Nigeria’s refining renaissance
Africa’s leading oil producer is looking to replace its archaic and underutilised refining capacity with the aim of becoming a global player
The 62-year old shoulders of Aliko Dangote support, to all intents and purposes, the lofty ambitions and desperate hopes of Nigeria in boosting its refining capacity, thanks to his new refinery under construction in a free trade zone on the outskirts of Lagos, its commercial capital.
Africa’s largest oil producer averages around 1.8-2mn bl in daily crude oil production but its four refineries have a combined refining capacity of only around a quarter of that—a measly 445,000 bl/d. One is a relic from before independence from the UK in 1960, while the others were built in the 1970s and 1980s.
Just as depressing is the fact that each of the plants operate at a level far below their full capacity. Data from the Nigerian National Petroleum Corporation (NNPC) reveals that the facility in the northwestern state of Kaduna did not refine a single barrel between February 2018 to January 2019.
Consequently, the NNPC has resorted to the so-called direct-sale direct-purchase (DSDP) programme. This entails exchanging crude oil for imported fuel, using selected independent marketers in a process often fraught with fraud.
“Dangote's refinery will impact supply, ensuring fuel is available for Nigeria” Ajileye, SBM Intelligence
Oil theft in the Niger Delta due to a proliferation of illegal small-scale artisanal refineries has—together with NNPC’s interventionist subsidies to cushion the effect of rising inflation on its estimated 200mn people—set back the west African country’s oil revenues. Finding the funds to fix the refineries has therefore been an uphill task. Political will and capability to fix or sell the refineries has also been lacking, despite protestations to the contrary.
When he was the junior petroleum minister, Ibe Kachikwu pledged that the government would raise $1.2bn to upgrade its refineries in order to reduce imports by 2019. Kachikwu, who was initially disposed to selling them, eventually kowtowed to the wishes of President—and supervisory minister of petroleum— Muhammadu Buhari who promised to overhaul the assets while campaigning for election in 2015.
Around 80pc of Nigeria’s domestic refined products needs in 2018 were offset by the swaps in deals totaling $6bn. Maikanti Baru, managing director of the NNPC at the time, told journalists earlier this year that, since the swap scheme was introduced in 2016, 29.5mn t of products had been supplied, equivalent to over 90pc of the country’s needs.
The swaps will now be extended to 2023, while NNPC aims to revamp the refineries to enable them work at full capacity by 2025. Baru has also disclosed that “the country’s petroleum product demand is expected to grow from 13.2mn t in 2015 to 15.1mn t in 2020 and 17.3mn t by 2025”.
Dangote’s refinery, with its 650,000 b/d capacity, is marketed as a more economic solution to the supply-demand gap. Initially billed to be operational at the end of 2020, analysts predict a 2022 launch after a series of setbacks on steel importation and other crucial logistics. Nigeria’s favourite industrialist has also had to build a seaport and jetty to surmount other infrastucture shortcomings, as well as a nitrogen and ammonia fertilizer plant to process associated gas.
The $12bn refinery, which will be the biggest on the continent when completed, is also the largest single train petroleum refinery in the world. It would help meet Nigeria’s domestic needs and, ideally, change the country’s status from products importer to net exporter , as well as providing a few thousand more jobs in addition to its current 7,000 workforce.
Despite the billionaire’s best efforts, there will still be a residual shortfall of 427,000 bl/d after the refinery comes on stream, according to NNPC’s calculations. And analysts warn that there is also no guarantee it will be the magic wand for which stakeholders in the oil and gas sector have been crying out. “Dangote’s refinery will impact supply, ensuring fuel is available for Nigeria. As long as the country is willing to pay the prevalent international rates, they will sell to Nigeria,” says Tunde Ajileye, consulting partner at SBM Intelligence, a Lagos-based political and economic risk advisory firm.
13pc Nigeria’s estimated share of global CDU capacity by 2023
“However, it will not impact price and, if Nigeria wants to continue selling at a subsidized rate, they will need to pay Dangote subsidies. It is also likely that swap arrangements may be used as payment to Dangote in any event.” In February, during a visit of central bank governor Godwin Emefiele to the refinery site, the billionaire industrialist said he would not sell his refined products at the government’s regulated price, stating his intention to sell internationally if need be.
“If there will be subsidy, which I doubt very much, [it would be] the job of government, not the job of Dangote, to determine what the price will be. But [the export] price… is [the price] we sell, which depends on the international market… Locally, if there will be a subsidy, the government will carry that responsibility and not us,” he stresses.
NNPC says it plans to add 215,000bl/d to the capacity of existing state-owned refineries. To further close the supply-demand gap, the government has also granted licenses for 38 modular refineries. Two of them were launched in 2018 and eight more are in various stages of completion.
According to presidential spokesman Tolu Ogunlesi, African Refinery Port Harcourt Limited (ARPHL) is set to relocate a 100,000bl/d refinery—previously owned by BP in Turkey—to Nigeria for ‘collocation’ with the existing state-owned refinery in Port Harcourt. In 2017, ARPHL signed an agreement with the state oil company to own and operate the refinery close to existing facilities in Port Harcourt, the centre of the country’s oil industry.
The relocated facility will occupy 45 hectares of land and will share NNPC’s facilities, including access to crude. Other private refineries with smaller capacities—including some with as seemingly insignificant capabilities as 1,000bl/d—litter the landscape of the Delta and, combined, could beef up total refining capacity nationwide.
“[By 2021 Nigeria should] have the 650,000b/d Dangote refinery running, there will also be this 100,000b/d collocated refinery, as well as half a dozen or so modular refineries with combined capacity in excess of 30,000b/d” Ogunlesi, presidential spokesperson
Set in place under Kachikwu’s watch, these mini-refineries are modular in nature; last September, Nigeria’s Bank of Industry secured a $500mn loan from China to enable it to distribute small loan packages to investors in modular refineries. “This means that, by 2021, all things being equal, not only should Nigeria have the 650,000bl/d Dangote refinery running, there will also be this 100,000bl/d collocated refinery, as well as half a dozen or so modular refineries with combined capacity in excess of 30,000bl/d,” says Ogunlesi.
All of this could result in Nigeria finally emerging as a major exporter of refined products on the world stage. A September 2019 outlook report by consultancy Global Data predicts that Nigeria will account for 13pc of global CDU capacity by 2023. Critics have speculated that taking so long to augment capacity via state-owned firms has been a deliberate strategy to boost demand for private projects.
But SBM’s Ajileye dismisses this matter-of-factly, explaining that the increased investor interest is instead an unintended consequence of delays in boosting refining capacity.
“The more tenable reasons for the hamstringing of the institutions are political— in order to maintain discretionary powers over the oil and gas industry, and in order to ensure elite extraction of rent from the oil industry,” he says. “Private investors have observed the gaps and have now found enough muscle to carry out projects to exploit these gaps, as savvy entrepreneurs must be expected to.”