BY EMEKA EJERE
There are high hopes that Nigeria’s lingering foreign exchange crisis, humongous amounts spent on fuel subsidies among others shall be things of the past when the giant new Dangote Oil Refinery starts processing crude in the third quarter of this year.
Chairman of Dangote Industries Limited, Alhaji Aliko Dangote, said during a recent briefing at the plant site in Lagos that mechanical work on the refinery is complete and “hopefully before the end of third quarter we should be in the market.”
According to Bloomberg, Dangote, who revealed that the plant will start with a processing capacity of 540,000 barrels a day, said “full production can start maybe, by the end of the year or beginning of 2023.”
The facility, which will cost an estimated $19 billion to build on completion, has an installed capacity of 650,000 barrels per day. With capacity of meeting 100 per cent of local demands of refined petroleum products with surplus for exports, the facility is expected to be Africa’s biggest oil refinery and the world’s biggest single-train facility.
However, the facility has suffered several deadline misses and postponements such that some degree of scepticism still greets its greatly anticipated coming on stream to relieve the nation and Nigerians of the burden of managing the oil sector dependency challenges.
Nigeria is currently facing a huge foreign exchange crisis as a result of high dependence on imports, which has continued to put the local currency, naira, under pressure, despite efforts by the Central Bank of Nigeria (CBN) to put up a defence.
In its ‘Nigeria: Selected Issues Paper’ report released on Thursday, the International Monetary Fund (IMF) said the long-term rate of the depreciation of the naira equates to a loss of 10.6 per cent of its value annually since 1973.
According to the IMF, this rate is 1.5 times higher than the long-term rate of the currencies of other emerging market and developing economies at 7.2 per cent, and Sub-Saharan Africa at seven per cent over the same time period. According to the report, this is one of the reasons why Nigeria’s inflation rate is higher than that of its peers.
The report read in part, “Nigeria’s long term average rate of CPI inflation (1971-2020) was 16 per cent, which is higher than both SSA (13 per cent) and EMDE (13.6 per cent) averages.
“Compared to SSA (7.2 per cent) and EMDE (6.2 per cent) median, the difference is more pronounced. Two possible explanations come to one’s mind upon data investigation. First, Nigeria’s broad money (M3) growth has been persistently high — with its 50-year average registering 21.2 per cent. This is 1.5 and 1.3 times more than EMDE (18.5 per cent) and SSA (16.7 per cent) averages respectively.
“Likewise, its exchange rate underwent more persistent depreciation. Nigeria’s long-term rate of currency depreciation (on average 10.6 per cent annually since 1973) was 1.5 times higher than both EMDE (7.2 per cent) and SSA (seven per cent). Given limited availability of long-term data, it is difficult to estimate the exact reasons.”
Nigeria has the 10th largest crude reserves in the world, yet imports refined petroleum products and is reported to have spent over N10 trillion (over US$26 billion) on petrol subsidy in 12 years.
The country currently exports at least 1.5 million barrels per day of crude. Research by the Nigeria Extractive Industries Transparency Initiative (NEITI) shows that in 2018, Nigeria earned US$32.6 billion from crude sales; with peak prices now, more revenue is expected.
Yet, with no functioning refineries, the country continues to export unrefined crude, which gets sold back at a premium as petroleum products, with all the attendant costs of production, shipping, demurrage, security, as well as the exporter’s profit factored into it.
The effect is that the downstream marketer who sells the products in Nigeria does so at cost plus, making the average Nigerian end user pay high prices for the products, unless the federal government subsidizes it. This, in turn, also takes up a large share of the budget, depriving other sectors of development funding and deepening poverty.
Two weeks ago, in a letter that proposed the amendment of the 2022 budget, President Muhammadu Buhari requested an additional provision of N2.557 trillion for petrol subsidy payments in 2022.
The federal government had proposed an 18-month extension for the implementation of the petroleum industry law to cater for subsidy shortfall. If approved by the national assembly, the government will continue to cater for the costly subsidy on premium motor spirit (PMS), which gulped N1.4 trillion in 2021 although there was no record for under-recovery in January. according to the Nigeria National Petroleum Company (NNPC).
In February, March, April, May, and June 2021, under-recovery for PMS amounted to N25.37bn, N60.39bn, N61.96bn, N126.29bn, and N164.33bn respectively. In July, August, September, October, November and December, the NNPC spent N103.28bn, N173.13bn, N149.28bn, N163bn, N131.4bn, and N270.83bn, respectively.
Economic and energy experts have continued to decry the rising cost of fuel subsidy to the federal government. The World Bank had warned that further delay in removing the fuel subsidy could see the federal and state governments unable to pay salaries from 2022.
The Lead Economist, Nigeria Country office of the World Bank, Marco Antonio Hernandez, had urged Nigeria to remove subsidy on PMS in February 2022, as prescribed by the Petroleum Industry Act (PIA), warning that further delay could worsen the precarious revenue situation confronting the country.
According to him, the present fiscal condition of the sub-national governments would take a turn for the worse in 2022 with 35 of the 36 states unable to meet their financial obligations. He stated that a situation where N250 billion goes into fuel subsidy monthly was unsustainable.
However, the CBN governor, Godwin Emefiele, is optimistic that Nigeria’s import of petroleum products using 30% of its forex can be reversed by the successful commencement of operations at the Dangote Refinery.
Emefiele, who spoke at a recent foreign investors’ meeting held in New York, was answering a number of questions raised by foreign investors, which bordered around Nigeria’s foreign exchange reserves, exchange rate, balance of payments and the country’s increasing foreign debts.
“On the Dangote Refinery, by the time it begins production latest July next year, it is going to be a major source to save forex for Nigeria”, Emefiele said.
“Right now, the overall forex we spend on imported items, the importation of petroleum products consumes close to 30 per cent.
“By the time you add diesel, aviation fuel, petrol and the rest of that which makes up the 30 per cent, the Dangote Refinery has the capacity to produce 650,000 barrels per day. There is a domestic component that is about 455,000 barrels. Even if the 455,000 is sold to Dangote in naira alone, it is going to be a major forex saving for Nigeria.
“What does that mean? It is going to save five percent of our imports. If you save five per cent of your imports and another 30 per cent in petroleum products and then in fertiliser where we would save about two per cent of our imports, we are moving close to saving 40 percent of the country’s imports.
“By that time, you will see what we would be doing what people talk about floating the naira, and then let’s see how the currency will depreciate.”
Meanwhile, economic policy analysts have hinged the growth of the downstream sector of the Nigerian oil and gas sector and the economy in general on the Dangote Refinery.
In its Nigeria Economic Outlook Report for 2022, the Centre for the Promotion of Private Enterprise (CPPE), an economic advocacy group, identified Dangote Petroleum Refinery as one of the key expected drivers of growth that would impact positively on the downstream oil sector of the Nigerian economy in 2022.
The Chief Executive Officer, Dr. Muda Yusuf, said the activation of the Petroleum Industry Act (PIA) in 2022 and the coming on stream of the Dangote Refinery were expected to impact positively on the economic outlook.
“We expect to see positive outcomes as investor sentiments in the oil and gas sector improve on account of the reforms anchored on the PIA”, Yusuf said.
“This will however depend on the political will deployed to drive the implementation of the provisions of the Act. It is also expected that the coming on stream of the Dangote refinery in 2022 will also impact positively on the downstream sector of the economy.”
He said the average oil price in 2022 was expected to exceed the budgeted benchmark of $62 per barrel, offering some fiscal headroom. This, he noted, would be powered by higher energy demand driven by the recovery of economic activities globally.
“This trajectory was expected to impact on our foreign reserve and strengthen the capacity of the Central Bank of Nigeria to support the foreign exchange market,” Yusuf said.
He, however, added that if the Dangote Refinery comes on stream in 2022, the fiscal pressure on the economy might abate, but not completely eliminated.
Similarly, in its recent Economic Outlook Report for 2022, the Financial Derivatives Company (FDC) Limited, a Lagos-based financial advisory and research company, expressed firm belief that Dangote Refinery would boost the growth of the downstream sector of the nation’s oil and gas industry and enhance petroleum products distribution across Africa.
The Managing Director/Chief Executive Officer of FDC, Mr. Bismarck Rewane, however, warned that the refinery, when operational, would not be a final solution to Nigeria’s economic crises.
“The coming on stream of Dangote Refinery will no doubt enhance product distribution across Africa. Will Dangote refinery solve Nigeria’s problem? The answer is no. But the company is going to make Nigeria an exporter of refined petroleum products,” he said.
However, a social critic, Magnus Vincent questioned the rationale behind the nation’s planned dependence on the private refinery, despite its existing refineries still gulping government funds, noting that the development could drive monopoly.
“Why is a whole country centring its fiscal policy on a one-man business; what level of monopoly will that cause?” he queried.