The Nigerian billionaire Aliko Dangote and Dangote Refinery, Africa’s largest refinery has finally joined the call for ending Nigeria’s wasteful petrol subsidy. For more than three decades, the fuel subsidy has progressively weakened the capacity of Africa’s largest producer of crude oil to refine petroleum, caused perennial budget deficits and depleted foreign exchange reserves, leading to frequent bouts of instability of the national currency, the naira.
The business tycoon made the call for an end to the petrol subsidy during a Bloomberg Television interview in New York on Monday, stressing that ending the fuel subsidy would lead to the stability of the naira.
Dangote said, “Subsidy is a very sensitive issue. Once you are subsidizing something then people will bloat the price and then government will end up paying what they are not supposed to be paying. It is the right time to get rid of subsidies.
“Petroleum products consume about 40% of our foreign exchange. Our refinery can actually stabilize the naira.”
The Fuel Subsidy and Dangote Refinery
Global oil and gas companies and experienced petroleum refiners in emerging markets have steered clear of investing in a refinery in Nigeria because of the big risk that Nigeria’s decades long fuel subsidy to which many social groups were tenaciously attached represent. But Aliko Dangote who had become a billionaire by investing and enjoying import protection and tax breaks in the cement sector decided in 2013 to invest in building a refinery in Nigeria.
By the time the refinery started producing petroleum in early September 2024, conditions in Nigeria’s oil and gas sector and the nation’s economy had changed drastically. Oil production had decreased from 2.26 million barrels per day to around 1.4 million barrels per day. The economy had also been pulverised 8 years of investment-repelling policies under former president Muhammady Buhari and an acute foreign exchange scarcity.
The naira has lost around 70% of its value against the dollar since rules that pegged the currency at an artificially high level were relaxed last year.
Nigeria had sold a significant portion of its diminished crude oil production in advance to alleviate foreign currency scarcity which meant that the Nigeria National Oil Company Limited (NNPCL) had little crude oil to supply to the 650,000 barrels per day Dangote Refinery. Nigeria’s foreign currency problems also means that Dangote Refinery would have problems securing dollars to pay for imports of crude oil.
Attacking Everything But the Fundamental Problem: Dangote Refinery, the Fuel Subsidy and the NNPCL
Dangote Refinery launched a series of attacks on different targets to over its problems to source feedstock i.e. crude oil – the oil sector cabal that is bigger than the hard drugs cabal, international oil companies, Nigerian oil industry regulators etc. many commentators (in newspapers and on television) also joined, harshly criticising these “saboteurs” for plotting to destroy a $20 billion investment.
This was avoiding the biggest problem of the Dangote Refinery and the reason why experienced oil companies and refiners avoided building a refinery in Nigeria. This is the impossibility of selling refined petroleum at a profit in a market where the NNPCL / the government the government has fixed a price below the cost of production i.e. the fuel subsidy unless the NNPCL/the government is the sole “off-taker” or buyer that pays the subsidy and supplies the petrol to “marketers” at a fixed price.
This led to the bizarre situation where Dangote Refinery, a private enterprise built by one of Africa’s biggest entrepreneurs, issued a statement saying that the NNPCL was its “sole off-taker” i.e. buyer and would fix the price of its petrol. The NNPCL issued a counter statement denying it was Dangote Refinery’s sole off-taker.
Why Is Dangote Refinery Now Calling for an End to the Subsidy?
It seems the “war of press statements” between Dangote Refinery and the NNPCL was caused by differences over the price which the NNPLC would pay for the refinery’s petrol.
Even as local oil marketers drove into Dangote Refinery to lift the first supply of its petrol to the market with NNPCL acting as the primary off taker, DRL issued a press statement denouncing the price that the NNPLC announced that it was paying for Dangote Refinery petrol as “malicious”.
It seems that Nigeria’s biggest tycoon, Aliko Dangote has had a change of mind, seeing a fully deregulated market in which petrol is sold at market prices that fully cover the cost of production is better for his largest enterprise than relying on the government to recover a substantial part of his cost i.e the subsidy element.
This is not as bold a decision as it seems for Mr Dangote; he may face some public criticism but he is also a very credible messenger for the message that Nigerians would ultimately benefit by getting rid of decades of government control and the waste and corruption that has accompanied the fuel subsidy over five decades. A host of business people, commentators and journalists would be willing to also change their minds and support Dangote’s argument.
The government of President Bola Ahmed Tinubu also need to support Dangote by ending the fiction that it is not paying a subsidy for petrol. This would be a historic collaboration to end what has been the number one emblem for Nigeria’s reputation for waste, gross inefficiency and mind blowing levels of corruption.
