Dangote Refinery and the Monopoly Question
By Abdulhaleem Ishaq Ringim
The petro-chemical market in Nigeria has over the past few days been subjected to scrutiny regarding the market structure it will assume with the advent of the Dangote Refinery. The CEO of the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA), Mr. Farouk Ahmed suggested that Dangote’s operations might create a monopoly if the company demands government restrictions on imports. He also highlighted that imported AGO contains lower sulfur content than Dangote’s products.
Independent lab tests have dispelled quality concerns over sulfur content. However, the monopoly questions continue to linger and it poses detrimental consequences to Dangote’s image as a global corporate leader. It is particularly troubling considering the official semblance of the pronouncement. But will Dangote Refinery really constitute a monopoly in the petro-chemical market?
A monopoly represents a market structure that discourages competition and limits consumer choices due to the dominance of a single producer of a particular product in an industry. The monopolist often has the advantage of determining the quantity to produce and the price to set in the market due to a complete lack of competition and earn supernormal profits as a result. This is generally undesirable in market economies.
Now, does Dangote truly seek to entrench a monopoly by seeking protection against importers? The clear answer is NO! Market structure is about production and importers of fuel are certainly not considered producers. Hence, Restricting imports does not equate to fostering a monopoly. In fact, it is preferable from an angle of energy security to rely on an indigenous monopoly rather than to be import reliant. This settles the crux of the matter!
Meanwhile, it is relevant to measure the allegations against all other possible scenarios. When isolating the refinery from importer competition and considering the broader refining industry, it becomes clear that the market structure is still not a monopoly. Several other refineries exist, including major NNPC-owned refineries in Kaduna, Warri, Port Harcourt and the private BUA Group refinery being developed. The combined capacity of these other refineries is over 670,000 barrels per day.
Equally, it is certainly not Dangote’s fault that the government has over the years failed to rehabilitate the state-owned refineries even after expending over N11 trillion in turnaround maintenance cost within 10 years leaving the refining industry devoid of local content. And in a daunting business environment like that of Nigeria especially the refining sector that has proven hard even for the government to survive in and given the crucial role such a sector plays in macroeconomic stabilization, Dangote’s efforts should not only be commended but supported by the government.
To envision, implement and complete a $20 billion refinery project with a refining capacity of 650,000bpd speaks to the valiant nature of Dangote’s entrepreneurial spirit. The high-cost and high-risk nature of the enterprise represents the tremendous barrier to entry into the industry. Dangote took the risk, mobilized the finance, assumed the gargantuan fixed cost and delivered the project becoming a pioneer (private) in the industry.
At best, if he must be called a monopolist, then the form he would represent is that of a natural monopoly considering the fact that the barriers of entry into the market are not inherently of Dangote’s design. He faced and defeated the same barriers himself.
With the return of industrial policy in several developed economies where states are seen to be supporting sectors of strategic importance for national security and economy, it is only fair that the government considers supporting the Dangote Refinery which represents Nigeria’s chance at defying import dependence and facilitating indigenous control over the refining industry. Hence, Dangote’s call for import restrictions is justified, especially as his refinery can meet domestic demand.
This is not unprecedented. Both historic and contemporary industrial policies in developed countries demonstrate the need for government support for the refinery venture. The potential benefits are significant: it could ease the strain on our foreign exchange reserves caused by import demand and improve the availability and affordability of refined products.
One of the first policy pronouncements President Tinubu made was the abolishment of the fuel subsidy regime. The fundamental basis of such a policy is the expectation of improved local refining through the operations of the new Dangote refinery and other state-owned refineries that are undergoing rehabilitation. The resultant hike in the pump price and its contribution to inflationary pressures have become overbearing even as subsidy payments have unofficially returned.
As criticisms of monopoly arise, it’s essential to question if preferring import dependency over local sufficiency aligns with the Renewed Hope agenda even if through private investment.
One of the Renewed Hope Agenda’s fiscal policy propositions highlighted the need to “curb our reliance on imported goods”. The policy document also pledged to “make it a priority to encourage industries vital to national development” as a matter of industrial policy. Additionally, it promised to “ensure stability of petroleum product supply” by “ensuring that local refinery capacity will meet domestic consumption needs”.
Given recent developments, can we say that the actions and pronouncements of the government align with these promises?
Abdulhaleem Ishaq Ringim is a public policy enthusiast. He writes from Zaria and can be reached via [email protected]
