Examining Nigeria’s economic transformation through local refining

Successive administrations in the country have in the past
labored in vain to deregulate the downstream petroleum sector, amid resistance from groups such as the Nigeria Labour Congress and the Trade Union Congress.

However, the current administration, led by President Bola Tinubu, took the bold step by embarking on the total removal of the Premium Motor Spirit subsidy, which has since sparked off concerns among citizens.

The deregulation policy, though aimed towards allowing market forces to determine prices, but it has caused dire economic consequences, including inflation, high transportation costs, and rising cost of goods and services.

The country’s dependence on a single commodity for foreign exchange earnings and its import dependent economy exacerbate these issues.

The fluctuating high exchange
rate of the Naira to the Dollar and other foreign currencies hurts the economy, while Nigeria’s reliance on imports rather than exports hampers economic growth.

Furthermore, the country’s dependence on oil for foreign exchange earnings
makes it vulnerable to market fluctuations.

The situation is likely to persist, putting pressure on the government to provide palliatives to cushion the policy’s effects on citizens.

However, some argue that full deregulation of the downstream sector is necessary to attract foreign investment and sanitise the industry.

To mitigate the challenges, experts believe that Nigeria needs to diversify its economy to reduce dependence on oil and encourage exports to stabilise the exchange rate and boost economic growth.

Ultimately, Nigeria’s economic growth hinges on its ability to navigate these challenges and implement effective policies to promote economic stability and development.

For years, Nigerians believed that local refining of petroleum products would automatically translate to cheaper fuel prices. However, this misconception obscures the far-reaching eco-
nomic benefits that local refining can bring to the country.

Local refining is a critical step towards industrialisation. By processing crude oil domestically, Nigeria can create thou- sands of jobs, both directly and indirectly, across various sectors. From refinery operations to downstream industries, the ripple effects of local refining will stimulate economic growth and reduce unemployment.

It is also believed that local refining will also drive the expansion of downstream infrastructure, including pipelines, storage facilities, and distribution networks. This will improve the efficiency of petroleum product distribution, reducing transportation costs and increasing access to markets.
Pundits also argued that as Nigeria becomes self-sufficient in petroleum production, the pressure on foreign exchange (FOREX) will ease. With reduced importation of refined products, the naira will gain strength, and inflation will decrease. This, in turn, will bring down the cost of goods and services, benefiting consumers and businesses alike.

It is also believed that the ultimate goal of local refining is for Nigeria to become a net exporter of petroleum products. This will earn the country much-needed foreign exchange, bolstering its economic resilience and
global competitiveness.

Deregulation of the petroleum sector will unlock the full potential of local refining. By removing subsidies and price controls, the market will dictate prices, encouraging efficiency and competition among refiners. This will lead to better services, improved quality, and increased investment in the sector.

While speaking on the issue, Public Affairs analyst, Gbenga Aboyade, said: “Local refining is not just about cheaper fuel; it’s about transforming Nigeria’s economy through industrialisation, job creation, infrastructure expansion, forex stabilisation, and becoming a net exporter of petroleum products. As Dangote Refinery and other local refiners begin operations, Nigerians should look beyond the misconception of cheap fuel and focus on the broader economic benefits that local refining will bring. With deregulation, Nigeria can unlock the full potential of its petroleum sector, driving growth, prosperity, and a brighter economic future.”

The Minister of Finance and Coordinating Minister of the Economy, Wale Edun said in a press statement that the committee recognised questions and discussions regarding the change in the market structure, and pledged the commitment to providing clarity on the development, and continuous engagement with stakeholders to ensure a seamless transi- tion process.

He stated: “Following the directive of the Federal Executive Council (FEC) and the implementation of the new Naira-based sales mechanism, the Implementation Committee on the Sales of Crude Oil and Refined Products in Naira, held its review meeting. The meeting focused on assessing the transition towards a deregulated market structure for Premium Motor Spirit (PMS) and addressing the change in the purchasing model for petroleum product marketers. Key Update: New Direct Purchase Model: The most significant change under the new regime is that petroleum product marketers can now purchase PMS directly from local refineries.

 “This direct purchasing mechanism allows marketers to negotiate commercial terms directly with the refineries, fostering a more competitive market environment and enabling a smoother supply chain for petroleum products. Local Production of PMS: With the commencement of local PMS production, the market is better equipped to support these direct transactions. This transition is expected to enhance efficiency in product availability and stabilise market conditions for the benefit of all Nigerians”.

This decision marks a departure from the previous arrangement where the NNPCL served as the sole purchaser and distributor of PMS from the refineries.

In its document, titled: A Quick Guide to the Current Fuel Pricing in Nigeria,’ the government noted that the latest development effectively means that NNPCL is no longer a regulator of fuel prices.

It noted that following the reforms under the Petroleum Industry Act (PIA), NNPCL now operates as a commercial entity and a limited liability company, competing with other players in various aspects of the petroleum and fuel market upstream, midstream, and downstream.

“It purchases fuel based on agreed commercial terms from local or international refiners or suppliers and distributes it like other marketers to their retail stations or others who want to buy from them.

“The price of petrol, whether from NNPCL or any independent marketer, is decided by market forces, as well as the cost of products they receive from local refineries or global suppliers. For instance, the latest batches of products obtained from the private local refinery in Nigeria were sold to NNPCL by the refiners at around N990 per litre.”

The document further added that if properly managed, removing subsidies will free up billions of dollars that can be channelled into critical sectors like healthcare, education, infrastructure, and job creation.

“This will reduce the government’s borrowing needs, stabilise the Naira and create a more competitive market for domestic refining. It will also incentivise local refineries to expand their capacity, reducing the dependence on imported fuel and increasing Nigeria’s energy security.”

“By significantly boosting investment in the downstream sector, Nigeria can generate thousands of jobs, drive industrialisation, and liberate Nigeria from its reliance on imported refined petroleum products. Through local refining, the country can bring home jobs once sent abroad, empowering the economy and nurturing local talent.”