• DISPATCHES
• NIGERIA

Row over adulterated fuel deepens

Opaque deals by middlemen still dominate crude oil and products trading despite last year’s reforms

After a week of worsening shortages caused by the discovery and withdrawal of adulterated fuel from the market, the state oil company, the Nigerian National Petroleum Company (NNPC), announced it was urgently seeking some 500,000 tonnes of petrol to fill the gap. Then, on 11 February, President Muhammadu Buhari announced the government would seek compensation from the fuel-trading companies involved.

At the heart of the problem is the fact that none of the country's four oil refineries, which have a theoretical output of 450,000 barrels a day, work efficiently or, in some cases, at all. As a result, the country buys the bulk of its 350,000 b/d petroleum product requirement from traders.

After decades of shortages and over-priced products, many Nigerians has been hoping that this year's opening of the 600,000 b/d refinery by cement magnate Aliko Dangote's company would end the recurrent crises in Africa's biggest oil-producing economy. They may be disappointed.

Dangote's business model seems to rely on a substantial percentage of output being exported to the region and a set of complex and, so far undisclosed, crude-buying contracts with the NNPC.

Several global commodity companies have been negotiating contracts to trade the refined products, fertiliser and petrochemicals to be produced at Dangote's operation in Lekki, just outside the commercial capital of Lagos, we hear.

For Mele Kyari, the NNPC's managing director, the fuel adulteration crisis is a double-blow, coming less than a year after his team had persuaded the National Assembly to pass the long-delayed Petroleum Industry Bill to boost accountability and efficiency in the sector (AC Vol 62 No 17, Energy law unsettles rentiers). It shows how the official regulatory system is failing but also how middlemen thrive in an opaque, corrupt and costly procurement environment.

Under the new rules the NNPC is to become a limited liability company and subject to the auditing and other disclosure obligations of commercial entities. It was also meant to end the crude-oil-for-products swaps routed through politically-connected middlemen which won them super-profits while risking shortages and sometimes low-quality products.

When world oil prices crashed at the start of the pandemic in 2020, Kyari had hoped the country's expensive system of universal fuel subsidies could be quietly dropped as the new laws governing the sector went through parliament.

But with oil prices spiralling past US$90 a barrel, plans by the treasury to drop the fuel subsidy system and replace it with targeting income support for the poorest households have been quietly dropped.

With elections due in March next year, the government's political calculation was clear. Any attempt to end fuel subsidies could have triggered strikes by the oil workers' trade unions and, probably, mass protests, as they did a decade ago. So far, officials haven't explained how the government intends to finance what could amount to over $4 billion in subsidies this year.

In the wake of this crisis, Kyari and his team will be under pressure to police the products-trading contracts more assiduously. This is just as some of the politically connected traders had been looking forward to a good business season as election contenders raise funds for their campaigns.

Industry insiders say that middlemen have been trying to increase their leverage in the market before they lose business to the Dangote refinery and the reformed regulatory system that Kyari wants to enforce. All this is likely to tighten fuel supplies for the next few months.

Copyright © Africa Confidential 2024
https://www.africa-confidential.com