Umari Umar @ommarii - Twitter Profile

Dangote, NNPC and The New PMS Price at N890/L I wrote this about 2 weeks ago and is still relevant. Read Dangote Refinery has, by the grace of God and commitment of dedicated people, commenced PMS production today and is about to be rolled out into the local market. But the offtake arrangement between Dangote and NNPCL where the NNPCL will serve as the exclusive offtaker from the refinery leaves an argument. It’s on this note that I decided to write this piece for knowledge sharing and clarification. I will try as much as possible to make it snappy and basic. CRUDE OIL 1. PMS is a product of Crude Oil which is a global commodity regulated by international market because of its impact on the global economy. Even though Nigeria is Crude Oil Producer, it depends on the international market in terms of pricing and supply. Every barrel of crude oil produced and recorded officially must comply with the regulations guiding the global crude production to protect the market and ensure energy security across the globe. The guidelines have rooms of peculiar situations like transaction in local currency but at prevailing global market rates on transaction date. 2. Nigeria too is under those guiding principles and must comply with the global guidelines. Because the crude oil is in our backyard doesn’t mean we can wake up and sell it out in our terms. Even government owned refineries must either buy it in dollar (the official currency for crude transactions) or in local currency at exchange rate of the prevailing dollar rate. For countries with stable exchange rate, refineries can buy in dollar and sell products in their local currency. But for Nigeria that is battling with foreign exchange liquidity, it’s best if refineries buy in Naira and sell products in Naira. This will reduce pressure on Naira by reducing the demand for dollar. It’s unsustainable sha. PMS and PRICING 3. PMS is a major product of Crude obtained after refining. The cost of pms is made up of so many components. But the major component, like every other product, is the cost of raw materials (crude). The cost of crude is a major factor for the pms produced. So, if the crude is supplied in dollar, the price of pms and other products will be pegged in dollar or corresponding rate in local currency. And if crude is supplied in local currency at rate of prevailing price in dollar like in the case of Dangote and FG, the price of pms too will be computed in Naira at the corresponding dollar rate. 4. Example: NNPCL sells crude to Dangote at $87/barrel at dollar rate of N1600:$, NNPCL will bill Dangote N139k/barrel instead of applying pressure on Naira by buying dollar to make the transaction. This amount has now become part of the production cost for pms. If the final production cost stand at $0.7/liter of pms, that is N1,120/liter. To add more context to this, same $87/barrel last year would have cost Dangote N39k/barrel at N450:$. The production cost of pms as at last year for Dangote would have been N315/liter as against the N1,120/liter due to dollar rate. SUBSIDY, DOLLAR and NNPCL 5. Landing cost of PMS to our ports is about N1,300/liter and at previous pump price of N700, NNPCL is definitely paying the differentials of about N600 for every liter. 6. Dangote Refinery will not be exception. They will either buy crude in dollar or in Naira rate which means dollar rate will affect their production cost even if they buy it in Naira because the initial price benchmark was in dollar. And with N1,600:$, finished product in Naira will definitely be high. 7. For govt to regulate and continue paying subsidy, NNPCL will now either subsidize crude for Dangote or buy PMS from Dangote at open market rate and then subsidize for Nigerians that’s why they are now the exclusive offtaker. The increase in today’s price is govt reducing the amount of differentials (subsidy) they have to pay per liter. 8. The lower the dollar ($) rate, the lower the PMS price and vice versa.