BY Gideon Osaka
The recent commissioning and imminent commencement of petroleum product supply from the Dangote Refinery has continued to elicit excitement and expectations among Nigerians, industry operators, government officials and other stakeholders.
The refinery is one that bears the hope of Nigerians including the government as a solution to the country’s seemingly jinxed fuel problem. The Nigerian government is banking on the Dangote Refinery to fulfill the fuel demand in Nigeria and even meeting West Africa’s demand for refined oil. The refinery would move Nigeria from an import-dependent nation to self-sufficiency in petroleum products.
Among other things, Nigerians expect that with the refinery, petroleum product supply that often led to long queues at petrol stations and incessant scarcity across the country will now be over. Also, expectations are high about the job creation aspect as thousands of Nigerians look forward to be taken off the unemployment market directly and indirectly as a result of the operations of the refinery.
Last year Nigeria reportedly spent $23.3 billion on petroleum product imports. With the refinery, Nigeria will eliminate importation and this will lead to saving the country a lot of revenue that could have been spent on shipping, insurance, clearing, demurrage and other costs associated with importation of petroleum products into the country. The refinery’s production of other critical products would stimulate the development of other industries, such as cosmetics, plastics, and textiles.
The plant
The Dangote Refinery is a private enterprise, with the NNPC Ltd. holding a 20 per cent stake on behalf of the Federal government. The refinery located in Ibeju-Lekki, Lagos, covers a land area of approximately 2,635 hectares, which is seven times the size of Victoria Island. It is the biggest refinery in Africa and also the biggest single-train refinery in the world. Due to the large capacity of the refinery, its pipeline infrastructure is the largest anywhere in the world, with 1,100 kilometres to handle three billion Standard Cubic Feet per day (Scf/d) of gas. The complex has a 435-megawatt power station, deep seaport and fertiliser unit.
With the capacity to meet 100 per cent of the Nigerian requirement of all refined petroleum products, such as petrol – 53 million litres per day; diesel – 34 million litres per day; kerosene – 10 million litres per day; and Aviation fuel, two million litres per day, there is also surplus of each of these products for export.
Designed for 100 per cent Nigerian crude with flexibility to process other crudes including many of the African crudes, some of the Middle Eastern crudes and the US Light Tight Oil, the refinery has a self-sufficient marine facility with ability for freight optimization. The refining plant has been described widely as a legacy project that will see Nigeria netting $21 billion per annum.
The issues
The excitement and expectation from the refinery especially among Nigerians are enormous. First is that the price of petrol should drop even when the government deregulates the downstream and stops paying subsidy.
The launch of the Dangote Refinery comes at a time the federal government plans to scrap fuel subsidy which could allow market forces to determine pump price. With the inauguration of the refinery, it is hoped that the uncertainty and the skepticism around the total deregulation of the downstream petroleum sector and resultant abolition of petrol subsidy regime may be doused soon.
The Petroleum Industry Act (PIA) signed into law in 2021 provides for total deregulation of the downstream sector, which implies the removal of subsidy and enthronement of a free market regime for the sector.
Before now, there had been postulations that the Dangote Refinery was the only reason the government was delaying the deregulation of the downstream sector. The fear of the government has been that deregulating when there is no guarantee of sufficient petrol for local consumption may shoot inflation to the roof and cause severe hardship on the poor and vulnerable members of the Nigerian state, as transport and food prices would definitely rise.
Valuechain reports that irrespective of when the government deregulates the downstream and ends subsidy, expectation that the price of petrol will drop as a result of the refinery may be unrealistic. The major component and determinant of the price of petrol is actually the price of crude oil in the international market. Unlike NNPC-owned refineries, the Dangote Refinery would be driven by the niche to make profits. Importantly, Dangote Refinery is a private entity with the sole aim to maximize profits.
Secondly. it is important to note that situating the refinery in Nigeria does not necessarily make refined products from the refinery cheaper than refined products produced abroad. Other factors like general costs of doing business in the country could also bug down the refinery. For instance, analysts argue that Dangote cement is cheaper in other African countries because they have better climates for business than Nigeria. Many Nigerian manufacturers switched to importation because their products made in Nigeria could not compete with China-made products even after paying for shipping and import duty.
Analysis shows that over 50 countries in within the African Continental Free Trade Area (AfCFTA) depend on imported refined petroleum products. At the historic commissioning of the Dangote Refinery were Presidents of Togo, Faure Gnasimgbe Eyadéma; Ghana’s Nana Akufo-Addo; Senegal, Macky Sall; Niger Republic, Mohamed Bazoum, President of Chad, Mahamat Déby and a host of ambassadors, captains of industries from outside the country, global oil traders, top international bankers and international multilateral agencies. The refinery is expected to meet the needs of Nigerian consumers and those in neighbouring countries, while allowing for exports beyond the African continent.
What this means is that the refinery is not bound to sell to Nigeria alone. Nigerians still pay the lowest amount for the product in West Africa sub-region since the product is still being subsidized. The low pump price of petrol in Nigeria compared to what obtains in other countries in West Africa could be an incentive for Dangote to be more export-oriented for markets in Togo, Ghana, Senegal, Niger Republic, Chad among others.
While uncertainty over petroleum pricing remains, disparities in prices of petrol across the states may become a bigger concern. Currently, pump prices of petrol are expected to be uniform (equalization) because of bridging claims paid by the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA), a role performed by the defunct PEF(M)B. To administer uniform prices of petroleum products throughout the country, the NMDPRA reimburses marketers’ transportation differentials for petroleum products’ movement from depots to their sales outlets in order to ensure that products are sold at a uniform pump price throughout the country.
The source of the fund is from the net surplus revenue recovered from oil marketing companies. This is what makes it possible for all Nigerians from Sokoto to Ikorodu, from Owerri to Calabar to Jos to Maiduguri to buy petrol at the same price or prices not far apart. It is not clear how this system will work when products from the Dangote refinery begin to flood the market. States closer to Lagos may benefit from lower petrol price compared to far-flung states in the North.
The Dangote refinery expects to begin refining later this year, reaching 50-70% next year, with a staggered process of other units into 2025. The refinery needs a constant supply of crude but Nigeria’s oil production has been declining due to oil theft, vandalism of pipelines and underinvestment. In April, production fell under 1 million barrels per day (bpd), below Angola’s output.
Lower production would affect NNPC Ltd’s ability to fulfil an agreement to supply Dangote refinery with 300,000 bpd of crude. NNPC, with a 20% stake in the refinery, has production-sharing agreements with oil majors like Exxon Mobil, Shell and Eni and is entitled to a portion of the crude, which it also swaps with traders for petrol and diesel. The refinery has not signed an agreement to buy from oil majors in Nigeria. That could see Dangote importing crude from traders like Trafigura and Vitol, at a time local refining was expected to save foreign exchange and keep prices lower.
Is the Refinery solution to Nigeria’s downstream oil sector problems? Will the Dangote Refinery solve the Nigerian petroleum sector problems? Will the high hopes and expectations of Nigerians about the refinery be met? Experts have continued to weigh in on some of the challenges that will continue to overwhelm the oil sector going forward.
The Managing Director/CEO of Financial Derivatives Company, Bismarck Rewane, in a recent media interview warned that the refinery, when operational, would not be a final solution to Nigeria’s economic crises.
He said, “The first thing is to clear the myths that Dangote Refinery is here and, therefore, it will solve Nigeria’s numerous problems. That’s not true. The refinery is a milestone on the path to achieving macro-economic stability, but it is not the be-all. In other words, it is a necessary condition, but not a sufficient condition to cure all of it,” adding that “the refinery won’t solve Nigeria’s foreign currency issues, and its impact on foreign exchange will be minimal.”
Noting that the refinery would send the right signal to foreign investors, when it commences operation, Rewane said the price of fuel will not markedly change with development.
On his part, the Vice President, Crude and African Markets, Argus (a London-based petroleum and energy market information provider), Mr. James Gooder, said that contrary to the impressions out there, Dangote’s 650,000 barrels per day refinery would not solve all the challenges associated with petroleum supply in the country.
Speaking during an online workshop for journalists organized by the Major Oil Marketers Association of Nigeria (MOMAN), with the topic, “Fuel Pricing in International Market and Nigeria,” Gooder argued that Nigeria was growing in terms of population, wealth and consumption, adding that with the demand rise against the low production capacity, the country would definitely need more refineries of Dangote capacity to be able to meet the growing demand.
Gooder said: “On whether Dangote Refinery will solve all the petroleum issues in the country, the sure answer is no. It will not, because Nigeria is a growing country, it’s growing in terms of population, it’s growing in terms of wealth and it’s growing in terms of products consumption.
“And so, if you are to look at the rising Nigeria’s consumption against Nigeria’s production of refined products, you will see a kind of rise in line of demand and a very low line of production.
“But that’s nowhere close. So, in order to meet that demand, you will not only have to have Dangote now, you will have to have another Dangote every five years or so, just to keep up. And so, it’s not going to happen, I fear.”
He said when the refinery comes on stream, Dangote could become the price-setting refinery for the country. He maintained that the market would determine the price and reward those who are efficient in supplying the market, whether through domestic refinery like Dangote or through an importer who has got a particularly efficient way of doing things.
He said currently, based on the prevailing exchange rate, the pump price of petrol should be somewhere above N400 per litre. Gooder pointed out the dangers in imposing such high price at this time in the country, stating that doing that would trigger some shock to consumers.