Dangote Refinery, with the grace of God and the commitment of dedicated people, has commenced PMS production today, and the product is about to be rolled out into the local market.
However, the offtake arrangement between Dangote Refinery and NNPCL, where NNPCL serves as the exclusive offtaker, raises questions about its impact on PMS pricing.
PMS is a product of crude oil, which is a globally regulated commodity due to its significance in the global economy. Nigeria, despite being a crude oil producer, must adhere to international market regulations. Every barrel of crude oil produced in Nigeria must comply with these global guidelines, even when transactions are in local currency.
Even though Nigeria’s refineries, including government-owned ones, might prefer transactions in Naira to alleviate foreign exchange pressures, the crude oil price is still benchmarked in dollars. This affects the final PMS pricing. For instance, if NNPCL sells crude to Dangote Refinery at $87 per barrel with an exchange rate of N1,600 to $1, the cost becomes N139,200 per barrel. This cost is factored into the PMS production cost, leading to higher PMS prices when the dollar rate is high.
The landing cost of PMS in Nigerian ports is currently about N1,300 per litre, while the previous pump price was N700. This price difference required NNPCL to pay a subsidy of approximately N600 per litre.
The Dangote Refinery will face similar challenges, as the dollar exchange rate will influence its production costs. If the government continues to regulate PMS prices and pay subsidies, NNPCL might need to subsidize crude for Dangote or buy PMS at open market rates and subsidize the difference for Nigerians.
In conclusion, the arrangement between Dangote Refinery and NNPCL and the prevailing dollar rate will significantly impact PMS pricing in Nigeria. The lower the dollar rate, the lower the PMS price, and vice versa.
