Report: Dangote refinery reduced diesel price due to relaxed quality controls

Relaxed quality controls for diesel at the Dangote refinery resulted in reduced domestic prices, S&P Global is reporting.

According to a report on Thursday by S&P Global, high-sulphur diesel from the Dangote refinery led to the decision by the refiner to lessen domestic prices by 37 percent.

Low-sulphur diesel is below 500 ppm, and is considered cleaner for the environment; while high-sulphur diesel is used for off-road purposes because it causes progressive damage to the engine of machinery.

On April 16, Dangote refinery said it had reduced the price of automotive gas oil (AGO), also known as diesel, to N1,000 per litre.

The publication said more relaxed quality controls for the diesel supply have helped to undercut imports.

The report said three market sources confirmed the refinery’s first diesel supplies have been marketed with a sulphur content of around 650 parts per million (ppm) — higher than the 200 ppm cap that the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) has enforced on imported product since March.

“By permitting Dangote to sell diesel above the 200 ppm sulfur cap, the regulator has provided a route to market for early supplies from the refinery ahead of secondary unit start-ups for gasoline and low-sulfur diesel, deflating local fuel prices and clawing back revenue for the project,” the report said. 

Analysts quoted in the report said previously, the “refiner announced intentions to supply products conforming to Euro 5 specifications (10ppm diesel), but its low sulfur diesel production remains contingent on the start-up of its key distillate hydrocracker unit”.

S&P Global said the refiner has been pressured to alleviate surging fuel import costs amid the rapid depreciation of the naira, “which has seen diesel prices nearly double year on year”.

“While the price of gasoline has remained comparatively stable thanks to suspected government subsidies, concerns of a rising debt burden have added pressure to accelerate supplies from the refinery,” the report said.

The publication said neither Dangote nor the NMDPRA were available for comment on the quality of supply from the refinery nor the permitted sulphur cap.

CHEAP DANGOTE DIESEL CAUSES UNCERTAINTY

S&P Global said pressure from cheap Dangote diesel supplies has exacerbated the growing uncertainty surrounding diesel flows into West Africa, as traders have responded to rapid specification changes.

“Last month, high sulfur gasoil flows were dramatically reshaped by new Nigerian import requirements reducing sulfur limits from 0.3% (3,000 ppm) to 200ppm, while officials have hinted at further reductions,” S&P Global said.

“Meanwhile, it remains unclear whether Dangote will reduce the sulfur content of its domestic diesel supplies, or if imports will consistently be held to higher quality standards.”

According to the report, a diesel trader said the market is currently distorted due to Dangote’s volumes, noting the emerging mismatch.

“As markets have quickly adapted to new import specifications banning 0.3%S, gasoil flows have shriveled,” S&P Global said.

So far in April, diesel ports from northwest Europe to West Africa have halved to 15,900 b/d — dropping to the lowest level since February 22.

“Without Nigeria, who is left to take 0.3%S gasoil?” a second trader was quoted in the report.

“All the remaining shorts are small, you need to find 200 ppm gasoil now.”

The production of high sulphur gasoil is characteristic of a refinery’s ramp-up stages, when units are still unstable or offline, according to the report.

S&P Global said early diesel specs from Dangote, described as “inconsistent” by one trader, highlight aggressive timeframes by the refiner and considerable outage risks.