Diesel price spike amid Russia-Ukraine war, exploring Nigeria’s domestic refining capacity

EnergyDay Editorial

The global diesel supply outlook is becoming very grim with the Russia/Ukraine conflict constraining the highest percentage of market share from the international market. This will naturally spike prices, which will in turn have an excruciating impact on the Nigeria’s economy because it is heavily dependent on petroleum products imported from Europe.

Nigeria is the 17th largest importer of refined petroleum products in the world. The country is the only Organization of Petroleum Exporting Countries (OPEC) member importing 90 to 95 per cent of refined petroleum products to meet its domestic consumption.

It is therefore an established fact that the uptick in diesel price in Nigeria with attendant effect on the manufacturing sector, public transportation will further put pressure on the country’s  foreign exchange health (depletion).

Meanwhile, EnergyDay has discovered that Nigeria has the potential to actually meet all of its diesel requirements through the full utilisation of existing refinery capacities, both formal and informal.

Having given very careful consideration to all the available options and the need for conscious activation of the domestic refining capacities as viable alternative to addressing the lingering problem of rising diesel prices at short, medium and long terms, EnergyDay wants the Presidency to play a decisive role in mitigating the negative impact of rising fuel costs on the citizenry, apart from the concerns expressed by manufacturing companies.

This should be done quickly through Presidential Orders, empowering a task force that will fast track the completion processes of those modular refineries that have passed mechanical construction stages. These are about seven(7) of them.

The task force should also be empowered to put into a common basket, all the crude oil allocations that are given to all green refineries and convert them to the importation of diesel and aviation fuel in the short run but not exceeding one calendar year.

Investigations conducted by EnergyDay showed that 70,000 barrels of crude oil a day can be recovered from the NNPC alone, being the leftover volume arising from the 460,000 barrels the corporation receives daily for product swap arrangements.

This figure will be combined with those from other modular refineries that are yet to commence operation but are said to receive regular crude oil allocations.
 
As an immediate intervention, this step will enable the country to exchange a minimum of 100,000 barrels of crude oil for diesel and aviation fuel to douse the escalating price increase in the domestic market.
 
According to the figure obtained by EnergyDay from the Nigerian Midstream and Downstream Regulatory Authority (NMDPRA), which showed that the average daily sufficiency for the country’s consumption of diesel is about 88,057.35 barrels per day, or 14 million litres, as at June 22,2022.
 
Based on additional data, which was first published in 2021 by the defunct Department of Petroleum Resources (DPR), which is now NMDPRA, EnergyDay’s analysis of the data under reference, revealed that Nigeria’s refinery infrastructure has the capacity to produce into the domestic market, a total volume of 228,900 bpd of diesel.
 
In the long run, this volume will conveniently absorb the current in-country market demand profile while mitigating challenges associated with a global price spike.

There are other licensed private operators offering to contribute relatively large outputs to the diesel supply value chain in Nigeria, including the Dangote Oil Refinery, which has the capacity to supply Nigeria with up to 136,500 bpd of diesel (59.63% of total diesel production potential of all 23 private operators). About sixteen of them have a capacity of 12,000 bpd.
 
A breakdown of the expected diesel production potentials of 5 of these refineries revealed that they are altogether capable of supplying Nigeria’s oil marketers with about 144,060 barrels daily.
 
The 650,000 BPD Dangote Oil Refinery in Lagos would produce 136,500 bpd, while the 10,000 BPD Walter Smith Refining & Petrochemical Company Limited in Ibigwe, Imo would produce 1,050 bpd. At 10,000bpd OPAC Refineries in Umuseti, Kwale, Delta State would produce 2,100 bpd while neighbouring 11,000bpd Niger Delta Petroleum Resources in Ogbele, Rivers State would produce 2,310 bpd.

 As rightly pointed out by an industry expert, “Diesel is the lifeblood of the global economy, essential to vital sectors such as agriculture, construction, and transportation- its price impacts almost all supply chains and goods.”

In the face of this very crisis, the Government needs to assist consumers by dropping taxes on diesel, but this will likely only increase demand, which may support the overall economy but will worsen the existing tight supply situation.
 
If supply does not improve, governments will be forced to enact emergency plans to limit sales to consumers to ensure essential sectors are kept going.
 
Although the Automotive Gas Oil market (Diesel) is completely deregulated to the extent that it is not subsidised, the demand and supply interplay remain under the firm control of the Presidency, the NNPC, the Dangote Refinery and the Underground Producers.

 
Put differently, the influence of  these institutions could curtail or improve , to a large extent , the country’s fuel market, which includes diesel. This is presently playing out, and a sustainable solution may continue to elude the country, even as the price of diesel continues to rise beyond control.
 
Meanwhile, the propaganda attributing all of  Nigeria’s domestic fuel woes to the Russia-Ukraine conflict is not only false, misleading but unfortunate, especially at a time when  other oil producing countries are reaping windfalls, Nigeria seems to be reaping self-deception in grand style.
 
The country loses in excess of $50 million every day because of its inability to export 500,000bpd of crude oil to the global market . Most of the crude oil cargoes that are not officially exported are said to be stolen by Nigerian elites, according to the Managing Director of the NNPC, Mele Kyari.

As a consequence, said an expert, the loss of crude supply has hindered the shrinking European refining sector’s ability to run at high utilization rates and has accelerated a downward trend in Europe, which has lost 2 million bpd of crude refining since its peak capacity of 17.5 million bpd in 2005.

In response to the immediate challenge facing the country, On Tuesday, June 28, 2022, the Independent Petroleum Marketers Association of Nigeria (IPMAN), the Depot and Petroleum Marketers Association of Nigeria, and the Major Oil Marketers Association of Nigeria, proposed  that oil marketers be permitted to import at the official CBN rate.

In principle , this sounds reasonable, said Engr. Farouk Ahmed, Chief Executive Officer of NMDPRA, adding that ‘importation of  petroleum products should be made accessible to the genuine importers at the CBN official rate, but,  “the challenge with this, however, is that petroleum products importers are unable to access the required amount of forex at the official rate and therefore rely on the parallel market to complement their forex US dollar requirements.”

Ahmed explained that, “The upswing in international prices, combined with the prevailing naira/US dollar exchange rate, contributes about 80 percent of the product price at the pump.”

While the official naira/US dollar exchange rate has remained relatively stable at about N415/USD since the beginning of the (Russia-Ukraine) war to date, the parallel rate, on the other hand, has increased considerably.

After gathering a variety of perspectives, EnergyDay remains convinced that Nigeria should prioritize local capacity expansion through the completion of ongoing modular refineries and the artisenal refineries on the drawing board, including the ever-controversial state-owned refineries.

 
Unfortunately, societal hypocrisy has criminalized indigenous petroleum refining initiatives and has labeled them as “illegal refineries” while condoning those who steal crude oil cargoes wholesale. 
 
EnergyDay holds the view that the Presidency should take the lead to absorb , reform, and empower this sector of the petroleum value chain. The country cannot continue to afford the consequences of the growth of those who operate their businesses in the dark or underground.