In 2013, Aliko Dangote, a Nigerian businessman and the richest man in Africa, unveiled the first plans to build a refinery in Nigeria. He had secured about $3.3 billion in financing for the project. It was good news for Nigeria, which was Africa’s main oil producer but had been exporting crude oil for years due to challenges in refining its crude oil. Nigeria has four refineries with a combined capacity of 445,000 barrels per day, but they have been operating at a fraction of their potential for years.
So even when the refinery took longer than expected- it was initially to begin operations in 2020, then H1 2021. And finally, in 2023 – the nation remained somewhat hopeful. Last May, the refinery’s grand inauguration ceremony drew prominent figures from across Africa, symbolizing hope and progress for the continent. In Nigeria, it promised relief from high fuel prices after the government’s subsidy removal, while local manufacturers, especially in the cosmetics and detergent industries, anticipated access to affordable, domestically produced base oils. The timing also aligned perfectly with the nascent African Continental Free Trade Area (AfCFTA), fueling dreams of regional trade and integration. The wait, however, extended till January 13th, 2024, when – like a New Year’s gift – the refinery announced that it was producing the first batch of diesel and aviation fuel. However, reports have surfaced that the Dangote refinery will be importing crude oil from the US in the forthcoming months, with 2 million barrels of WTI Midland set for delivery by the end of February.
Why is this a concern?
Refining is the process of transforming crude oil into useful products such as gasoline, diesel, jet fuel, kerosene, and liquefied petroleum gas. The process involves separating, converting, and treating the crude oil components into different fractions based on their boiling points, molecular weights, and chemical properties. The initial notion was that the Dangote refinery would be refining Nigerian crude oil, which is mostly light and sweet, meaning that it has a low density and a low sulfur content. This type of crude oil is easier and cheaper to refine, as it requires less processing and produces more high-value products. However, the refinery was also designed to process a variety of crude oil grades, including heavier and sourer ones, such as those from the US and Saudi Arabia.
Besides, Dangote’s refinery has been significant for Nigeria. It signals hope that Nigeria could finally reduce its dependency on imported petroleum products, which currently account for over 90% of the country’s consumption. This less dependency enhances Nigeria’s energy security and reduces its vulnerability to external supply shocks, such as price fluctuations, sanctions, or disruptions. However, importing could undermine these economic implications and the opportunity cost of not using domestic crude oil for local development.
For one, it is more expensive for Dangote to import leaving Nigerians to bear the burden. Since last year, the naira has experienced significant depreciation. As of February 1st, the exchange rate rallied to around N1,320/$1 during mid-day trading at the official market. Purchasing non-Nigerian crude also fades the whole construct of stabilizing the Naira via the refinery. “You cannot expect the company to import with USD dollars, and sell on Naira terms,” said Ndubuisi Ekekwe, Chairman of Tekedia Capital. “Yet, I have made the point here that the forward-selling of crude oil for immediate cash will deliver a victim, and that victim would be our local refineries. Simply, if we subtract crude oil Nigeria ships to those who gave us loans as part of repayment and the little we need to run the affairs of the nation, we may not have enough for companies like Dangote Refinery, based on our production capacity, despite the national obligations to supply them feedstuff,” he added.
Just Another Pipeline Dream?
Importing crude oil from the US, or any other country, as an oil giant in Africa seems ironic. Nigeria has the largest proven oil reserves in Africa, estimated at 45 billion barrels as of 2022. However, the country’s oil production has been declining in recent years. In 2020, Nigeria produced an average of 1.8 million barrels per day, down from 2.1 million barrels per day in 2019. As of August 2022, production declined to 972,394 bpd, down 30.22 percent, dropping Nigeria’s status as Africa’s oil giant. One of the reasons Nigeria has not been able to meet the growing demand for gas in its domestic market is the low and regulated pricing of gas for domestic use. This discourages gas producers from supplying the local market and makes them prefer the more lucrative export market. The frequent disruptions and vandalism of gas pipelines and facilities by militants and criminals have also affected the security and reliability of the gas supply.
Beyond the domestic supply deficiency, crude oil from Nigeria is priced highly. According to the Central Bank of Nigeria, the average price of Nigeria’s crude oil (Bonny Light) as of January 19, 2024, was $82.86 per barrel higher than the global benchmark Brent crude oil price of $79.34 per barrel. This is attributed to Nigeria’s crude oil’s high API gravity ( the measure of how light or heavy the oil is compared to water) The higher the API gravity, the more valuable the oil is. Nigeria’s crude oil has an API gravity of 35.3 degrees, higher than the world average of 32.7 degrees.
Besides, Dangote aims to build the world’s largest single-train refinery, with a capacity of 650,000 barrels per day, which will meet Nigeria’s domestic demand and create a surplus for export. Moreover, Dangote’s vision is to establish a world-class energy hub that will serve the Nigerian and African markets and compete globally. So far, the business mogul has invested about $19 billion in the project, which he expects to generate $30 billion in annual revenues. The US, thanks to the shale oil boom, has become a major exporter of crude oil and petroleum products in recent years. In 2023, the US exported about 11.5 million barrels per day of crude oil and petroleum products, of which about 3.99 million barrels per day were crude oil.
Also, the refinery’s location in Nigeria does not mean that Nigeria will be the only customer or supplier of the refinery. It just means Nigeria should be a priority customer/supplier. Saudi Aramco, a state-owned oil company in Saudi Arabia, exemplifies the approach. The company runs five refineries. Three prioritize domestic needs, using locally sourced crude. Importing crude from other sources, such as the US and Saudi Arabia, allows the refinery to optimize its profitability and flexibility, as it could adapt to the market conditions and demand. “What is also interesting is that because the US, despite being the world’s largest producer of crude oil, still often has to import petrol, it is very possible that in the future, Dangote Refinery will export petrol to the US in the same way Dangote Fertilizer is currently exporting Urea to the US, ” commented Tolu Ogunlesi via a post on X (formerly Twitter). Nevertheless, it is no surprise that people are concerned. The refinery has generated a lot of expectations, both realistic and unrealistic, before its launch due to its potential impact on Nigeria’s economy. However, it appears Dangote’s refinery, as one of the biggest in the world, has a capacity that Nigeria alone cannot utilize.