Revealed: The Truth About Nigeria’s Post-Subsidy Gasoline Prices

Hello ?? and Welcome to another edition of the Energy Business Analytics Newsletter. In this edition we will revisit the evolution of gasoline prices since the removal of the subsidy on gasoline.

KEY TAKEAWAYS

• Domestic gasoline pricing remains pegged to international benchmarks, even with the on-streaming of the Dangote refinery.
• The retail price of gasoline did not initially rise as expected post-subsidy, leading to speculation about hidden government intervention.
• Over time, however, gasoline prices have been increasing, now surpassing the model-predicted minimum market price.
• Nigeria’s diesel-gasoline price ratio is aligning with international norms, suggesting further price corrections ahead.
• The refinery’s pricing strategy has influenced market trends, but concerns remain about whether it truly benefits consumers.

INTRODUCTION

Since the declaration of the end of subsidy on gasoline (premium motor spirit – PMS) by Nigeria’s president Bola Ahmed Tinubu in May 2023, a lot has happened in the midstream and downstream energy space. From the initial debates about whether the subsidy was truly gone or not, to the on-streaming of the 650,000bpd Dangote Petroleum & Petrochemicals refinery and the expectations that transport fuel prices would drop.

There was also drama around the pricing template or framework adopted by the Dangote refinery versus that provided by NNPC Limited . Thrown into the mix was the Naira for crude deal which was supposed to price crude supply to refineries [read Dangote] in the local currency (Naira) instead of US Dollars, and so lessen the country's pressure on foreign exchange.

Then came the announcements of the restreaming of the NNPCL’s Port Harcourt and Warri refineries in quick succession. The news was trailed paradoxically by a mix of doubt and a reignited hope that transport fuel prices would be competitively priced [downwards] to the consumer's benefit. Meanwhile, the understandably fatigued consumer had been pummeled by the effects of rising and unabated inflation fueled in part by upward movement of transport prices.?

The common denominator in all these developments has been the retail price of gasoline. So, in this edition, we update our trend analysis of retail gasoline pricing in Nigeria following the removal of subsidy (post-subsidy).

Let’s dive in!

GASOLINE PRICING IN NIGERIA

Gasoline is priced on an import parity basis in Nigeria. This pricing basis is consistent with the way gasoline is priced in other African countries as we previously demonstrated in a two-part article – here and here. Before the passage of the Petroleum Industry Act, the Petroleum Product Pricing Regulatory Agency (PPPRA) was responsible for determining the price of products within Nigeria. The PPPRA at the time utilized a pricing template to determine the open market price – which referred to the expected retail price (or pump price) of petroleum product. A snapshot of this template is shown in Figure 1 below:

This retail price was a buildup of:

-????? The Free on Board (FOB) price of gasoline in the originating market priced in $/mt. Nigeria references European gasoline prices.

-????? Freight, Lightering Expense, Nigeria Port Authority Fees, and Nigerian Maritime Administration and Safety Agency Fee.

-????? Financing Cost, Jetty throughput charge, and Storage charge.

-????? Retail Margins which included dealer’s margins, transport, and the retail outlet margin.

Exchange rate would convert the USD components of the pricing framework into Naira (NGN), while conversion factor for gasoline would be used to convert the gasoline pricing from metric tonne basis to litres.

In Sept 2024, the NNPCL released a price template which it explained was used to settle gasoline offtake from the Dangote refinery. Figure 2 is a capture of the template.

Although the template doesn’t provide as detailed a break down of its components as the PPPRA template did, we are still able to glean some important details such as:

-????? That import parity is the basis for gasoline pricing as the FOB gasoline price is Platts 10ppm Amsterdam-Rotterdam barge.

-????? The “Premium” would very likely include a transport element to mirror clean tanker freight between Europe and West Africa.

-????? Build up from the loading gantry at the refinery includes NMDPRA fee, Inspection fee, distribution costs, and a margin.

-????? Pump prices differ across the country driven by the distribution cost, with locations farthest from Lagos (where the refinery is located), subject to a higher price.

?While the Dangote refinery disputed the specific offtake price at the gantry, it neither clarified the offtake price nor did it dispute the pricing principle (of import parity) communicated by the NNPCL release.

We can thus be confident that retail gasoline price is based on the import parity pricing principle.

SO HOW HAS GASOLINE PRICING EVOLVED

For months after the subsidy was removed in May 2023, many argued that the subsidy on gasoline wasn’t really removed.

1. The Nigerian Government was accused by Industry players of a continued spend of N1 Trillion monthly ($1 billion) on petrol subsidies.
2. The World bank in Dec. 2023, 6-months after the subsidy removal asserted that retail gasoline price wasn’t “cost-reflective,” hence concluded that a partial subsidy existed on gasoline.
3. Union leaders weighed in, and public commentators spoke up too.

To substantiate the claim that there was still a subsidy on the price of gasoline, two major strands of argument were advanced.

1. That the oil price increase by 25% from $75/bbl in June 2023 to $94/bbl in Sept. 2023 coupled with the 24% exchange rate depreciation of the Naira against the US dollar from N615/USD to N760/USD was not matched by an expected increase in gasoline retail prices.
2. That the post-subsidy retail price gasoline in Nigeria was too low relative to the already deregulated retail price of diesel, hence a subsidy must be at play.

Our previous newsletter examined these arguments in detail and found that indeed, the retail price was lower than the price suggested by the model we had constructed to simulate market reflective prices.

Since our last analysis, oil prices, exchange rates and retail prices have changed as illustrated in Figure 3.

As of Dec 2024, oil prices were at 0.85 (85%) of their level in Jan 2022, meanwhile the Naira had depreciated further. In Dec 2024, nearly 4-times as much naira exchanged for a dollar than in Jan 2022. In Dec. 2024, the national average gasoline retail price was 7-times its value in Jan 2022, and 5-times its value in May 2023, in the month subsidy was removed.

In view of these changes, let’s revisit the analysis and see if how market reflective gasoline prices have been.

Actual vs Modelled Retail Gasoline Price

I show the graphic of the modelled gasoline prices against the actual national average retail prices obtained from the National Bureau of Statistics Nigeria , and this is illustrated in Figure 4. Note that this is updated to December 2024.

There are several moving parts in the graphic, so let’s unpack them one at a time.

First off, the graphic is split in two halves to represent the period of subsidy and the post-subsidy period demarcated at the May/June 2023 when the subsidy removal was announced. The purple line is the difference between the actual retail gasoline prices and the model derived retail gasoline prices.

Think of the model derived retail gasoline price as the “minimum open market price.”

During the period when subsidy was in place, the model retail gasoline price, exceeded the actual retail price thus giving rise to the subsidy. We can all agree on this point that, a subsidy was at play prior to May 2023. The extent of the subsidy – the difference – reached N201/Litre in June 2022, was already in decline due to oil price decline. This decline was such that on the eve of the declaration, the estimated subsidy had shrunk to N47/Litre.

See that between January 2024 and August 2024, a subsidy was clearly at play as the actual PMS price was below what the model suggested as the “minimum open market price.” In Feb 2024, the actual PMS price discounted as deeply as ~N300/Litre.

From September 2024, the same month gasoline offtake commenced from the Dangote refinery, the actual retail price exceeds the minimum. This model suggests that there were significantly higher margins on the table to be distributed along the supply value chain. Even with the model suggesting a decline in the “minimum open market price,” the actual price kept moving upward.

As of Dec 2024, the national average retail gasoline price was N1,189/Ltr compared to N892/Ltr suggested by the model. That is a N297/Ltr difference.

However, for Dec 2024, the Dangote refinery discounted gantry off-take price to N899.50/Ltr, and partnered with some independent retail marketers to deliver uniform gasoline price across the country of N935/Ltr. Even at the uniform price promised, there was still an estimated N43/Ltr margin above the minimum open market price suggested by the model. This should put some context around the discount offered by the Dangote refinery during the Christmas break.

Diesel Gasoline Price Ratio

It was also argued that gasoline pricing was suppressed relative to retail diesel prices which had long been deregulated.

We tested this in a previous edition of our newsletter, by tracking the diesel-gasoline price ratio in Nigeria relative to a cohort of other countries. We found that:

• Before the subsidy removal, the average retail diesel price in Nigeria peaked at 5-times that of gasoline. This was several times more than that for other countries compared – Kenya, Ghana, United States and Canada.
• Following the removal of subsidy, Nigeria’s gasoline-diesel price declined from 3.54 in May 2023 to 1.50 in June 2023, and declined further to 1.32 in July 2023.

Let’s look at the updated picture since we last ran this analysis. Refer to Figure 5.

In the post-subsidy era, the diesel – gasoline price ratio rose from 1.32 in July 2023 to peak at 2.01 in April 2024, from where it has been on decline. We see the ratio converging towards the “consensus” ratio defined by the other cohort of countries.

As of Dec 2024, the diesel-gasoline ratio for Nigeria was 1.22 compared to 1.19 for the US, 1.12 for Canada, 0.99 for Ghana and 0.93 for Kenya. This implies that Nigeria’s gasoline price is correcting upwards – as seen in Figure 4 – relative to retail diesel prices.

Judging from the Dec 2024 indices, we can say that:

????????????????????????????????????????? i.??? In the US: diesel was 19% more expensive than gasoline.

???????????????????????????????????????? ii.??? In Canada: diesel was 12% more expensive than gasoline.

?????????????????????????????????????? iii.??? In Ghana: diesel was 1% less expensive than gasoline.

?????????????????????????????????????? iv.??? In Kenya: diesel was 7% less expensive than gasoline.

???????????????????????????????????????? v.??? And in Nigeria: diesel was 22% more expensive than gasoline.

?

The above results indicate that following the removal of subsidy, Nigeria’s gasoline price has been slowly rising relative to the deregulated diesel price. This is noted in convergence of the diesel – gasoline price ratio to the “global consensus” ratio.

IN CONCLUDING

In our newsletter from eight months ago, we noted that the retail price point of gasoline supply at the time had resulted in financial bleeding [for the government] as it was clearly less than the minimum open market price suggested by our modelling.

We had asked if the retail pricing of gasoline would be adjusted to scale back on some of the bleeding seen in the first quarter of 2024.

It turns out that our updated analysis indicates that indeed, gasoline price has been adjusted upwards in the months since then. The correction is seen in the positive margins of the retail price over the modelled “minimum open market” price, as well as the convergence of the diesel – gasoline price ratio to levels more commonly seen globally (between 1.04 – 1.19).

We keep an eye on these developments especially considering recent complaints from marketers that the Dangote offtake prices are higher than the landed cost of gasoline.

Interesting times.

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