Oil & Gas

Dangote Refinery and Local Oil Marketers Face Off Over Rising Fuel Prices

Published by
Ibrahim Fatai

The ongoing pricing conflict between Dangote Refinery and the Independent Petroleum Marketers Association of Nigeria (IPMAN) highlights a fundamental dispute over production costs and their effect on fuel pricing. With Dangote Refinery setting its wholesale price at around N990 per litre, local marketers are struggling with unexpectedly high costs.

The termination of NNPC’s exclusive purchase agreement with Dangote in October has allowed for more direct purchasing and increased prices. IPMAN argues that these high costs hinder their competitiveness, as imported PMS is often cheaper. Petroleum retailers operate on narrow margins, further constrained by their reliance on credit instead of immediate payment, which is common in the industry.

Ademola H. Adigun, CEO of AHA Consultancies, emphasizes that “refined product prices are not determined solely by production costs; they also involve various associated costs and terms, similar to other businesses and sectors. The margins on petroleum products are relatively low, which leads to squeezed profits for retailers.

Petroleum product retailers rely heavily on credit rather than operating as cash-and-carry businesses.” As fuel prices in Lagos and Abuja reached N1,025 and N1,060 per liter, respectively, in late October 2024, retailers are under increasing pressure to balance profitability with high operational costs.

Interest Rates and Operational Costs

In addition to these pressures, local oil marketers find it difficult obtain loan to purchase fuel because the fuel margin is low and interest rates are high. For instance, Nigeria Export-Import Bank (NEXIM) offers various lines of credit with rates such as Exim Taiwan at SOFR +1.3% per annum for a 6-month term and Afreximbank’s 5-year facility at a 6.0% margin above the 3-month SOFR. Local interest rates, including interbank and lending rates, hover around 20-27%, illustrating the challenging financial landscape for importers. This scenario compels them to seek lower-cost fuel from international markets to effectively compete with Dangote’s domestic supply.

Distributors’ Profit Margins Reflect Industry Challenges

To understand the impact on distributors, examining the difference between retail and wholesale prices, minus operating costs, sheds light on their margins. Based on the N990 per liter wholesale price from Dangote:

  1. Lagos Distributors’ Margin: With retail prices at N1,025 and estimated operating costs around N50 per liter, distributors in Lagos have a slim margin of about N15 per liter.
  2. Abuja Distributors’ Margin: In Abuja, where retail prices are N1,060 and operating costs are around N60 per liter, distributors’ margins are even tighter, at approximately N10 per liter.

These narrow profit margins reflect the cost pressures faced by distributors, particularly considering high operational costs and limited flexibility in retail pricing. Any fluctuations in wholesale pricing, operational costs, or retail price caps will have a direct impact on distributor profitability and the overall stability of the industry.

The ongoing dispute underscores the need for greater transparency in Nigeria’s fuel pricing and production costs. A sustainable solution may require stakeholders, including government regulators, to assess and possibly restructure how domestic fuel prices are set in light of production costs. IPMAN advocates for clearer commercial terms and transparency from Dangote Refinery to help align domestic production costs with market expectations. Without cooperation and compromise, the situation risks perpetuating a cycle of high fuel prices, credit dependence, and restricted consumer access to affordable fuel.

Ibrahim Fatai

Ibrahim Olamilekan Fatai is a young journalist with a Bachelor's degree in Mass Communication from Kwara State University and a National Diploma from Yaba College of Technology. He has experience in writing, social media management, and content creation, and is skilled at producing impactful stories and reports on business and economic trends. Ibrahim is also dedicated to promoting sustainable development and advocating for human rights, aligning his journalism with causes that drive social change.

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