Professor Omowumi O. Iledare
1.0 Preamble:
The petroleum downstream market is dominated by refineries. They are the plants that transform crude oil into refined goods. Distillation, cracking, reforming, and blending are examples of these processes. The refined goods are then distributed to end customers via a network of pipelines, tankers, vehicles, and retail stores. Refineries are difficult to construct, expensive, and its operations are complex. They are, nonetheless, required for the creation of refined products utilized by consumers and businesses worldwide majorly to facilitate energy humanization. The global number of refineries has been decreasing over the recent years. This is due to a variety of causes, including higher crude oil prices, increased refinery efficiency, and the rise of the shale oil industry in the United States, not to mention fossil-fuels and environmental sustainability conundrum. The decline in the number of refineries has led to a significant reduction in worldwide refinery capacity yet the demand for refined products is rising as is the middle-class population.
West Africa, though an important oil hub, with Nigeria as the dominant producers in the region, is a net importer of refined petroleum products. The countries in the region are mostly very reliant on refined products imports, making the regional economies vulnerable to crude oil price swings and supply interruptions as well as forex market instability. This is because the region has a limited number of refineries, and those that do exist are frequently outmoded, ineffective, and inefficient. For example, Nigeria, ECOWAS’ largest crude oil producer, has significant refining capability of about 450,000 barrels per day in addition to growing modular refinery capacity. However, operational issues have resulted in full dependency of Nigeria on imported petroleum products with significant petroleum subsidy estimated at approximately 25 % of its annual fiscal budget, over the last 10 years.
Certainly, the commissioning of the Dangote Refinery, a large-scale project located in Lagos, Nigeria, and developed by the Dangote Group, is a welcome development. It is indeed the dawn of a new era with implications for worldwide refinery business, especially in ECOWAS. The refinery complex, apart of being one of the largest conglomerates in Africa, is one of the world’s largest single-train refineries, with a capacity to process 650,000 barrels of crude oil per day. Thus, making it plausible to speculate that in the not-too-distant future, Nigeria is anticipated to have approximately 1.2 million barrels per day refining capacity when the NNPCL refineries in Kaduna, Warri, and Port Harcourt become fully rekindled, streamlined, and refurbished. This is expected to change the global petroleum downstream market dynamics and perhaps, halt significantly, the petroleum import propensity, specifically in Nigeria and in ECOWAS in general.
Additionally, speaking of refinery infrastructure and business expansion in ECOWAS, Ghana also wants to increase the refining capacity of its primary refinery, the Tema Oil Refinery (TOR), which has a refining capacity of around 45,000 barrels per day, to minimize its reliance on imports. Further, the Société Ivoirienne de Raffinage (SIR), the principal refinery in Côte d’Ivoire, has a capacity of around 65,000 barrels per day. Modernization efforts are underway to improve its capabilities as well. The petroleum downstream market activities in West Africa, which include but not limited to the refining of crude oil into various products such as gasoline, diesel, jet fuel, lubricants, and petrochemicals are vital to the region’s economy, supporting industries like transportation, industry, and agriculture.
This op-ed aims to highlight the key factors, challenges, and opportunities associated with the petroleum downstream markets in West Africa; and to provide recommendations for harnessing the potentials inherent in the Dangote Refinery Complex to humanize energy in the ECOWAS.
2.0 Ramifications of Dangote Refinery
The Dangote Refinery and Petrochemical infrastructure in Nigeria, which started in 2013 is projected to have cost nearly 20 billion dollars when it becomes operational in July 2023. The potential benefits, however, are substantial, and the regional governments should carefully explore how to harness these benefits expeditiously. The Dangote Refinery would have a variety of positive ramifications for the petroleum downstream business and the downstream markets in ECOWAS.
Sustainable Petroleum Products Retail Prices: The price of oil has been fluctuating in recent years, which has had a substantial impact on the pricing of refined products in the region. The Dangote Refinery would assist in lessening the region’s reliance on imports, making the region less sensitive to crude oil price shocks, especially domesticated crude in local currency. Stabilizing the price of fuel would be advantageous for both consumers and marketers with less need to import refined goods from outside with hard currency. The refinery can make refined goods locally efficient. This has a lot of potential advantages. For instance, a region with refineries will be less impacted than a region that depends on imports if the price of oil rises dramatically. Petroleum product prices and forex are more likely to decouple than not in the region, especially if pricing of product prices is in local currency. Nigeria has set a good example offering Dangote to pay for the Nigeria crude slates in Naira.
Refined Petroleum Products Availability: The Dangote Refinery will greatly improve the supply of refined petroleum products in Nigeria and West Africa because of its large processing capacity of 650,000 barrels per day. It is estimated that about 60 per cent of the output from the refinery will be for export after satisfying the entire petroleum product demands in Nigeria. The greater production capacity of the Dangote Refinery may increase the region’s access to and availability of petroleum products at affordable prices. This can lessen supply constraints, product prices, and the occurrence of fuel scarcity, which has been a problem in the area, especially, Nigeria regularly. By reducing the need for imports and perhaps stabilizing prices, this increasing supply can assist in meeting the rising demand for gasoline, diesel, jet fuel, and other products in West Africa and elsewhere in Africa.
Enhance Competitive Market Dynamics: Actual variations in crude oil prices and demand for commercially viable crude oil products are unpredictable. This is a result of the current state of the world economy and a variety of unforeseen causes, including the start of a war, changes in the regulatory environment, corruption, unpredictable raw material prices, strikes, and many other variables. The entry of Dangote Refinery into the downstream petroleum industry will put established firms up against new rivals. As businesses compete to retain market share and draw in customers, this may result in more efficiency, better pricing, and higher standards of quality. It might also encourage other market participants to improve their productivity and effectiveness to compete.
The apprehension about monopoly in petroleum downstream market structure emerging, especially, in Nigeria is speculative and less likely than not. Dangote Cement Industry did not make the cement market in Nigeria a natural monopoly. Of course, we are not dismissing the possibility of a dominant firm effect, in the short run, on petroleum downstream market dynamics in the region because of such a large refinery complex. But in the long run, many competitive options may emerge because of the existence of regulatory institutions with transformational leadership mindset.
Technological Advancements: The Dangote Refinery incorporates advanced technologies and processes to improve efficiency, product quality, and environmental performance. These technological advancements can set new benchmarks in the downstream petroleum market and influence industry-wide practices and standards. Dangote Group took a remarkable perspective with respect to complementing the technological advancement strategy with human capital development. It is also strategic that the Dangote Group sent several prospective employees for skill development to enhance competence levels. This is an awesome strategy, especially, with the workforce in the refinery being majorly from the region. It reminds me of the Shell BP model, which became the bedrock of the Indigenous Petroleum Companies in Nigeria. Competent human capital in combination with advanced technology is a surety for optimal production processes and investment performance.
Downstream Industry and Market Development: In Africa for example, most refineries have had to deal with numerous challenges ranging from political and fiscal regulations in certain countries to low complexity and competition from European and Middle Eastern exports. Furthermore, low utilization rates as well as the impact of international financial institutions (market liberation and deregulation of oil prices) are issues refineries have had to deal with. A robust Dangote Refinery will provide raw materials for other ancillary industries and downstream sectors and industries, such as manufacturing, petrochemicals, and transportation, fostering industrial development, economic growth, and value addition.
Jobs and Economic Growth: Dangote Refinery complex would increase employment and stimulate the economy. It is estimated that the complex would create about 100,000 jobs at full operational capacity and generate nearly 21 billion dollars annually in revenue. The refinery will improve the labour force and regional economic growth both directly and indirectly. Engineers, technicians, and laborers are only a few of the employees needed for refinery development and operations. The refinery will also create jobs in the neighborhood, particularly in the transportation and logistics industries. The presence of the Dangote refinery in Lagos can be expected to contribute to the economy of Lagos, Nigeria, and ECOWAS. The refinery will also increase local demand for goods and services. It is not surprising to observe the lamentations coming from the residents of Ondo and Ogun States for the foregone opportunity of the complex.
Environmental Quality: By building the Dangote Refinery, air pollution and other environmental issues brought on by the burning of imported refined goods would be reduced. Compared to domestically manufactured goods, refined imports frequently have greater amounts of sulfur and other contaminants. This may result in smog, acid rain, and other environmental issues like air pollution. Refineries need to embrace sustainable practices to reduce their negative effects on the environment, such as air and water pollution, by implementing cutting-edge technology and abiding by stringent rules. By providing cleaner-burning fuels, the Dangote Refinery’s presence can aid in reducing these environmental issues. Both the ecosystem and the population’s health in the area may benefit from this.
Government Fiscal Enhancement: The government will also receive tax revenue from the Dangote Refinery, which could be used to finance other development initiatives. The refinery will increase tax revenue directly and indirectly, royalty from crude oil production dedicated to the refinery is protected from global crude oil market instability, and there is equity revenue for the government through NNPCL as well. Hitherto, Nigeria, which like many other West African States, imports refined petroleum products at a high cost in foreign currency. The Dangote Refinery hopes to cut back on these imports and will save Nigeria a lot of outflow hard currency, which might help Nigeria and other regional States to preserve precious foreign exchange reserves. Additionally, it can enhance the broader economy and stabilize the local currency against the dollar, especially.
Regional Integration: Regional integration may result from the Dangote Refinery. Because of its advantageous location in West Africa, Nigeria has the potential to export a sizable amount of refined petroleum products to its neighbors because of the Dangote Refinery. In addition to strengthening Nigeria’s position as the region’s energy hub, this can promote regional trade integration and economic cooperation. Enhancing regional energy security and fostering an independent downstream petroleum market can both be achieved through coordinated efforts among West African nations to boost the refining industry. Although speculative, that because 70 per cent of the construction loan in hard currency has been settled, Dangote refinery complex can make the dream of a regional currency plausible in the near future.
3.0 Conclusion
It is important to emphasize that the Dangote Refinery’s performance and effects will depend on several variables, including institutional and managerial efficiency, operational effectiveness, market conditions, and government regulations and fiscal policy. However, the refinery has the potential to alter the downstream petroleum industry and market dynamics in Nigeria and the wider West African region, spur economic growth, and improve the security of the region’s energy supply if it is implemented successfully. In the petroleum downstream sector, refineries are crucial. They play a crucial role in the creation of refined goods that are used by consumers and companies all over the world. The downstream petroleum market can benefit from refineries being present in a region in several ways, including reduced reliance on imports, employment creation, and economic expansion.
That the Dangote refinery complex became a reality is commendable and laudable. Its impact on the economy is not conjectural in terms of employment of skilled and unskilled workers as well as other positive macroeconomic indicators. In the short run, one expects less pressure on forex market, especially if Nigeria crude for the refinery is purchased and paid for in local currency. It will also bring a dent to the ongoing rising trend in the consumer price index. One can also expect a more direct impact on the local economy than the upstream business even if the direct contribution to government revenue is lower than the upstream. Because NNPCL is selling crude in Naira to the refinery, the price of petroleum will in the short run decouple glaringly from the dollar exchange rate. Pricing will depend on willingness and ability of consumers to pay for PMS rather than Forex.
The only caveat is the implications on the downstream petroleum market structure in ECOWAS. Of course, in my opinion, the fear is not that monopoly structure will emerge because of this complex. However, there is the possibility that the impact of the refinery on retail market pricing as a dominant firm can be significant, if NNPC refineries remain dormant, in the long run. This is where the Petroleum Regulatory Authority must watch the market trends in the region as it evolves from being import dependent with Dangote propensity to become a dominant firm player in the downstream market. Lessons are available from the Dangote Cement market behavior in its early days. So, there is no need to anticipate a monopoly structure in the downstream market in Nigeria, at all. NNPCL is a potential competitor as well as other emerging modular refineries! But time will tell.
Finally, it is indeed a new dawn in the petroleum downstream market in Nigeria and perhaps, in the Gulf of Guinea countries. NNPCL seems to be playing the energy security responsibility well with determination to domesticate petroleum products availability and accessibility to guarantee product affordability in the short run, through its equity share and selling its crude at local currency. However, NNPCL must rekindle its refineries as scheduled for petroleum products sustainability in ECOWAS, in the long run!
•I sincerely acknowledge my PhD Student, Clement Otteng for the concept note he prepared for this op-ed.
OMOWUMI O. ILEDARE, PhD, Snr. Fellow USAEE, Fellow NIPetE, Fellow EI. Professor Emeritus, LSU Center for Energy Studies, Baton Rouge, USA & Executive Director Emmanuel Egbogah Foundation Abuja, Nigeria.