Driving Discussions: Unhooking West African Fuel Prices from Europe

Benedict: Hello and welcome to this podcast made by the Argus European Products team. This podcast is going to focus on West African fuel pricing because the West African fuel and indeed oil markets have been changing a lot this year. They've been, I think I would say, the most interesting part of the global oil complex for a lot of 2024. It's been taking up a lot of our attention. We've been fascinated by the developments down there.

So, before we go any further, I'm Benedict George, the deputy editor of the Argus European Products Report. And I'm joined on the podcast today by George Maher-Bonnett, who's our diesel reporter in London and who also has been leading our West African fuel coverage. So, thank you for joining us today, George.

George: Thanks, Benedict.

Benedict: Now, just as a spot of background on the West African market before we get into the details of price assessment in the region, the reason why the West African market has changed so much this year has really been that the Dangote refinery, this huge 650,000-barrel-per-day refinery in Nigeria, has actually come online in 2024 after roughly a decade in preparation. There's been a lot of talk about the refinery for years, and the actual start-up date kept getting pushed back.

So, it was originally expected in the later years of the 2010s, but it was pushed back, and I think some people in the market had started to doubt if it would ever come online. But at the beginning of 2024, it did start receiving crude oil, started distilling crude oil, and actually selling refined oil products. And because it's so big and because it's in a region that historically has not had very much operational refining capacity, it has begun to change that region a lot.

It was around March of 2024 that it actually started selling products. It was first selling straight-run products like naphtha and low-sulfur straight-run fuel oil, which didn't need very much...it didn't need a lot of secondary upgrading units in order to finish those products. Those products came straight out of the distillation process. But as the year has gone on, Dangote has started selling diesel and gasoline that can actually be put into cars in the local Nigerian market. And because Nigeria is such a huge demand hub for fuels, this has started to change the economics of companies, not only in the West African region but in the wider Atlantic Basin region.

Europe, for example, has historically exported a huge volume of gasoline to Nigeria and to the West African region as a whole. In fact, West Africa has been the second-largest export destination for European gasoline after the United States. And there's a possibility that the Dangote refinery, as it approaches its full operating volumes, that Europe could lose most or perhaps all of its Nigerian market for its gasoline, which would have an enormous effect on European refining economics.

So, this is a topic that's of great concern to the global oil market. Perhaps why it's so interesting and why it's occupied so much of our attention is that the startup has not been smooth, and the refinery is not operating at full capacity yet. And indeed, it's not clear when the refinery will approach its full 650,000-barrel-per-day operating capacity. At the moment, it's operating closer to 200,000 to 300,000 barrels per day. So, not even 50% of its nameplate capacity. And we've published various pieces of analysis on Argus Direct about the reasons for this, which you can read if you subscribe to our report.

But that's the bottom line. The background for this conversation is that the West African market has been complicated this year by a lot of domestically produced fuels from the Dangote refinery mingled with a lot of imported fuels that are still required in the market.

Now we're going to turn to what Argus is doing about this evolving market and how Argus is tackling the price assessment challenge in West Africa. So, George, could you just explain to us what is the Argus price assessment that we've launched this year for gas oil in West Africa?

George: Yeah, sure thing. So, we've recently launched a 50 ppm gas oil assessment, which assesses 5000 to 20,000 tonne-sized cargoes, dealing in ship-to-ship transfers of the product at the offshore Lome hub.

Benedict: Okay, let's unpack that piece by piece. We're particularly focusing at the moment on gas oil, which many listeners will be aware that gas oil is the refined oil product that becomes diesel. Diesel particularly means gas oil that is suitable for usage in an engine. Gas oil is an umbrella term for that product in any of its more or less refined forms. So, gas oil with 50 ppm sulfur can be put into a car in Nigeria and go by the name automotive gas oil, which could be called diesel. In Europe, that's not usable as road diesel because it needs to have a lower sulfur content. So, the terms diesel and gas oil are sometimes interchangeable, but not exactly interchangeable.

Now, you told us the assessment is on a ship-to-ship offshore Lome basis. So, Lome is in Togo, which is very close to Nigeria. And this part of the sea by Togo, which is also very close to Nigeria, is a common trading hub. People refer to transferring product offshore Lome, which basically means transferring the product from one ship to another close to the West African coast. So, I just want to ask you, despite Dangote selling products regularly now, is the ship-to-ship offshore Lome basis still the most liquid traded basis in the region?

George: Yes, that's right, Benedict, indeed. So, what we found that since the Dangote startup has accelerated and ramped up to a higher crude throughput volume, we've essentially seen a larger flow of product from the Dangote refinery, not just to its own domestic ports within the country of Nigeria, but also the odd cargo would sail across the Gulf of Guinea and to drop anchor at the offshore Lome hotspot. The kind of regional trading hub, if you will, where these ship-to-ship transfers occur.

So, we are not only getting a flow of low-sulfur gas oil product coming from the Dangote refinery, but we continue to receive a flow of large cargoes, typically, which would drop anchor on the way to other destinations, whether it be in northwest Europe or across the Atlantic to the Caribbean or South America. And there we still see a significant volume of now low-sulfur gas oil being traded.

Benedict: The offshore Lome hub remains the sort of logistical pivot. I want to clarify for listeners that this is a direct price assessment that we're talking about. So, you are speaking to traders, brokers, analysts down there in the West African market every day and canvassing their feedback from what they see in the market about what is the traded value today for gas oil, as opposed to a calculation using a European price and the cost of freight to transport the product from Europe to West Africa.

Traditionally, there would have been lots of price assessment agencies had a calculated price just using the European price and the cost of freight. But what's new about this is that this is informed every day by fresh indications from actual participants in the West African market. And the reason that's so important is because with Dangote, with the refinery coming online, fundamentals in the West African market can now deviate from fundamentals in Europe in a much more volatile, unpredictable way than they perhaps would have in the past when most of the West African market had to be supplied by European exports.

And I suppose it's imaginable at some point if West African demand was in a rut for some reason and if the European market got very tight next year, the year after, just speaking hypothetically, the West African gas oil price could even be lower than the European gas oil price. There could be a situation where there's a surplus of gas oil in West Africa that was actually exported to Europe.

And that's where this price assessment becomes so important, I suppose, because historically the price assessment for West Africa would have assumed that Europe was always exporting to West Africa, and the price assessment would just have been calculated using the European price plus the cost of freight to ship the product from Europe to West Africa. So, it would have been baked in that we're assuming West Africa is always more expensive than Europe. And that is not the case anymore. So, that's where this assessment can reflect the new possibilities for the West African market.

Maybe it's important for us to point out that there is a market in Europe for 50 parts per million in sulfur, even though that kind of gas oil is not usable as diesel to put in your car in Europe. That is a grade that is used in French, German homes as a heating fuel. So, it's not a... And also it can be blended into the marine fuel pool. So, Europe does have a use for that product.

There's another peculiar possibility as well, isn't there? There's a scenario where Dangote actually reduces the sulphur content of the fuel it produces down to 10 ppm, 10 parts per million sulphur, which is suitable for the European market. And the local West African market may still only require 50 ppm, 50 parts per million. And in that scenario, Dangote could be exporting its fuels to Europe while West Africa is importing higher-sulfur fuels to meet its own domestic demand, higher-sulfur fuels that would not be acceptable in Europe. So, you might have a strange situation where the West African refinery is selling to Europe while European refiners sell to West African consumers because of this difference in the sulphur content, in the sulphur content that's required.

However, that scenario where Dangote is exporting to Europe and Europe is exporting in the other direction to West Africa, that will only happen... Correct me if I'm wrong here, George. That will only happen if the West African regulation does not follow the Dangote spec. Do you think there's a possibility that Dangote brings its product down to 10 parts per million and then the local West African authorities require that all fuel in West...for example, the Nigerian regulators could require that all Nigerian fuels have to be 10 parts per million?

George: It's up for debate whether there'd be the, I suppose, the consumer interest or whether that's something that West African nations are happy to enforce on their consumers to pay that much more. There is ultimately a premium for 10 ppm diesel when you compare it to 50 ppm gas oil. But the regulatory environment has somewhat shifted in turn with the progress made at Dangote. We've seen that the Nigerian regulators have tightened their sulfur content cap on imported refined products. So, that's gradually come down as the refineries ramped up. So, the domestic legislation has moved in lockstep with the progress made at Dangote.

Obviously, as the largest market within the West African region, Nigeria is quite the trendsetter. So, whatever follows on in the regulatory sphere there should realistically be reflected in the offshore market, which serves it on a kind of majority basis. Many ECOWAS, so that stands for the Economic Community of West African States, member states are moving towards a compliance whereby domestic refineries ought to be targeting no higher than 50 ppm sulphur output by the year end. So, that's by the 1st of January 2025.

Benedict: There's a lot of political contention around the regulation and also around Dangote's trading pattern because there are different factors that have to be weighed against each other. There's the cost for the consumer, where the consumer would have to pay more for a lower sulfur content because reducing the sulfur content of a fuel costs money ultimately. The cost to the consumer for a lower-sulfur fuel has to be balanced against the benefit of reducing the sulfur dioxide emissions from burning the fuel, which of course is not an issue of global warming or of climate change, but is simply an issue of acid rain.

So, there's the cost, there's the environmental factor, and then there's also the factor of the security of supply. I think there's a certain perspective where it would be preferable for the local market to be supplied by a local refinery rather than depending on imports from a long way away from supplier regions where fundamentals can change radically and prices can be volatile in a way that might be detached from the fundamentals in Nigeria. Politically, it may be desirable that the local producer supplies the local consumer. So, there are lots of different things that the regulator and the government are probably balancing against each other. And there's a political component to it that we can't predict. We just have to wait and see.

It's particularly interesting, maybe, that Nigeria is bringing a large refinery online because historically Nigeria has had a lot of crude oil to export. Nigerian crude oil has found its way to refineries all over Europe, all over the Atlantic basin, and this crude oil has often been traded out of Nigeria in explicit swap agreements where the crude oil will be delivered in return for finished fuels that can be supplied to Nigerian consumers. So, rather than crude oil leaving Nigeria and finished fuels coming in, the startup of the refinery may mean more of that Nigerian crude oil gets refined in Nigeria into the fuels that can then be consumed in Nigeria or indeed exported as the case may be. So, it's turning that local market on its head versus the historical norm.

And it's important to point out, I think, that the refinery is running lately, entirely Nigerian crude. There was a lot of talk in the market earlier in the year about the fact that the refinery was running some U.S. crude. And it was during the summer of 2024, about a quarter of Dangote's crude intake was U.S. crude. But only about a quarter. And in the autumn and going into the winter now of 2024, all of the crude that Dangote is running is Nigerian local crude.

Now, if the listener will bear with us while we delve into some of the more nitty-gritty detail of the assessment. First of all, I suppose we should clarify that this assessment does not reflect any Russian-origin gas oil, even though there is a certain amount of Russian gas oil shipped to the West African market where it is not sanctioned. So, it is absolutely legal for it to be consumed in West Africa. And if it's traded below the G7 price cap, then it doesn't fall foul of any G7 sanction, and it certainly doesn't fall foul of any local West African sanctions. So, there's no sanctions issue there. But this assessment does not reflect Russian-origin gas oil, does it, George?

George: That's absolutely right, Benedict. So, we do not take into account Russian-origin gas oil, i.e., we do not take into account the discounts which are associated with Russian-refined products. We require our gas oil cargoes, which we assess, to conform to a minimum flashpoint of 66 degrees Celsius closest to Nigerian specification gas oil.

Benedict: Now, flashpoint, for the benefit of listeners who may not be up to speed on the terminology, the flashpoint of the product is the lowest temperature at which the material will catch fire when exposed to a naked flame. So the specification requires a certain minimum flashpoint of typically something in the 50s or 60s degrees Celsius as a safety precaution, basically. And indeed, in Nigeria, the minimum flashpoint is much higher than in some neighboring West African countries. Sometimes even the traders in these markets are not absolutely sure why different jurisdictions impose very different specifications on fuels. But the fact is that in Nigeria, the flashpoint has to be at least 66 degrees Celsius.

And the interesting thing about the flashpoint requirement in Nigeria is that it tends to naturally exclude Russian gas oil because the Russian gas oil usually doesn't meet that flashpoint. And in some markets, we assess one specification of fuel in the summer, another specification in the winter, depending on the local regulations. Is that the case in West Africa? Are we assessing a different specification depending on the season?

George: There is no summer or winter grade requirement, given the differences in the region's climate. So, of course, in West Africa, we're talking about quite tropical, consistent climate, which lasts the whole year long. Whereas in Europe, of course, our seasons are a bit more acutely felt in their differences. And our specs in Europe change to reflect that in line with the seasonal change, I suppose.

Benedict: Just to finish up, is Argus considering a gasoline assessment in West Africa, a jet fuel assessment in West Africa, and I mean a direct assessment informed by a daily survey of traders, brokers, and so on, as opposed to a calculation using the European price?

George: Yes, Benedict. We can confirm that we are running essentially shadow assessments currently. So, we are developing an assessment criteria for both gasoline and jet volumes traded offshore Lome, just to expand on our offering, which we've begun with our 50 ppm gas oil assessment. And essentially, as the West Africa region continues to deviate and form its own market fundamentals from other Atlantic basin trading hubs, it requires us to pivot and draw some clarity for our readers.

Benedict: Well, I think that's all we've got time for today. So, thank you very much, George, for joining us and helping us understand Argus pricing in West Africa. Thank you very much to everyone listening for joining us, and I hope that you'll be able to join us again soon for another Argus European Products podcast. Thank you, and have a nice day.