Nigeria’s Dangote refinery reignites oil subsidy debate

Good morning and welcome back to Energy Source, coming to you today from London.

Overnight, the Israeli army crossed the border into Lebanon, bringing the Middle East closer to an all-out war that fires into Iran. The incursion is Israel’s first ground offensive against Hezbollah since 2006, and yet oil prices have barely moved. Brent crude was flat on Monday and fell 2 percent early Tuesday in London amid expectations elsewhere that Libya is preparing to restore production to nearly 1 million barrels a day.

For now, traders continue to bet that the escalating conflict will not disrupt supply from any of the region’s major producers and that if it does, OPEC+ members, notably Saudi Arabia and the United Arab Emirates, will have spare capacity more than sufficient to compensate for disturbance elsewhere.

Brent crude prices closed up more than 3% last week after we reported that, after two years of production cuts, Saudi Arabia was committed to increasing output from December 1. Given the kingdom’s plans and weaker-than-expected growth in Chinese oil demand, crude prices may not rally even if the conflict worsens. We will continue to follow.

Our main report today takes us to Lagos, where our West Africa correspondent, Aanu Adeoye, asks how much Nigerians should be paying for petrol.

Thanks for reading,

tome

Nigeria’s ‘polarizing’ oil subsidies under new scrutiny

How much is a liter of petrol in Nigeria? Now that the country’s 650,000 bpd Dangote refinery has started producing fuel, making it available locally, the age-old conundrum must be solved.

In most countries, it’s a simple answer based on the global price of crude oil and the forces of supply and demand specific to each nation.

Nigeria is not one of these countries.

For decades, Africa’s biggest oil producer, which discovered oil four years before gaining independence in 1960 from the British, has allowed its citizens to pay some of the lowest gas prices in the world, annually subsidized by the government in the amount of billions of dollars. In a country devoid of the social benefits that usually flow from the government to its people, Nigerians see cheap petrol as the only social good their oil-rich nation has to offer.

But the subsidies are financially ruinous and the bill keeps rising every year. In 2022, the subsidies consumed $10 billion and left the state oil company NNPC with nothing to hand over to the treasury. Expenditure on fuels represents a not insignificant part of the country’s GDP. The subsidies are also largely regressive, in that they mostly benefit citizens who own cars, according to an IMF analysis, as well as those wealthy enough to afford a gasoline-powered generator to replace irregular supply of electricity from the national grid.

There was a general economic consensus – from the IMF, the World Bank and the neighborhood economist – that the subsidies were not sustainable and needed to be reduced. However, he has become the third rail of Nigerian society, a political potato too hot to touch. Periodic and often half-hearted attempts by previous governments to remove these subsidies led to nationwide protests.

“Gasoline prices are such a polarizing topic in Nigeria,” said Noelle Okwedy of Nextier, an energy advisor. “It’s a combination of factors: high inflation and low confidence that the funds that would be saved from not paying subsidies will go to development, healthcare or education.”

Then came Bola Tinubu who became Nigerian president last year. In his inaugural address and to everyone’s surprise, he declared that the subsidies had “disappeared”. Fuel prices tripled overnight as people flocked. It has already fueled worsening inflation. But Tinubu was hailed as embracing economic orthodoxy that would put the country on the path to growth.

His decision only lasted a few months. A decision to devalue the local currency naira meant fuel imports became unbearably expensive and Tinubu’s government reinstated what the IMF called “implicit” subsidies by capping fuel pump prices. The landed cost of petrol was more than N1,000/litre ($0.60) but prices at petrol stations have hovered around N630 for months. A leaked paper from the finance minister admitted the falling currency meant the government was on track to pay more for subsidies this year than in the past.

This is where oil imports come in – another anomaly of the Nigerian economy. Despite being a major oil producer and a member of OPEC, Nigeria has been unable to refine its own crude oil for decades with moribund state refineries worth billions of dollars. however in investments. And so an absurdity continued for decades: Nigeria sent its crude oil to refineries abroad and imported finished products which the state then subsidized before reaching the final consumers.

When the NNPC admitted last month that it was financially strained by the cost of petrol importation and owed billions of dollars to its suppliers, it became inevitable that prices would rise. Since then, they have increased by 45 percent, but are still below what they would cost without government help.

Enter Aliko Dangote. . .

Nigeria’s foremost industrialist of his generation built his empire on cement and amassed a fortune of nearly $14 billion, making him Africa’s richest man. Dangote’s “one train” refinery, the largest of its kind in the world, has long been touted as a potential solution to Nigeria’s import woes. The facility, located on the outskirts of Lagos, delivered its first petrol last month, sold exclusively to the NNPC, an arrangement brokered by the Tinubu government, according to people familiar with the talks.

Dangote, who has dollar debt to services, will inevitably sell petrol to NNPC at global prices. He said this in a television interview last week. “Removing the subsidy is entirely up to the government, not us,” he said. “We have to make a profit. We’ve built something worth $20 billion, so we’ve definitely got to make money.”

No doubt, Dangote’s home-produced petrol will be cheaper than the imported variety, but it remains unclear whether the state will allow NNPC to sell at market prices. In theory, eliminating subsidies entirely could leave enough money to invest in other areas, particularly health, education, and welfare programs. But in a country where trust in government is low and a social safety net is lacking, few believe the savings will be channeled properly. And with an unpopular government sensitive to any protests, there is an understandable reluctance to let the markets fully decide the cost of petrol.

Okwedy said: “The horse has left the stable with subsidies. NNPC cannot afford it and government cannot afford it.”

“Something will force them to remove the subsidy: either they are hurt and can no longer afford it even if people protest or oil prices fall and the naira improves and it is no longer needed,” she added. “Other than that, I don’t see them (willingly) taking it.”

Nigeria needs to figure out how much a liter of petrol costs – it would have far-reaching consequences for a cashless nation. (Aanu Adeoye)

Recommended Viewing: Can Dangote Refinery Help Transform Nigeria’s Oil Industry – And The Economy At Large? This FT film explores the country’s struggle to break its ‘oil curse’.

Power points

Energy Source is written and edited by Jamie Smyth, Myles McCormick, Amanda Chu, Tom Wilson and Malcolm Moore, with support from the FT’s global reporting team. It reaches us at [email protected] and follow us on X at @FTEnergy. Keep up to date with previous editions of the newsletter Here.