Izielen Agbon
Oligopolies are a few companies that control product supply in a market. Oligopolies create artificial barriers to competition in a market and sell commodities at higher oligopolistic prices to maximize profit.
This seems to be the case with Dangote Petroleum Refinery as the major supplier of PMS in the Nigerian market. The refinery has the capacity of 53 million litres per day of gasoline, 35 million litres per day of diesel, 9 million litres per day of jet fuel and kerosene and 75,000 million litres of Polypropylene (LPG). Currently, Dangote produces about 30 million litres/day or about 70% of the national PMS demand.
Producing refineries in Nigeria include the 650,000bpd Dangote Petroleum Refinery, 11,000 bpd Niger Delta petroleum Resources Refinery (Aradel), 60,000bpd Port Harcourt Refining Company (PHRC I), 5,000 bpd Walter Smith Refinery, 5,000 bpd Ogbele Refinery, 12,000bpd Edo Refinery and Petrochemical Company, 2,500bpd Dupport Midstream Company Ltd, and 100,000bpd OPAC Refinery, Kwale.
Other non-producing refineries undergoing turn-around maintenance (TAM) or under construction are Kaduna Refining and Petrochemical Company Ltd (KRPC), Port Harcourt Refining Company (PHRC II), Warri Refining and Petrochemical Company Ltd (WRPC), Azikel Refinery, Yenogia, Alexis Refinery Ltd, Atlantic International Refinery and Petrochemical Company Ltd, and BUA Refinery.
Dangote Petroleum Refinery is a privately owned $19.5 billion 650,000 barrels per day single train refinery and integrated petrochemical complex. It has 86 loading bases, marine facilities, a 900,000 tons polypropylene plant, 36,000 tons sulphur plant, 585,000-ton carbon black plant and a 4.7 million storage capacity. The refinery’s products include polypropylene, naphtha, RCO, PMS, diesel and jet fuel.
Since Dangote Petroleum Refinery is not owned by the Nigerian masses, it is not everything that is in the interest of Dangote that is beneficial to the Nigerian masses. For example, higher PMS prices do not serve the interests of the Nigerian masses as they result in higher inflation and increased prices of food, transport, health, housing, and education. However, higher PMS prices serve the interests of Dangote Refinery because they increase the profits for its owners and shareholders. Lower PMS prices benefit Nigerian workers, students, peasants, women and small businesses. But lower PMS prices do not benefit Dangote Petroleum Refinery because they generate less profits for its private owners and shareholders. What is good for Dangote Petroleum Refinery is not automatically good for the Nigerian masses.
On November 24, 2024 Dangote Petroleum Refinery reduced its refinery gate PMS price from N990/litre to N970/litre for marketers “as a way of appreciating the good people of Nigeria for the unwavering support in making the refinery a dream come true”.
Later in December 2024, the Petroleum Products Retail Outlet Owners Association of Nigeria (PETROAN) held a strategic meeting with Dangote Refinery that arrived at a secret buyer-seller deal. According to PETROAN, “We reserved the right not to make public the business terms and conditions”.
Nigerians dreamt of a Dangote Refinery in a competitive market that would result in lower PMS prices. What they now have is a nightmare where Dangote Refinery and PETROAN hold private meetings to fix secret PMS prices contrary to section 206 (1) of the 2021 Petroleum Industry Act, which clearly states that wholescale transfer prices negotiated between PMS suppliers and buyers at arm’s length basis must be transparent.
We need to examine if Dangote Petroleum Refinery PMS prices are oligopolistic and if its N20 reduction in its refinery gate PMS prices is a ruse aimed at misleading the Nigerian masses.
There are two basic methods for determining PMS prices. There is the production cost pricing method and the import parity pricing method. The production cost pricing method assumes that the PMS prices are based on the cost of crude oil production and refining in the domestic market. This method implies that the crude oil is produced and refined in the country. OPEC supports the use of the production cost methods for petroleum products and all energy resources in domestic markets.
Using this production cost pricing method, we can examine the pricing of Dangote PMS at the refining gate.
Dangote Petroleum Refinery is new. Therefore, we will assume that the PMS supply component costs at the refinery will not be much different from prevailing world average costs. Presently, Dangote refinery purchases Nigerian crude oil (e.g. Qua Iboe) in naira at the prevailing Platt’s price of $72.93/bbl ($536.25/MT). Actually, Dangote Refinery buys crude oil in naira from NNPCL at an Official Selling Price. The Official Selling Price is not the prevailing Platt’s Market price. Rather, it is an NNPCL price set monthly for each major Nigerian crude oil streams, after an official meeting for long term contract customers.
The Official Selling Price is usually lower than the spot market price by a discount and is published on the 20th of every month. Platts sometimes publishes NNPCL Official Selling Price for its crude oil streams. NNPCL reduced the December 2024 Official Selling Price for Qua Iboe to Dated Brent plus 89 cents per barrel. Nevertheless, we will use $536.25/MT for the crude oil cost, $10/MT for transport/freight to Dangote Refinery and $107.25/MT for the Refining cost. Hence, we arrive at a Dangote Refining Gate price of $654.12/MT or N790.22/litre at an exchange rate of $1/N1,620. Therefore, the promised Dangote Refinery PMS price of N970/litre is an oligopolistic price with an extra oligopolistic profit of N179.78/litre.
NNPCL and Dangote Petroleum Refinery use the Import Parity pricing method. The IMF import parity PMS price consists of three components. The first component is the opportunity cost of importing the PMS into the country and transporting it to the consumers. The second component is the environmental cost associated with the PMS consumption. The third component is a consumption tax aimed at raising revenue.
The import parity pricing method does not recognise the concept of comparative advantage for oil and gas producers/exporters nor the negative economic effects of eliminating the barriers between the international and domestic markets. It assumes that all Nigerian crude oil is exported to North West Europe (NWE) where it is refined and all refined products, including PMS, are imported from NWE to West Africa. Thus, using the import parity pricing method, the PMS price is calculated using a North West European FOB PMS price and the cost of freight to transport the product from Europe to West Africa.
On September 3, 2015, Platts launched the West Africa Gasoline FOB Northwest Europe, and West Africa Gasoline CIF West Africa assessments to reflect the import of gasoline into West Africa. The December 2024 Platts 10 ppm West Africa Gasoline FOB Northwest Europe barge gasoline price is $683.75/MT, the Average Freight Rate (NW Europe-West Africa) is $30/MT, and Premium is $50/MT. This gives a Refining Gate price of $763.75/MT or N922.65/litre at an exchange rate of $1/N1,620.
Therefore, even with import parity pricing method, the promised Dangote Refinery PMS price of N970 is an oligopolistic PMS price with an extra oligopolistic profit of N47.35/litre. Oligopolies always make oligopolistic profits unless constrained by anti-trust laws.
In 1890, the United States passed the Sherman Antitrust Act in response to the domination of the leading sectors of the economy by oligopolies and monopolies. Section 1 of the Sherman Antitrust Act declares “every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, to be illegal”.
Furthermore, Section 2 states that “every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a misdemeanour”.
Upon conviction every company found guilty of oligopolistic or monopolistic actions in restraint of trade or commerce by fixing prices or rigging bids shall be punished by fine not exceeding 100 million dollars, and any person found guilty of the same offenses shall be punished by fine not exceeding one million dollars, or by imprisonment not exceeding 10 years, or by both said punishments, in the discretion of the court”.
There is an urgent need for a Nigerian Antitrust Law in light of the rise of oligopolies in the Nigerian refining, petrochemical, cement, sugar, salt, fertilizer, flour, automobile, coal mining, etc industries.
Given the above PMS pricing results, we arrive at our primary conclusion that Dangote Petroleum Refinery’s PMS prices are oligopolistic. This might explain why Dangote Refinery reacts negatively whenever anybody calculates PMS prices using the Production Cost pricing method or the Import Parity pricing method.
In September 2024, NNPCL used the Import Parity Pricing method to calculate a N950.22/litre price for Dangote PMS at the pump. The Platt’s 10 ppm FOB Amsterdam barge price was $690/MT and Premium was $46/MT. This gave a Dangote Refinery PMS Gantry Price of $736/MT or N898.75/litre at a $1/N1,637.59 exchange rate. NNPCL ignored the transport/freight costs.
The NMDPRA and Inspection fees were N8.99/litre and N0.9/litre respectively. The Distribution cost in Lagos was N15/litre and the Margin was N26.48/litre. Therefore, the NNPCL estimated pump price of Dangote PMS in Lagos was N950.22/litre.
The Dangote Petroleum Refinery objected publicly when NNPCL published this price. Dangote Refinery rejected the price and insisted on setting its refinery gate price as it deems fit to meet the pecuniary interests of its private owners and shareholders. This affirms our secondary conclusion that what is good for Dangote Petroleum Refinery is not automatically good for the Nigerian masses.
The Nigerian masses need an Antitrust law to stop high oligopolistic PMS prices fixed by NNPCL, Dangote Petroleum Refinery, PETROAN and marketers. We need Official Selling Price with a 20% discount of Dated Brent price for the 445,000bpd crude oil reserved for internal demand. We need the 4 NNPCL state-owned refineries to come on stream. We need lower PMS prices based on the Production Cost pricing method. The Nigerian masses should fight for their autonomous interests including low energy prices.
Dr Agbon, now a consultant; was HOD, Department of Petroleum Engineering, University of Ibadan (UI), former ASUU Chairman, UI. He lives in the USA, and can be reached via: Izielenagbon@yahoo.com, or Twitter: @izielenagbon.
