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Losses mount at idle Nigerian refineries

There is little hope that state-owned refiners will resume production, partly due to Covid-19, while the new Dangote refinery is insufficient to meet demand

Nigeria’s four state-owned refineries have been idle for more than a year as they wait for essential maintenance, with little likelihood of resuming production as cashflow constraints and coronavirus-related movement restrictions hamper repairs.

The four refineries were completed between 1965 and 1989 and have a combined capacity of 445,000bl/d, which should be sufficient to meet around 70pc of daily domestic demand. The quartet registered combined operational expenses of NGN142.1bn ($367mn) in the 12 months to 30 June despite being out of service, according to the country’s NOC, Nigerian National Petroleum Corporation (NNPC).

Consequently, Africa’s top oil producer is entirely reliant on fuel imports, straining government finances and dollar reserves. “Few in the industry expect state refineries to return to capacity,” says Yvonne Mhango, head of research for sub-Saharan Africa at Johannesburg-based investment bank Renaissance Capital.

“Nigeria will continue to rely on fuel imports in the long term” Nwaozuzu, Emerald Energy Institute

The four refineries, state-owned via NNPC, were flawed from the outset, according to Chijioke Nwaozuzu, a deputy-director with the Emerald Energy Institute at the University of Port Harcourt.

The refinery’s management has no control over crude supply, storage, marketing or pipeline maintenance, which is largely handled by NNPC subsidiary Pipelines and Product Marketing Company.

“With that kind of structure, it was inevitable the refineries would collapse—it was just a matter of time,” says Nwaozuzu, noting the pandemic has slowed attempts to repair the refineries and that there is no timescale for reopening.

“Most need major upgrades that would take three-to-four years, but the government cannot afford to pay for that,” says Nwaozuzu. “Nigeria will continue to rely on fuel imports in the long term.”

This situation benefits a well-connected import cartel that has thwarted efforts to reform the refinery industry, academics from Robert Gordon University claim in a 2020 paper.

Dangote to deliver?

Although the state-owned industry is in ruins, the long-delayed $12bn Dangote refinery near Lagos will process 650,000bl/d, making it Africa’s largest. Owned by billionaire Aliko Dangote, the refinery says it can meet all of Nigeria’s domestic demand for refined products while also producing a surplus for export.

In June, a senior Dangote official told The Africa Report the refinery would start operations in early 2021, despite pandemic-enforced disruptions causing a 45-day delay.

“Some government officials seem to be betting on Dangote solving Nigeria’s fuel import problems, which tells you they have little faith in bringing production back up to 450,000bl/d at the state refineries,” says Mhango.

Yet Nwaozuzu believes Dangote, which borrowed at least $5bn towards the refinery’s $12bn construction costs, will export most of its finished products.

NGN142.1bn – Opex for Nigeria’s state-owned refineries in 12 months to 30 June

“Do you think any investor would be crazy [enough] to invest that kind of money if the 650,000bl/d was just going to be sold domestically?” says Nwaozuzu. “Long-term contracts with foreign buyers would have been arranged even before the ground-breaking ceremony for the project. Dangote is not being built for domestic supply purposes.”

Nwaozuzu says it was unknown whether the government secured a specified percentage of Dangote’s production for domestic use.

“Even if there was a domestic supply obligation and the Dangote refinery fails to comply with it, who would enforce it? Aliko Dangote is a financial colossus in Africa, who can successfully oppose him?” adds Nwaozuzu.

Market distortion

Dangote and Niger Delta Petroleum Resources Refinery are two of only 40 projects since 2002 to receive refining licences that have made significant progress in construction, according to the Robert Gordon academics.

Pricing distortions remain a key barrier to foreign investors or IOCs entering Nigeria’s refinery industry, says Jeremy Parker, head of business development at Africa downstream specialists Citac. Nigeria sets gasoline prices despite lacking an official subsidy mechanism.

These distortions, along with NNPC’s role in controlling crude production and pipelines, plus a multitude of risks spanning policy, regulation, politics, payments, operations and security, are why so many mooted refinery projects failed to get beyond the licensing stage, adds Parker.

Yet the government remains bullish. On 31 August, the CEO of Nigeria’s Department of Petroleum Resources stated the country would become a net exporter of petroleum products in 2022, predicting Nigeria will have domestic refining capacity of 1.475mn bl/d: 450,000bl/d from the restored state refineries, 650,000 bl/d from Dangote and 375,000bl/d from 27 modular refineries.

That seems implausible, according to analysts, while privatisation remains unlikely.

“In order for that to happen the government would have to offer long-term tax concessions, which Nigeria really cannot afford right now,” adds Mhango. “This is another reason why the Dangote’s investment is important for the government.”

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