Rather than argue over whether Nigeria has a transparent, global standard pricing mechanism for Premium Motor Spirit (PMS or petrol), maybe we should take a different view. Nigeria’s pricing mechanism is in transition and its current state may improve alongside living standards.
While that sounds very uncertain and many will find it harder to navigate, consider this, the U.S. Energy Information Administration (EIA) predicted the price of crude oil will expectedly decline in 2025, with Brent Crude to average around $74 per barrel.
This projected decrease in global prices by EIA, will directly impact domestic petrol costs, meaning that consumers will likely see petrol price drop at the pump. Underscoring the generally known fact that the primary driver of domestic petrol prices is the global crude oil price, which is largely influenced by factors like supply and demand dynamics, geopolitical tensions, and OPEC production quotas.
We have seen that play out recently in Nigeria, when Dangote Refinery dropped its ex-depot price from N950 to N890, citing the ”positive outlook within the global energy and gas markets, as well as recent reduction in international crude oil prices.” Beyond these trends, fuel is priced on an import parity basis in Nigeria, which is consistent with the way it is priced in other African countries.
The play of the naira exchange rate also has an impact in pricing. Fluctuations seen in the exchange rates of the Naira in recent times have had a significant impact on the import and export of crude oil and refined products.
Depending on the direction it swings, procurement cost is impacted either negatively or positively which in turn reflects on the price the consumer pays at the pump.
Recall that the Petroleum Product Pricing Regulatory Agency (PPPRA) determined the process of pricing the product before the passage of the Petroleum Industry Act (PIA). The PPPRA utilized a pricing template to determine the open market price or the expected retail (pump) price for the product.
The template reflects the Free on Board (FOB) price in the originating market priced in $/mt. It is common knowledge that Nigeria references European petrol prices. Additionally, the template also reflects freight, lightering expense, Nigeria Port Authority (NPA) charge, Nigerian Maritime Administration and Safety Agency charge as well as retail margins, financing cost, jetty throughput charge and storage charge. The exchange rate would convert the USD components of this pricing framework into naira, while conversion factor for petrol would be used to convert the petrol pricing from tonnes to litres.
The import parity principle is the basis for petrol pricing as explained by Dr. Kaase Gbakon, an economists and data analytics expert, ”the FOB petrol price is Platts 10ppm Amsterdam-Rotterdam barge.”
Kasse suggested that ”the Premium would very likely include a transport element to mirror clean tanker freight between Europe and West Africa, build up from the loading gantry at the refinery which includes Nigeria Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) charge, inspection charge, distribution costs, and a margin.”
He noted that pump prices differ across the country driven by the distribution cost, with locations farthest from Lagos (where the refinery, for instance, Dangote Refinery) is located, subject to a higher price.
In September 2024, NNPL Limited published a new price template which it explained was used to settle the petrol offtake from the Dangote Refinery, many analysts argued that the template did not provide as detailed a breakdown of its components as the PPPRA template did. Amidst that, is the disparity in the pricing template adopted by the Dangote Refinery versus that used by the NNPC Limited (NNPCL).
However, analysts were able to conclude from the templates that petrol price in the country is based on the import parity pricing principle, given that Dangote Refinery neither clarified the offtake price nor did it dispute the pricing principle published by the NNPCL.
Quality Vs Pricing:
Meanwhile, technology plays a crucial role in determining petrol quality, which directly impacts pricing. Producing high-quality petrol requires a more complex refining process to remove impurities and achieve the desired standards. Naturally, this increases production costs. Meeting global environmental regulations further adds to the expense, as stricter standards demand more advanced refining techniques.
The conversation on petrol quality resurfaced in 2024, fueled by crude oil shortages affecting local refineries and allegations that some marketers were luring consumers with lower prices—a debate initially sparked by Dangote Refinery. This coincided with the discovery in February 2024 that NNPCL had imported a significant batch of adulterated petrol into the country . Around the same time, the Petroleum Products Retail Outlets Owners Association of Nigeria (PETROAN) claimed its members could sell petrol at prices lower than those offered by Dangote Refinery to oil marketers.
When the $20 billion refinery Dangote refinery began production of fuel, its biggest constraint was accessing crude oil for its plant. Vexed by what it saw as sabotage, the controversial narrative suggested that oil majors were blocking the refinery’s access to locally produced crude and the Nigeria Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) was allowing petrol traders to import high-sulphur petrol thereby undermining its refinery. When PETROAN raised its own argument on pricing, Dangote responded by accusing them of importing substandard products which invariably will come cheaper.
The rift prompted an investigation by Nigerian law makers. A committee was set up in July 2024, to investigate alleged importation of dirtier petrol and the operation standards of the regulatory agencies.
The NMDPRA responded, saying that Dangote Refinery was barely 45% completed and unable to meet the country’s needs. Adding that petrol processed by the refinery is between 650 to 1200 parts per million of Sulphur, thus inferior to imported products.
Intriguingly, when members of the National Assembly visited the Dangote Refinery to investigate its claim on quality, tests result showed that Dangote Refinery’s diesel had a Sulphur content of 87.6 ppm, while two other samples taken showed Sulphur levels exceeding 1800 ppm and 2,000ppm, respectively. For context, the benchmark for Sulphur content for petrol imported into Nigeria is capped at 50 ppm. Whether the alleged ”inferior” petrol imported into the country is responsible for the frequent tweaking of its (Dangote) ex-depot price is yet to be determined, as the NMDPRA is yet to announce commencement of enforcing standards which it promised in 2024.
It is tough to find answers on what the appropriate price of fuel at the pump should be, given these chaotic, unpredictable and controversial circumstances. In longer term, a need for more investment in due diligence and supervision as well as enforcement will be needed to set the appropriate, recognizable process to determine who is complying on quality, pricing template, etc, processes investors could easily buy into and make bold investment decisions. Indeed, the process badly needs to be retooled for the economy to thrive and for the consumer to be at peace, but it could take a while.
~ Bamgbala, an energy enthusiast and social commentator, writes from Lagos.