Second, divest from all IOC joint ventures or exercise the first refusal right option in the JV arrangement Third, reinstate the 20% equity participation in Dangote using JV shares in the recent Total Energies divested assets. Fourth adopt NLNGL operational strategy for refinery sub business unit. Fifth, disavow energy security mantra that is delimiting NNPC ability to function commercially. Sixth, let the rules of law guide decision making and avoid political expediency. Seventh, the PRESIDENCY needs not be the anchor of the PIA POLICY INSTITUTION. This is antithetical to the intentional crafting of the core objectives and the intentional crafting of Chapter One of the PIA 2021.