Refining Nigeria's oil: Dangote's hard fix
Aliko Dangote, Africa's richest man

The Dangote Group is building Africa's largest oil refinery - the 7th on world rankings. 

In recent years, Nigeria and its African peers have spent foreign reserves importing refined crude from foreign oil suppliers. Well, that trend is about to change as Africans are building oil refineries of their own.

What does it mean for us?


Dangote's history with refineries

For Nigeria, importing petrol has always put a strain on foreign reserves. And in the not so distant past, it has also led to petrol scarcities in situations where petrol could not be imported. 

The culprit for our reliance on foreign suppliers is our ailing refineries. In full operation, Nigeria’s refineries have the capacity to produce enough petrol for most of our consumption. However, this has not been the case for many years. 

Nigeria has thus spent over $12 billion - almost half of our annual national budget- on petrol imports since 2018. Improving our refining capacity is the only way out. If the government can’t get its act together, then, there is an opportunity for the private sector to capture significant value in the space.

However, building a refinery in Nigeria is not for the faint-hearted. There are many issues to combat, from “settling” the host community, to dealing with the powerful vested interests, who profit from Nigeria’s importation of petroleum products. Let’s not forget the lack of adequate power and transportation infrastructure.

According to the Department of Petroleum Resources (DPR) website, there are six private refineries in Nigeria at different stages of construction - the largest of which is the Dangote Oil Refinery with a capacity to refine 650,000 barrels a day. The second largest is expected to be at Ibeno, Akwa-Ibom with a capacity to refine 100,000 barrels a day. 

The Dangote Group believes it is able to tackle the many roadblocks in the sector.   

On paper, the experience might be there. The Group has built a ₦2 trillion cement manufacturing company, a ₦150 billion sugar refinery and a ₦100 billion flour milling company in a country that ranks 131st out of 190 countries in the Ease of Doing Business Index.

But refineries are a different ball game.

In fact, Dangote has been burned by the refinery business before. In 2007, he purchased the ailing state-owned refineries in Kaduna and in Port-Harcourt during the last few days of President Obasanjo’s administration. The purchase was fraught with political tensions. 

There were accusations of Obasanjo selling the refineries at a discount to his cronies and protests by oil workers who feared for their jobs.

It also did not help that Dangote controversially donated ₦220 million to Obasanjo’s Presidential Library in 2005. 

The purchase, eventually, led to a strike which paralysed Nigeria’s economy for four days. Dangote, then, cancelled the purchase of the refineries due to the widespread criticism.

Six years later, in 2013, Dangote announced plans to build a refinery in Ondo State. This time around demands from local communities forced him to abandon those plans and move to the Lekki Free Trade Zone instead.

In September 2014, the Dangote Group secured a Department of Petroleum Resources (DPR) licence to construct the refinery. 

Predictably, getting started has not been an easy feat. The Group has already spent close to $500 million to develop the road infrastructure in the swampy area. The company also had to build its seaport, power plant and road transportation infrastructure. 

The refinery, which is designed to maximise petrol output, will also produce diesel and aviation fuel, among other products. It is scheduled to be completed by 2022.  The original completion date of 2020 had to be adjusted due to “problems with importing steel and other equipment”.

The refinery, when finally completed, should make waves in the petroleum sector. If it can indeed meet its current capacity targets, then the impacts will be felt both within and outside Nigeria. 



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European refiners

First, let’s look at the current suppliers of Nigerian petrol. 

By 2017, 92% of Nigeria’s petrol imports were from Europe. Two countries accounted for almost 70% of our petrol imports –Belgium (44%) and the Netherlands (25%), which accommodate Europe’s largest refineries.

These refineries could face pressures on two fronts. 

The first is slowing demand from European consumers. Belgium, for example, sends over 60% of its petrol exports to countries within Europe, but the continent has one of the most aggressive stances against fossil fuel use. Its Union is phasing out all fossil fuel funding. 



For European refineries, another major buyer is African countries, which accounted for about 20% of Belgium’s petrol exports.

But it could now be facing competition. African countries are increasingly building oil refineries to reduce their dependence on Europe. 

According to S&P Platt, at least 20 African refineries are set to start operations within the next few years. Countries such as Nigeria, Algeria and Guinea that rely on fuel imports, are at various stages of developing refineries of their own. 

Like the Dangote refinery, they have aspirations of reducing the costs associated with relying on European refineries, such as foreign exchange. There is also a desire to export to neighbouring African countries as well. 

Dangote’s refinery is expected to produce roughly 60 million litres of petrol per day. That is more than enough to supply all of Nigeria’s petrol needs (38.2 million litres per day) and still export to neighbouring African countries who currently import petrol from Europe. 

Ghana’s Vice President has already expressed his country’s eagerness to start importing petroleum products from the Dangote Refinery instead of importing from refiners further away. He says "we will rather purchase from the Dangote Refinery due to the proximity of the refinery to Ghana and other neighbours.”

Equatorial Guinea’s Energy Minister has publicly stated that the two refineries being constructed in the country will meet Equatorial Guinea’s petroleum needs and will allow the country to export petrol products to its neighbours.

European refineries may struggle for market share. On the whole, they are dealing with fewer buyers at home and also in Africa. 

Admittedly, as Africa’s petrol consumption continues to rise, there is a risk that we will go back to relying on foreign suppliers once the African refineries cannot adequately supply the market. 

But in the near term, European energy investors and companies will start to shift their investments from the refining business towards clean energy. We are already seeing this trend happening. For example, Shell has closed more than 60% of its refineries within the past decade and has been making increasingly greater investments in its clean energy businesses.


A US refinery

Source: BP via Flickr


Nigerian oil producers

For Nigeria, Dangote’s refinery could come with several benefits. 

For starters, it would act as a stabiliser against geopolitical events that affect the demand for Nigeria’s crude oil.

Due to its lightness (low sulphur content), Nigeria’s crude oil has historically been one of the most sought after. For many years, the US was a major buyer of Nigerian oil – importing close to 50% of our crude in 2010.

However, advances in technology allowed the world’s largest economy to begin producing its own shale oil – which like Nigeria’s, is a light crude. Nigeria’s exports to the US and Canada consequently plummeted from 88 million barrels in 2013 (12% of Nigeria’s crude exports) to 27 million barrels in 2014 (4% of Nigeria’s crude exports).

Nigerian oil producers went from having their crude being highly sought after by refiners to having to compete on price with other light crudes. This resulted in a situation in which Nigerian crude was floating on ships with no buyers. This is similar to how the coronavirus outbreak -induced lack of demand caused an oversupply of Nigeria crude which drove the price from $53 per barrel to $12 per barrel in less than two months. 

In 2015, a trader of Nigerian crude oil lamented that “About a decade ago, quality of the crude was everything, now it is all about the price.”

Global energy analysts, S&P Platts described Nigeria as one of the biggest casualties of the US shale revolution while The Financial Times labelled Nigeria as the first victim of the US shale revolution.

As at 2018, the major buyers of Nigerian crude were India (13%), Spain (12%) and the Netherlands (9%). Nigeria is still in a position in which a few countries represent a significant market for her crude. 

If India, for example, finds a more suitable seller closer to its shores, Nigerian producers will again be left in a situation in which they are seeking buyers for over 10% of their crude exports.

Well, the Dangote refinery should, in theory, remove Nigeria from this risky path. It will have the capacity to process almost half of Nigeria’s current OPEC reduced production of 1.4 million barrels per day. 

For more stability, given Dangote’s close ties with the government, there is also room for favourable negotiations. The refinery might consider entering into a mid to long term agreement with NNPC to buy Nigerian crude, possibly at a slight discount.  

It could also go the other way where Dangote is able to secure a deal that isn’t optimal for Nigerians. Dangote, as a monopoly in domestic refineries, could be in a position of power in negotiations. 

This thought also highlights how Nigeria will be moving from being dependent on refineries in Europe to one company in Nigeria. Would that reduce the risk? 

Time will tell. 



Nigeria’s neglected refineries

But Dangote won’t have the only refinery in Nigeria. There are five others. However, it’s not news that they have historically been operating inefficiently. Now, will Dangote’s presence improve their ailment? All things remaining equal, it might actually exacerbate their decline.



Refineries typically have a utilisation capacity of over 90%. Anything below that is generally not profitable as the fixed costs to run the refineries could exceed the gains from the sale of the refined products. 

Yet, Nigeria’s refineries have consistently operated under 25% in recent months. 

In fact, Nigeria’s refineries did not process any crude oil from July 2019 until January 2020. Venezuela, despite its political and economic crisis, still had its Paranguana refinery processing 80,000 barrels of petrol a day (a utilisation capacity of 29%).

There are a number of reasons for the poor state of our refineries. One is the usual problem of our inadequate maintenance culture.

Refineries are supposed to be shut down for Turn Around Maintenance (TAM) at least once every three years. However, despite spending about $400 million to perform these operations since 2013, the former GMD of NNPC told Nigerians that its refineries had not undergone TAM for an aggregate of 42 years.

No surprise then that the infrastructure in these refineries have deteriorated.

Once Dangote’s refinery is launched, the economic and political pressure to fix the other refineries is likely to subside as Dangote’s refinery will be able to supply all of Nigeria’s petroleum needs. 

It may not be prudent for the government to continue funding the other refineries that make losses, when other sectors could use that funding.

These refineries made a loss of ₦141 billion between January 2018 and January 2019. Money that could have sufficiently funded Nigeria’s capital allocation for health and education in 2018. Still, an infrastructure upgrade will not matter much, unless they can get much closer to capacity and try to make profits. 



Not exactly smooth sailing for the refinery

To attain long-term success, the Dangote refinery would have to navigate around a number of landmines.

Some will be political. Production at Dangote’s refinery could commence shortly before a change in power at Aso Rock. In typical Nigerian fashion, this means that agreements by the Dangote Group and the current administration could be at risk. 

As we have seen in recent times in Nigeria, many business models are just one policy change away from dying. The risk is even higher in an industry as politically sensitive as the Nigerian petroleum industry, especially in relation to transporting products to and from the refinery.

There will also continue to be infrastructure challenges. 

Dangote has opted not to use the state-built pipelines to transport crude from the oil well terminals in Nigeria to his refinery. An understandable choice given the risks of pipeline vandalism – there were roughly 2,000 pipeline breaks in Nigeria’s petroleum pipelines in 2018 alone. 

Instead, the crude oil will be transported via water vessels from the oil well terminals to the refinery in Ibeju-Lekki.

Likewise, petroleum products will also not be delivered by pipelines to the product depots in Nigeria. The refinery plans to distribute some products via water vessels to the Calabar and Warri seaports and distribute the others via trucks, sure to add more traffic to the already congested Lekki-Epe expressway. The government has mentioned plans to add a parallel expressway to ease the traffic congestion from the refinery, but such plans have been touted for over ten years with nothing to show for it.



Financial landmines

Dangote has borrowed over $5 billion (about a third of the cost of the refinery) from local and foreign lenders to construct the refinery. These loans are dollar denominated – which mean they were disbursed in dollars and are expected to be repaid in dollars.

It is still unclear if Dangote will sell his petrol to Nigerian marketers in dollars or naira. Dangote will want to sell the products in dollars to mitigate against any foreign exchange risk that could result in a default on the dollar-denominated loans. 

Another issue would be Nigeria’s fluctuating exchange rate - the last thing you want when you are repaying a dollar-denominated loan. Ask Etisalat, now 9Mobile. Dangote’s Refinery has seen signs of this problem already. Construction was paused between 2015 and 2017 due to a scarcity of dollars in Nigeria.

So as with many things in Nigeria, there are challenges in the way. The excitement about the refinery does not guarantee its success - as we have seen refineries are not easy to crack. Both Dangote and the Nigerian government still have a lot to overcome for this project to be the happy ending everyone is expecting. 


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Osato Guobadia

Osato Guobadia

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