Will Dangote Refinery Crash The Price of Petrol? Here’s What You Should Know
The Dangote Refinery, owned by Africa’s richest man, Aliko Dangote, is expected to revolutionise Nigeria’s oil sector, and reduce the country’s reliance on imported refined petroleum. Having already received six million barrels of crude oil, the 650,000 barrel-a-day oil refinery, commissioned in May 2023, has commenced the production of diesel and aviation fuel, as announced by the Dangote Group on January 13, 2023.
Before the removal of fuel subsidies by the administration of Bola Tinubu, Nigeria, Africa’s most populous country, consumes 68 million litres of petrol per day, which cost the nation N400 billion per month. However, with the removal and the price of petrol at various retail stations as high as N630 per litre, Nigeria’s inflation has reached a 27-year high, pushing many below the poverty threshold.
For many, the Dangote Refinery offers a glimmer of hope for a much-desired reduction in the cost of petrol, which has increased transportation prices and is considered a prime factor in the soaring food prices.
But will the mega-refinery, the largest single-train refinery in the world, crash petrol prices?
According to the International Centre for Investigative Reporting, Dangote supplying Premium Motor Spirit (PMS) to the Nigerian market can reduce the current price by 15 percent. Adeola Adenikinju, a professor of energy economics, told ICIR that the commencement of the Dangote refinery, along with factors such as freight, logistics, insurance, financing, transportation, shipments, and import parity price, will reduce the cost of petrol to almost 10-15 percent.
However, Dangote’s Refinery, being located in Free Zones, is not obligated to sell its products to Nigerians and would be required by law to pay import duties when the products are exported into the Nigerian Customs Territory.
What Is a Free Trade Zone?
Free Zones are areas designated within a country where customs regulations, from production and manufacturing to trade, may not be applicable.
The Lekki Free Zone Development Company (LFZDC), covering 16,500 hectares, was established in 2008 as a joint venture between the Lagos State Government, China-Africa Lekki Investment Ltd, and Lekki Worldwide Investments Limited. It is one of the 42 Free Zones in Nigeria.
Hence, the Dangote Refinery, situated inside the Lekki Free Zone, is expected to pay “import duty on goods in commercial quantity exported into the Nigerian Customs Territory, at a rate applicable in the Nigerian Customs Territory” according to section 40 (i) of the Nigeria Export Processing Zone Act.
However, businesses within Free Zones, as per the Act, are accorded some incentives and business relief, such as tax relief, which might aid in reducing the cost of goods.
The law states; “legislative provisions pertaining to taxes, levies, duties, and foreign exchange regulations shall not apply within the Zone.”
The Permutation of Price
Although tax reliefs, along with factors like freight, logistics, insurance, financing, transportation, and shipments, could have generally reduced the price of refined petroleum products in Nigeria, the cost of production, including the purchase of crude oil, can significantly affect the price. With $72.03 being the current price of one barrel of crude oil in the global market, according to Bloomberg, and the cost of refining one barrel around $4, using an exchange rate of N853 (CBN rate as of January 15, 2023), and one barrel equaling 159 litres, Neusroom estimates that Dangote could spend between N500 – N550 to refine one litre of crude oil. However, the price could vary significantly to due to unstable exchange rate.
“There is a notion that if the product is processed locally, prices will reduce. Let me make it clear that it is not going to change anything. If you produce locally, the refineries will also input the cost of production and other things, and it will be sold at the current price,” Mele Kyari, CEO of NNPC, Nigeria’s oil company, said in 2023.
