Nigeria’s Energy Crisis: Analyzing the Feasibility of Reducing Petrol Prices and the Role of Modular Refineries

Nigeria recently recorded its highest inflation rate in 28 years, leading to significant increases in the cost of essential commodities such as petrol and other energy-related products.

This inflationary pressure has reached a point where citizens took to the streets between August 1 and August 10 to protest, making various demands on the government. Among these demands was a call to reduce energy costs, particularly petrol and electricity.

In light of this, the Energy Newsletter recently spoke with Dr. Kaase Gbakon, an Energy Economist, to gain insights into the economic feasibility of reducing petrol prices and the potential impact of operational modular refineries in the Niger Delta region.

The Feasibility of Reducing Petrol Prices to N100/litre

One of the key demands of protesters during the recent #EndBadGovernance demonstrations in Nigeria is for the price of petrol to be reduced to N100 per litre. However, according to Dr Gbakon, this demand, while understandable given the economic hardships faced by Nigerians, is not economically feasible under the current circumstances.

Dr Gbakon explains that energy subsidies are a complex and highly emotional issue in Nigeria and globally. Energy prices, particularly those for petrol, are sensitive topics for both consumers and governments.

For instance, in the United States, even the slightest indication of rising gasoline prices during an election year can cause significant concern among politicians. This highlights why energy subsidies are often considered a political "hot potato," making them difficult to scale back without causing public outcry.

In the case of Nigeria, the retail price of petrol is influenced by several key factors:

1. Crude Oil Price: The global price of crude oil is a significant determinant of petrol prices in Nigeria.
2. Clean Tanker Freight Rates: The cost of transporting petrol from its source, usually Europe, to Nigeria also affects the final price.
3. US Dollar/Naira Exchange Rate: The exchange rate between the US dollar and the Nigerian naira is a critical factor, given that crude oil is traded globally in dollars.
4. Distribution and Retail Margins: These costs are relatively fixed and contribute to the final price at the pump.
5. Duties and Fees: Additional regulatory and duties costs impact retail prices.

Crude oil prices and exchange rates are the most significant drivers of petrol prices in Nigeria. Dr Gbakon provides an example based on recent market conditions: with an average oil price of $80 per barrel and an exchange rate of N1,600 to the dollar, the cost of crude oil in naira terms translates to approximately N805 per litre.

This figure is already eight times higher than the demanded retail price of N100 per litre, and it does not even account for other supply chain costs involved in delivering petrol to consumers.

Before May 2023, the Nigerian government bore the burden of petrol subsidies, which fluctuated but averaged around 35% between 2010 and 2020. This meant that consumers were paying only 65% of the market price for petrol. In today's context, demanding a reduction to N100 per litre would require the government to subsidize nearly 90% of the petrol price, which is economically unsustainable.

The Potential Impact of Operational Modular Refineries in the Niger Delta

Another important aspect of Nigeria’s energy landscape is the role of modular refineries, particularly in the Niger Delta region. These refineries have been proposed as a solution to domestic petroleum product supply challenges and the difficulty of raising the substantial capital needed to establish large-scale refineries.

Dr Gbakon provides valuable context on the concept of modular refineries, which were introduced as a means to address specific challenges in Nigeria's energy sector:

1. Scalability and Location: The government intended for modular refineries to be scalable and strategically located in clusters to ensure efficient operations and minimal environmental impact.
2. Design Capacity: These refineries' capacity was capped at 30,000 barrels per day (BPD), and they were to be situated close to the source of crude oil, such as marginal fields, to minimize the need for extensive infrastructure.
3. Business Model: The guidelines for modular refineries envisioned a private sector-led initiative, with potential equity participation from state governments or regional stakeholders. The private entity would hold the majority equity and operate the refinery.
4. Government Support: The government pledged to support modular refineries by facilitating commercial agreements for crude oil supply from marginal fields and offering fiscal incentives, including an initial tax-free period of three years, extendable by an additional two years based on performance.

Despite these supportive measures, modular refineries in Nigeria face significant challenges. One of the primary issues, according to Dr Gbakon, is access to crude oil feedstock. This challenge is part of the broader problem of declining oil production from marginal fields and the difficulties of accepting naira payments for crude oil, given that upstream oil investments are predominantly in foreign currency.

Additionally, while petrol subsidies were a significant issue, many modular refiners have mitigated this by focusing on producing non-subsidized products such as liquefied petroleum gas (LPG), naphtha, diesel, and fuel oils.

If the operational modular refineries in the Niger Delta were to reach their full potential, the benefits could be substantial. These refineries could lead to competitive pricing of refined products in their local areas, create employment opportunities, and contribute to the growth of surrounding communities.

Dr Gbakon estimates that Nigeria has a total modular refining capacity of 40,000 BPD, which, if fully utilized, could help reduce the country's reliance on imported refined products and ensure that these assets do not become stranded.

The Dangote Refinery Context

In a statement issued on August 9, Dangote Refinery expressed serious concerns regarding the Nigerian Upstream Petroleum Regulatory Commission's (NUPRC) failure to enforce the Domestic Crude Supply Obligation. This critical provision mandates that crude oil producers supply a portion of their production to domestic refiners, ensuring a steady flow of crude oil within Nigeria's borders.

"We have consistently raised concerns about the NUPRC's inability to ensure compliance from international oil companies with the DCSO," stated Anthony Chiejina, spokesperson for Dangote Refinery. "Despite the commission's directives, these companies continue to disregard the requirements, forcing us to purchase the same Nigerian crude from international traders at a premium of $3 to $4 per barrel. This additional cost translates to an extra $3 to $4 million per cargo, significantly impacting our operational expenses."

Dangote Refinery's recent challenges are a direct consequence of this enforcement gap. For September, the refinery is expected to receive 15 crude oil cargoes but has only been allocated six by the Nigerian National Petroleum Corporation (NNPC). The refinery, which has a daily requirement of 325,000 barrels of crude oil, has struggled to meet this demand since it began operations in January. According to data from the NUPRC, the refinery has received nearly half of the required supply, severely limiting its capacity to operate at full scale.

The implications of this shortfall are far-reaching. Nigeria must ensure that the Dangote Refinery operates without hindrances. A fully functional refinery, alongside modular refineries, can significantly reduce energy costs for the average Nigerian, enhance the value of the local currency, and contribute to the overall stability of the Nigerian economy.

By addressing these supply chain challenges and enforcing the DCSO, Nigeria can capitalize on its domestic refining capacity, reduce dependency on imported refined products, and bolster economic growth.

Nigeria's energy sector is at a critical juncture, with rising inflation and increasing energy costs putting immense pressure on the government and its citizens. While the demand for reduced petrol prices is understandable, the economic realities make it clear that such a reduction is not feasible without significant government subsidies, which are unsustainable in the long term.

On the other hand, the development and efficient operation of modular refineries offers a promising solution to some of Nigeria's energy challenges. By addressing the issues of crude oil supply and optimizing refinery operations, Nigeria can potentially reduce its dependence on imported fuel, stabilize local energy markets, and promote economic growth in the Niger Delta region.