Nigeria: Dangote refinery project creates rash of copycats

This refinery, which will be located at the Tongeji Island in Ipokia Community that borders Benin Republic, is meant to cost N3bn ($6.5m) and produce 400,000 barrels of oil per day (bpd) when completed in 36 months. Other refineries also in the works include:

• Dangote plans to open the largest single-train refinery in the world in Lagos early next year. It will produce 650,000bpd.
• BUA Refinery, owned by BUA Group, Dangote’s key competitor in flour, cement, and sugar, has also started building its 200,000bpd capacity refinery in Akwa Ibom state, in the oil-rich Niger Delta.
• Waltersmith refinery is building a modular refinery with a capacity of 50,000bpd, while the NNPC says it is rehabilitating its old refineries.

Export rush 

Dangote Refinery is largely expected to become a dominant market leader, considering its pioneering status and huge capacity to exhaustively mop-up local demand and export the excess.

But competition for the upcoming oil refiners will mostly be on the export end, says Uwa Osadiaye, a senior vice president and oil and gas analyst at FBNQuest.  

The good news is that Nigerian refiners will be increasingly primed to supply other African countries as refined oil imports from Europe, which would have been a contender, are drying up due to Europe’s decarbonisation drive, Osadiye tells The Africa Report.

• In 2020, Africa’s daily oil demand was 4.1 million barrels while the import volume of petroleum products into the continent was 1.77 million bpd, an 8% decline from 2019’s 1.9 million, according to Statista. A recent McKinsey report also revealed that the demand will grow to approximately 5.3 million bpd by 2040.

With The African Continental Free Trade Agreement (AfCFTA) in place, Osadiaye says “the sky is big enough for the birds to fly,” referring to the upcoming Nigerian refiners. 

Local energy prices  

Energy prices in Nigeria are a big issue because of their inflationary effects, a major reason several administrations have not gone ahead with fuel subsidy removal.

For example, 90% of freight movement in Nigeria is done by road but only 25% (50K km out of 200K km) of which is paved across the country. This means that a significant increase in energy prices will have a direct impact on the overall prices of commodities across the country.  

“Products like kerosene and diesel are already deregulated. The immediate advantage of refining them locally is that it takes off import-related costs – such as freight, customs, and vessel costs – which are about 15-25% of the total cost of landed petroleum products,” Osadiaye says.  

A 20% deduction in the current diesel price of N800 per litre is about N600. In terms of pricing, therefore, local refining will be helpful, but prices will remain “highish” considering that pricing will be indexed to the dollars and subsidies may also be gone, he says.  

Competition, on the other hand, is generally expected to reduce prices as consumers benefit from the sell side trying to win market share by cutting prices.

But Osadiaye believes competing refiners may slightly reduce margins in order to compete with Dangote Refinery which is positioned to influence prices.  

Ultimately, the regulators are unlikely to allow a free-market mechanism to determine pricing but may adopt some price regulation mechanism, not in a subsidy sense, but some progressive price ceiling, he says. 

Exchange rate 

Nigeria earns most of its foreign exchange from crude oil export but also spends a lot of its petrodollars to import refined petroleum products.

What major difference will it make to the country’s foreign exchange administration if it ceases to import petroleum products thanks to its growing local refining capacity? 

This is because the instability of the naira remains a key concern to businesses. Nairametrics said naira had declined by over 70% to 605/$ in May 2022 from N180 in March 2022 when the current CBN Governor took charge. It is now being sold for about N800 at the parallel market. 

Nigeria will be better off supplying crude oil to local refiners while the government exports the remaining crude oil.

Having a competitive local refining industry may make a nuanced difference, Osadiaye says. He explains that if Nigeria could restore its two million bpd oil production capacity, it would then have to supply local refiners with about one million barrels daily. This would then mean the country would have one million barrels less of crude oil to sell abroad.  

Foreign exchange-wise, he argues that the government must significantly increase oil production.

“Nigeria will be better off supplying crude oil to local refiners (that in turn earn the country foreign exchange by exporting excess refined petroleum products) while the government exports the remaining crude oil”. 

Bottom line 

Nigeria needs to ramp up its oil production capacity and significantly reduce oil theft to be able to service the upcoming oil refineries and be able to earn more revenue from export.

Competition is also key to Nigeria being Africa’s refined oil powerhouse in the face of dwindling investment in hydrocarbons in the west.