NNPC - Dangote Refinery Saga: A Letter to Mr. President
An Economist's guide to securing Nigeria's energy future.
Dear Mr. President,
As a concerned citizen, I closely follow the ongoing negotiations between Nigeria National Petroleum Company and Dangote Oil Refinery, especially considering Nigeria's current economic realities. The noise surrounding this issue is overwhelming, but we must cut through the clutter and focus on the facts that matter for our country’s future energy security.
Key Questions to Consider:
1. Fuel Demand: How many litres of petrol does Nigeria need to meet daily domestic demand for a population of roughly 202 million (2024 estimate)?
2. Crude Oil Requirements: How many barrels of crude oil are needed to produce the required petrol daily?
3. Crude Supply: Does Nigeria's daily oil production meet the necessary crude oil supply, accounting for wastage, leakages, oil theft, and pipeline vandalisation?
We need accurate and reliable data to answer these questions. While secondary information abounds, we must rely on real-time data from our petroleum regulators to guide any economic decisions.
The Role of Petroleum Regulators
Now let’s talk about the regulatory landscape. The petroleum industry in Nigeria is governed by three key agencies, established under the Petroleum Industry Act of 2021. To understand where we stand and where we need to go, it’s important to revisit their roles.
1. Nigerian Upstream Petroleum Regulatory Commission (NUPRC): This agency regulates the upstream sector, which is responsible for extracting crude oil. They oversee how much oil is extracted, monitor the health of Nigeria’s oil wells and host community relations.
2. Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA): NMDPRA regulates the storage, transportation, and distribution of petroleum products to refineries. They monitor the movement of crude to ensure refineries get what they need for fuel production.
3. Nigeria National Petroleum Company (NNPC): As the entity closest to the consumer, NNPC is responsible for procuring crude oil, refining it into petrol and other products, and distributing these products through independent marketers and petrol stations.
Addressing Fuel Demand and Supply
Let’s break down the numbers. According to the latest Nigeria daily petrol consumption data from the NMDPRA, Nigeria needs about 40 million litres of petrol daily to meet domestic demand (https://punchng.com/marketers-plan-petrol-import-to-bridge-shortfall/?utm_source=auto-read-also&utm_medium=web&). This figure was previously higher, around 60 million litres, before the removal of fuel subsidies. On the other hand, the Dangote refinery, with its $20 billion investment, is currently producing close to 10 million litres of refined petrol per day, though they initially promised 25 million litres with plans to ramp up to 30 million litres.
While Dangote’s refinery is still ramping up production, we should harness the available capacity and focus on how to enhance our refining capacity across the country. There are other refineries, particularly modular ones such as Aradel, OPAC, and Waltersmith, that specialise in producing diesel and gas. Although they aren’t currently refining petrol, we can leverage their capacity to meet the diesel demand, reducing reliance on diesel imports.
A Strategy for Sufficiency
Mr. President, we have a potential path forward. If three of our local refineries, along with Dangote’s refinery, can be supported with Catalytic Reformers (costs about $60m to set up) to produce at least 10 million litres of fuel each per day, we could surpass domestic demand. This would not only drive down fuel prices due to increased supply but also stimulate competition, encouraging new players into the market.
To make this happen, I propose the creation of a *Petroleum Development Fund* —financed through a mix of public-private partnerships and oil revenues.
This fund would help indigenous companies expand refining operations and build new plants, particularly those capable of producing at least 10 million litres of fuel daily. Financing could come from a blend of government revenues, funds allocated from oil royalties, and private investments—offering both the private sector and the government shared interests in the success of this plan.
Refining Regulation and Incentives
For this strategy to succeed, the hands of all three regulators should be on deck. I suggest a reform of regulatory processes that involves:
- Reducing regulatory fees while maintaining strict sustainability oversight.
- Lowering margins on the sale of crude oil from NNPC to local refineries to encourage refining and lower the cost of refined petrol.
- Offering incentives for the establishment and expansion of modular refineries and investment in existing ones.
- Capacity building by the NUPRC to support the discovery and maximization of existing oil wells.
While it’s clear that long-term sufficiency is the goal, another strategy the government could adopt in the interim is a hybrid model.
This would involve a petrol import quota system, where the shortfall between daily demand and local refining capacity is imported. For instance, with Dangote producing 10 million litres daily, imports could be capped at 30 million litres, ensuring we meet the 40 million litres required without flooding the market with imported fuel. Imported fuel prices must align with Dangote’s terms of sale to avoid price distortions. For this option to work, NNPC and NMDPRA will need to grant direct licenses to independent marketers to buy petrol from Dangote, to prevent market exploitation, cutout middlemen, and stabilise prices.
Conclusion: The Road Ahead
Mr. President, if these steps are taken, we can harness Dangote’s investments and other existing refineries investments in the country, stimulate domestic fuel demand, and drive down prices. In the short term, imports can complement domestic production, but in the long run, a strong local refining sector will ensure Nigeria's energy security.
Thank you for your attention, Mr. President.
P.S.: According to NNPC, Nigeria requires 550,000 barrels of crude daily (https://africaoilgasreport.com/2024/10/refining-gap/eight-nigerian-refineries-demand-less-than-600000-barrels-per-day-of-crude-regulator-forecasts-in-a-report/) to meet the current petrol demand of 40 million litres. A barrel of Bonny Light crude currently sells for about $75. With more operational oversight from NUPRC and investment in indigenous players, we can maximize our resources and ensure Nigeria’s long-term energy stability.
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Bonny Light crude is a high-quality, low-sulfur oil from Nigeria. It's easy to refine into valuable fuels like gasoline, diesel, and jet fuel, making it highly sought after globally.
- Chibuzor Happiness Obi
