By: Reuters

Nigeria's giant Dangote refinery is benefiting from record margins for producing jet fuel that it is mostly selling abroad, while the domestic airlines it also supplies have threatened to stop flying because of the surge in fuel prices.

The refinery, the largest on the continent, was built to turn Africa's biggest oil producer into a net exporter of refined products, end Nigeria's reliance on fuel imports, and shield its economy from global energy shocks.

It became fully operational at the start of this year and is producing at its maximum capacity of 650,000 barrels per day.

That has improved local fuel availability, but domestic fuel prices are still among the highest in Africa as Nigeria's market is fully deregulated, meaning fuel prices are not subsidized by the government as they are in most African countries.

Industry body the Airline Operators of Nigeria said prices, taking logistics and storage costs into account, have climbed to 3,300 naira ($2.44) per litre, nearly triple the level in February before the start of the Iran war.

"With the recent increase in jet fuel we are seeing even much more increases in our flight tickets," said Otejiri Omare, founder of travel agency The Good Traveler. A Benin-to-Lagos flight that previously cost around 90,000 naira now runs at 145,000 naira, she said.

Nigeria's energy regulator said Dangote was selling jet fuel at 1,879 naira ($1.39) per litre, little changed from imported fuel prices of about 1,900 naira ($1.41) per litre delivered to Lagos earlier this month.

Oil marketers say they cannot match Dangote's prices because of additional costs. "Marketers can't sell at the same price as Dangote, they are buying from Dangote, including logistics costs," said Moroti Adedoyin-Adeyinka, chairman of the Depot and Petroleum Products Marketers Association of Nigeria.

Charles Iloegbunam, chairman of Masters Energy Group, said minimum order requirements from the refinery exclude many marketers. "If you want to buy or lift jet fuel from the refinery, there is a minimum order quantity" of 1,000 metric tons, he said, which translates to about 1 billion naira in costs for just 4 million naira in monthly profit.

The Middle Eastern conflict has led to unprecedented energy disruption, and the risk of jet fuel shortages is pressing, forcing airlines around the world to hike prices, add fuel surcharges and ground planes.

Nigerian airlines last week threatened to halt all flights, prompting the government on Thursday to approve measures including some relief on debts owed by local airlines and ordering talks to try to agree lower prices.

"The airlines cannot continue for the next 7 days without raising prices," Aviation Minister Festus Keyamo said. "They will tell you that, they have been stretched to limit."

Dangote, meanwhile, as a new, highly efficient refinery, has been able to take advantage of record margins for producing jet fuel from crude.

Its profits could be even higher if it could rely on Nigerian crude and avoid almost all freight costs.

State oil firm, the Nigerian National Petroleum Company Limited's joint-venture crude, however, is tied to oil-backed loans and pre-export deals.

That means much of Nigeria's roughly 1.5 million barrels-per-day of production goes to paying debts to international oil majors, banks and traders. The NNPC does not disclose its obligations, but analysts estimate they amount to about 400,000 bpd.

Lawyer Raphael Ezeoke said the government needs to negotiate with Dangote. "Nobody goes into business to make a loss. Dangote took his time to plan for today...so I think the government should negotiate, not by compelling, but by negotiation."

Travel agents are advising clients to book flights months in advance to mitigate rising costs. "What we are doing currently is to advice clients to start booking ahead...two, three months ahead," Omare said, adding that some travelers are postponing trips.

Dangote plans to list shares in the coming months and is expanding the complex to 1.4 million bpd capacity, which could make it the world's largest refinery by the end of the decade.

(Production: Kazeem Sanni, Abraham Achirga, Angela Ukomadu)