Why NNPC hiked petrol price and quit as middleman to Dangote

The recent petrol pump price hike by the Nigerian National Petroleum Company (NNPC) Limited marks another step toward the full deregulation of Nigeria’s downstream oil sector. However, NNPC’s role as the sole distributor of petrol from the newly operational Dangote Refinery has become an unsustainable burden for the national oil firm, according to industry insiders. The refinery officially began petrol production on September 3, 2024, but supply challenges have raised concerns about the efficiency of Nigeria’s long-awaited domestic refining solution.

Despite initial excitement, petrol lifting from the Dangote Refinery did not commence until September 15. The refinery’s first delivery of premium motor spirit (PMS) was met with high expectations, as many Nigerians hoped for a significant reduction in the country’s reliance on imported fuel. However, insiders reveal that the refinery supplied only 102,973,025 litres of petrol by the end of September, far below the promised 400 million litres. This shortfall created supply gaps, requiring the NNPC to inject over N13 billion into the market to keep fuel prices stable for consumers.

Logistical challenges and foreign exchange (FX) volatility further complicated NNPC’s sole off-taker role. The company had to contend with fluctuating FX rates that dramatically affected the cost of petrol. For instance, the price per metric tonne of PMS varied between $746 and $759.40 within the two-week period, while the naira value oscillated between N882.18 and N960.85 per litre. Despite a price reduction to $714.15 per metric tonne towards the end of September, the weakening of the naira led to a final pump price of N937.30 per litre.

In an effort to cushion the impact on consumers, NNPC Trading sold petrol to its retail arm and other marketers at a fixed price of N749.99 throughout the month. This strategy resulted in the NNPC subsidizing the cost by an average of N133 per litre, leading to a total financial outlay of over N12.5 billion. Sources within the company describe this situation as an “unbearable burden,” given NNPC’s existing $6 billion debt to international fuel suppliers and other financial constraints.

As reports circulate about NNPC’s decision to step back from its role as the sole off-taker of petrol from the Dangote Refinery, industry observers expect changes in the market. Allowing independent marketers to buy directly from the refinery at prevailing market prices could result in an initial spike in fuel prices at the pumps. However, experts suggest that increased competition and improved supply chain flexibility may lead to price stabilization in the coming months.

This development comes amid growing calls from industry stakeholders, including Dangote Industries Limited Chairman Aliko Dangote, for the federal government to end petrol subsidies, which are deemed unsustainable. The house of representatives has also urged the government to allow other marketers to purchase petrol directly from the refinery, a move that may reshape Nigeria’s downstream oil sector and usher in a new era of market-driven fuel pricing.