Market News

By Nduka Orjinmo and Paul Burkhardt

(Bloomberg) -- The start of gasoline production at Nigerian billionaire Aliko Dangote’s mega oil refinery earlier this month finally spurred Africa’s top crude producer to move toward ending fuel subsidy that costs the country billions of dollars annually and crippled it economically.

The World Bank has for decades urged the cash-strapped government to cut the subsidy to boost the naira and refill state coffers, but Nigerians have gotten used to having some of the cheapest fuel on the planet and its proposed removal regularly sparks mass protests. Now the tycoon and the government are pushing each other to officially take the blame for the new reality of a higher pump price.

“The removal of subsidy is totally dependent on the government, not on us,” Dangote said in an interview on Bloomberg TV. “We have to make a profit. We built something worth $20 billion so definitely we have to make money.”

The state-owned NNPC Ltd. has said the government doesn’t set gasoline prices, even though the price at its retail stations is used as the national benchmark, and has even teased the billionaire about selling the fuel at a discount. Dangote, meanwhile, has said he’s waiting for a presidential committee that negotiated a series of deals with him to fix the price. 

“Subsidy is a very sensitive issue,” Dangote said. “Our price of gasoline is about 60% of the price of neighboring countries, and we have very porous borders. So it is not sustainable — the amount of subsidies that were paid, government cannot afford those subsidies.”

President Bola Tinubu previously removed the subsidy when he took office in May 2023, but quickly reinstated it as inflation spiked and exacerbated a cost of living crisis that sparked protests. Nigerians have largely taken the current spike in prices — which jumped 45% earlier this month — in their stride, but global crude prices have declined in recent months and if they rise significantly, there could be a popular backlash.

Nigeria’s state-owned oil refineries have not functioned for decades, so the largest crude producer on the continent has had to ship its crude abroad to be refined into gasoline and other fuels before importing it at higher prices, which the government then heavily subsidizes. That means it never really benefits from oil-price increases despite being a major African producer.

Both Dangote and the government pitched the 650,000-barrel-a-day refinery — first announced more than a decade ago — as a way to source more affordable fuel at home. 

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Left out was how the politically-connected billionaire — who dominates the cement industry in the country of 220 million people — would turn a profit if the subsidy remained, and how he could sell fuel cheaply given Nigeria’s crude is among the world’s most expensive to produce.

“Nigeria needs cheaper petrol, and it needs it yesterday,” said Clementine Wallop, director for sub-Saharan Africa at political-risk consultant Horizon Engage. “The ability to wind down the fuel subsidy program comprehensively will free up the Tinubu administration to spend on the many other areas crying out for funds.”

That long-term view is a hard sell in one of the poorest countries in the world, where few trust the notoriously corrupt government.

An attempt to remove the subsidy in 2012 led to weeks of protests, and was partly responsible for the then-president’s loss in the 2015 election. Last month, at least 21 people died during protests against the high cost of living, including gasoline, and more than 100 people were arrested.

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Given Dangote wants to sell at the international market price, the government has two options, either reintroduce the subsidy or “increase costs for the consumer and brace for protests,” said Mucahid Durmaz, senior analyst at risk intelligence company Verisk Maplecroft.

“Foreign investors are watching closely,” Durmaz added. “The success of the collaboration between the Tinubu government and Africa’s richest man will certainly influence investor confidence in Nigeria.”

Less Oil

Dangote had high hopes for the facility. The project is the biggest single-train refinery in the world, configured to produce a larger proportion of the fuel from every barrel of oil than most modern facilities.

Since he announced the project in 2013, the price skyrocketed to $20 billion and its opening was delayed by 8 years. Meanwhile, Nigeria’s oil industry — long beset by graft, environmental devastation and inefficiency — shrunk as international oil majors like Shell and ExxonMobil divested.

“It was a monster,” Dangote said of the refinery. “If I knew how difficult it was to put in this kind of edifice, this kind of refinery, I wouldn’t have started it at all. But by the time we realized that it was a very difficult thing, we had already started.”

Nigeria now pumps about 700,000 barrels a day less crude than a decade ago, which has forced Dangote to source oil from the US and abroad. The NNPC saw its original 20% stake in the Dangote refinery shrink to 7% because it wasn’t able to supply enough crude to satisfy terms of the deal.

The political winds also shifted, and Dangote’s cozy relationship with previous administrations turned frosty under Tinubu, and included an unprecedented January raid by the anti-graft commission on the company’s offices. 

Setting Prices

Both parties have already negotiated deals that guarantee crude supply to the refinery, naira-settled transactions for October and that NNPC will be the sole domestic buyer of fuel.

When it began buying gasoline on Sept. 15 at the billionaire’s plant, the often-opaque NNPC announced that the refinery sold it at 898 naira per liter, that the market was now fully deregulated and that it forecast an 11% rise in price.

Dangote shot back, describing the NNPC’s statement as “misleading and mischievous, deliberately aimed at undermining the milestone achievement.” This drew another response from the state company, which said “it will be grateful for any discount.” 

The billionaire said the back-and-forth “wasn’t really a disagreement per se” and insisted that the two would soon reach an agreement.

“We will definitely strike a deal,” he said. “I think between now and the next couple of days, they will come out with a very, very clean agreement.”