Nigeria: Dangote refinery must break with country’s history of failed maintenance

By David Whitehouse
Posted on Thursday, 14 April 2022 06:00, updated on Thursday, 23 June 2022 12:26

Construction cranes and machinery stand at the under-construction Dangote Industries Ltd. oil refinery and fertilizer plant site in the Ibeju Lekki district, outside of Lagos, Nigeria, on Thursday, July 5, 2018. The $10 billion refinery, set to be one of the worlds largest and process 650,000 barrels of crude a day. Photographer: Tom Saater/Bloomberg via Getty Images
Construction cranes and machinery stand at the under-construction Dangote Industries Ltd. oil refinery and fertilizer plant site in the Ibeju Lekki district, outside of Lagos, Nigeria, on Thursday, July 5, 2018. Photographer: Tom Saater/Bloomberg via Getty Images

The Dangote oil refinery, Africa’s largest industrial project, must be accompanied by a leap forward in refinery maintenance capability if it is to meet its targets for Nigeria, analysts say.

Whether Dangote will be able to keep the refinery running better than others – a fact that Nigeria has struggled to do over decades – is a crucial question, “and behind closed doors a lot of stakeholders speak about this in Lagos,” says an analyst who asked not to be named.

There are doubts about Dangote’s ability to run such a facility “because they have not brought any experienced refiner to invest with them or run the plant,” the analyst said, pointing to repeated delays in the scheduled start of operations.

“Essentially you have the world’s largest single-train refinery built by a conglomerate with no previous expertise of such an asset, and that’s one of the reasons why the construction has been constantly delayed and poorly executed. If the construction phase was an indication of what is to come then it is not a good sign.”

Antony Chiejina, Dangote Group Spokesperson, pushes back, saying while government-run refineries have been failures, “we are the private sector; all our companies are doing well, in cement, in sugar in salt — why should it be different for the refinery?”

  • The refinery in the Lekki Free Zone near Lagos will have a capacity of 650,000 barrels of oil per day. CEO Devakumar Edwin said at this month that it will come into production by the fourth quarter.
  • Costs have increased to an estimated $19b from Dangote’s earlier estimates of $12bn-S14bn.

Historical failures

Nigeria has four existing refineries at Old Port Harcourt, Warri, Kaduna and New Port Harcourt, commissioned between 1965 and 1989. According to research published by Tony Ogbuigwe, managing consultant at PEJAD Nigeria in Applied Petrochemical Research, average annual capacity utilization at the refineries hovered between 15% and 25% in the 20 years to 2018.

The decline in the performance of the refineries started in the early 1990s after the military government effectively stripped the Nigerian National Petroleum Corporation (NNPC), which ran and maintained the refineries, of its autonomy, Ogbuigwe writes.

  • The NNPC was “subjected to interference and directives by politicians. It could no longer ensure prompt maintenance of the refineries.” Decisions on maintenance and which contractor to execute it came under government influence, rather than being decided by professionals, he adds.

A rights group called the Socio-Economic Rights Accountability Project (SERAP) in Nigeria said in March that it will file a lawsuit against the government for failing to repair the country’s refineries.

  • The group says that Nigeria spent nearly $400m for maintenance of the refineries between 2015 and 2020, to little effect.

Different this time?

Bolutife Odusanya, a board member at VFuels and Gas Engineering in Lagos, is optimistic that it will be different this time. Lenders will mandate maintenance contracts to be in place, he says. “You don’t invest billions and skimp on maintenance.” Dangote both owns the refinery and will market the products, which will lead to a holistic approach, Odusanya argues. “It’s a business structure issue. The decision-making is central.”

The cost of the refinery means it would be “unthinkable” not to aim to ensure that operates at full capacity, says Oghosa Erhahon, an energy transition advisor in Abuja. That reality is amplified by the parallel associated projects at the site, she adds.

The integrated refinery and petrochemical project is intended to meet Nigeria’s refined petroleum product requirement and provide a surplus for export. Ravi Bhatia, an analyst at S&P, points to the Dangote group’s good track record on running and executing projects.

  • Bhatia says that the refinery will save foreign exchange on imports of refined products and generate foreign exchange via exports.
  • But Mickael Vogel, director at the Hawilti research group in Lagos, questions how much of the refinery’s output will be for the domestic market and how much for the export.
  • The government wants to fully stop importing and expects the Dangote refinery to meet all the needs of the domestic market, but that is “easier said than done. Given current market prices and Dangote’s huge debt contracted for the refinery, the case is a lot more attractive to sell outside of Nigeria,” Vogel says.

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