The Dangote Refinery and its Effect on Commodities

The Dangote Refinery is a massive oil refinery project owned by Nigerian billionaire Aliko Dangote that was inaugurated on the 22nd of May 2023 in Lekki, Nigeria. It is expected to be Africa’s biggest oil refinery and the world’s biggest single-train facility, with a capacity to process up to 650,000 barrels per day of crude oil. The investment is over 19 billion US dollars.

The refinery is expected to have a significant effect on the commodities market, both internationally and in Nigeria. Possible impacts include:

Reduced oil import dependence

The refinery will help Nigeria meet 100% of its refined petroleum product needs (gasoline, 72 million litres per day; diesel, 34 million litres per day; kerosene, 10 million litres per day and jet fuel, 2 million litres per day), with surplus products for the export market. This will reduce Nigeria's reliance on petroleum product imports, which cost the country $23.3 billion in 2022. Nigeria currently imports more than 80% of its refined petroleum products.

Lower fuel prices

The refinery will likely lower the domestic prices of fuel products, as it will eliminate the costs of transportation, demurrage and other charges associated with imports. This will benefit consumers and businesses in Nigeria, as well as reduce the burden of fuel subsidies on the government budget.

Economic growth and diversification

The refinery will stimulate economic growth and diversification in Nigeria, as it will create thousands of direct and indirect jobs, enhance value addition and generate tax revenue for the government. The refinery will also spur the development of other industries that depend on petroleum products, such as petrochemicals, fertilisers, plastics and power generation.

The refinery also faces some challenges that could affect its performance and impact. Here are some of the possible challenges:

Crude supply issues

The refinery needs a constant supply of crude oil to operate at full capacity, but Nigeria's oil production has been declining due to oil theft, vandalism of pipelines and underinvestment. In April 2023, production fell under 1 million bpd, below Angola's output. Lower production could affect the state-owned oil company NNPC Ltd's ability to fulfil an agreement to supply Dangote refinery with 300,000 bpd of crude. According to economist Kelvin Emmanuel, who authored a report on oil theft last year: “The challenge is that if you don't have enough crude production then you can't supply Dangote Refinery with enough crude. And if you don't have enough crude then you can't produce enough refined products for domestic consumption or export.”

Commissioning delays

The refinery has faced several delays and cost overruns since it started in 2013. It was initially planned to be completed in 2016, but was pushed back to late 2018, then late 2019 and then early 2020. However, due to the COVID-19 pandemic and other factors, the refinery was not mechanically complete until May 2023. According to Reuters, citing sources familiar with the project, construction was likely to take at least twice as long as Dangote publicly stated, with partial refining capability not likely to be achieved until late 2023 or early 2024. Oil and gas expert Henry Adigun told the BBC that Monday's launch was “more political than technical” and that “there are still a lot of technical issues that need to be resolved before the refinery can start producing at full capacity”.

Market competition

The refinery will face competition from other refineries in the region and globally. Nigeria's existing refineries are undergoing revamping and are expected to resume operations by 2024. Other African countries such as Ghana, Senegal and Uganda are also building or expanding their refineries. Moreover, the global refining industry is undergoing a transformation due to changing demand patterns, environmental regulations and technological innovations. The progression towards bio-refineries worldwide may divert future research and development towards cleaner fuels and cleaner facilities, leaving traditional refineries at a technological standstill. The refinery will have to adapt to these changes and offer competitive products and prices. According to Bala Zakka, an energy analyst and former NNPC engineer: “The Dangote refinery will have to compete with other refineries in the Atlantic basin and beyond. It will have to be efficient, flexible and innovative to survive in the market.”

Monopoly concerns

The refinery will dominate Nigeria's downstream sector and potentially create a monopoly situation that could harm consumers and other players. Some stakeholders have expressed concerns that Dangote could use his influence and connections to gain unfair advantages or stifle competition. For example, Dangote could lobby for favourable policies, tariffs or subsidies that could undermine other refineries or importers. Alternatively, Dangote could abuse his market power by setting high prices or limiting supply. The government and the regulators will have to ensure a level playing field and protect the public interest. Dr Diran Fawibe, the Chairman of International Energy Services, said: “The government should not allow Dangote to dictate the market or become a monopoly. There should be a regulatory framework that ensures fair competition and consumer protection.”

The refinery's economic, political and social impact will depend on how well it can overcome these challenges and deliver on its promises. Here are some of the possible projections:

Economic impact

The refinery could add up to 2% to Nigeria's GDP, which was $432 billion in 2022. It could also save Nigeria up to $12 billion per year in foreign exchange by reducing fuel imports. There is potential to generate up to $5 billion per year in export revenue from refined products. The refinery could also contribute up to $1.5 billion per year in tax revenue for the government and create up to 70,000 direct and indirect jobs.

Political impact

The refinery could enhance Nigeria's energy security and sovereignty by reducing its dependence on foreign refineries and traders. It could also boost Nigeria's regional and global influence by becoming a major supplier of refined products to other African countries and beyond. It could also improve Nigeria's image and reputation as a destination for investment and innovation. It could also reduce the risk of social unrest and violence caused by fuel scarcity and price hikes.

Social impact

The refinery could improve the living standards and welfare of millions of Nigerians by providing them with affordable and reliable fuel products. It could also improve the quality of life and health of Nigerians by producing cleaner fuels that meet Euro-V standards, reducing air pollution and greenhouse gas emissions. It could also support the development of other sectors such as agriculture, manufacturing, transport, education and health by providing them with cheaper and more stable energy sources. It could also empower local communities and entrepreneurs by creating opportunities for skills development, technology transfer, value addition and backward integration.

Conclusion

The inauguration of the Dangote Refinery marks a significant milestone for Nigeria and the global oil industry. The refinery's immense capacity and ambitious goals hold the potential to bring about transformative impacts, including reduced oil import dependence, increased oil export revenue, lower fuel prices, and overall economic growth and diversification. By meeting Nigeria's refined petroleum product needs and generating surplus for export, the refinery addresses a critical issue of import reliance, saving billions of dollars in foreign exchange annually. It stimulates job creation, boosts local content development, and creates opportunities for value addition and tax revenue generation.

The refinery is not without its challenges. The availability and consistent supply of crude oil pose potential risks, as Nigeria's oil production has been affected by theft, pipeline vandalism, and underinvestment. Furthermore, the refinery's construction delays and cost overruns indicate the need for careful management and resolution of technical issues before achieving full operational capacity. Competition from regional and global refineries, as well as concerns of monopoly control, necessitate the implementation of fair competition policies and regulatory frameworks to safeguard consumer interests.

The success of the Dangote Refinery will depend on how these challenges are addressed. If overcome effectively, the refinery has the potential to make a significant contribution to Nigeria's GDP, enhance energy security, and improve the lives of Nigerians by providing affordable and reliable fuel products. Additionally, it can position Nigeria as a major player in the global oil industry, while reducing environmental impacts through cleaner fuel production. The government's commitment to ensuring a level playing field, protecting consumer interests, and fostering competition will be crucial in maximising the refinery's positive impact on Nigeria's economy, politics, and society.

Image credit: FrankvEck

The Piano Mattei lands in Brazzaville: A Look at Italy's Latest Quest for Energy Security.

On 25 April 2022, Italy moved one step further in consolidating its energy diplomacy across Africa. After securing gas deals in Libya, Morocco and Algeria, the state-owned energy group Ente Nazionale Idrocarburi (Eni) signed a US$ 5 billion deal gas liquefaction project with the Republic of Congo, from whom it had previously acquired the Tango FLNG liquefaction station in early August of 2022. Together, the facilities make up the Marine XII joint venture project along with 31 drilling wells, 10 platforms and 1 gas pre-treatment plant logistically integrated off the shores of Pointe-Noire.

Eni has been the flagship of Rome’s new foreign policy towards Africa dubbed as the Piano Mattei, initiated by Prime Minister  Giorgia Meloni as a strategy to reduce dependency on Russian gas imports by projecting its influence just below the Mediterranean Sea. Since the Piano could be pivotal for the EU to fulfil its energetic security objectives (as we previously discussed in this must-read Spotlight!), this article identifies key drivers of risk and success emerging from Eni’s new undertaking in the Republic of Congo and what is its contribution to Italy’s greater energetic security planning.

How Eni did it: Managing Political Risk in Congo

After almost 60 years in Congo, one could expect that Eni would have nurtured an engagement with the country’s most influential stakeholders in order to create an identity of interest that would later pay off as the company’s most competitive aspect to secure the resilience of its business. Interestingly, Congolese law largely centralizes the administration of oil and gas exploration projects - including the issuance of permits, renewal of contracts, and local content requirements - under the Minister of Hydrocarbons’ authority and discretion. Minister Bruno Jean-Richard Itoua, the current incumbent, not only oversaw the signing of the new LNG project but actively supports it as a potential driver of Congolese economic growth and energy self-sufficiency. Such good deeds bode well for the project's stability and are likely to work as a preemptive measure against any major regulatory disruption for the foreseeable future.

The Republic of Congo’s stable relations with Italy, the European Union and major continental powers such as France are also likely to play a stabilizing and supportive role in the operation as they currently show little signs of major degradation, even if thorny issues such as corruption, autocratic practices, and environmental degradation should be kept on a close watch for precaution’s sake. 

On the other hand, the majority of installations comprising the Marine XII project - including the ones designed to export liquefied gas - are located on the Gulf of Guinea where piracy activities targeting cargo ships happen, thus remaining a relevant risk to be observed along with the possibility of criminal violence against foreigners in Pointe-Noire. Whether Eni's previous incidents in Nigeria will foster greater investment in maritime security against piracy remains something to be seen.

Was it really all for nothing? 

Despite positive outlooks, Eni’s new undertaking in Congo is likely to do little for Italy’s energy security. Congo’s LNG production is expected to reach a peak of 4.5 billion cubic meters per year by 2025, which would only correspond to roughly 6.5 per cent of Italy’s total LNG imports in 2022. More broadly, the experience is telling of Piano Mattei’s fundamental weakness of over-pulverizing supply among possibly more reliable sources while still relying on other major individual actors.

Figure 1: Share of Italy’s Natural Gas Imports by Country (2010-2021).   Based on data compiled by the Ministry of Environment and Energy Security (2021),

For example, in 2020, it would take the combined gas supply of 4 countries (Netherlands, Libya, Netherlands and Qatar) to match Algeria’s participation totalling 24 per-cent in that year. While it should be recognized that Russia’s participation suffered sharp drops in 2022 and that logistical impediments could certainly hinder alternative solutions, data seems to indicate that Piano Mattei's current supply diversification strategy currently seems more like a substitution: by trading Moscow for Algiers, Rome’s new diplomatic undertaking might still be falling short of its ambitions. Nevertheless, the pursuit of risk hedges could be recognized. 

Since Meloni has veiledly thrown her support behind Algeria on the Western Sahara conflict before, further signs of support in this and other issues could indicate an appeasement with Algeria for the short term. Likewise, the share of renewable energy consumption consistently grew from 2018 to 2021 as well as their participation in Italy’s total energy consumption, despite still accounting for the smaller share. Thus, in the long term, the return of investment flows to renewables production capacity could become pivotal for Italy to achieve its desired - and fiercely pursued - energetic security.

Africa in the “white gold” rush

The global supply of lithium ore has become an increasingly tangible bottleneck as many countries move towards a green transition. The International Energy Agency (IEA) predicted that the world could face a shortage of this key resource as early as 2025, as demand continues to grow. The increasing popularity of electric vehicles (EVs), which saw sales double in 2021, as well as other products which require lithium batteries, have been primary factors in this supply crunch.

Demand for lithium (lithium carbonate in this case) has driven high prices, which also nearly doubled in 2022, over $70,000 a tonne, and put pressure on the mining industry to increase production. This has led to heightened competition over this strategic resource and a rush to explore new reserves. An emerging arena in this competition has been Sub-Saharan Africa which has the potential to become a major player in lithium production, behind already established producers in South America and Australia. This region does, however, pose a unique set of challenges for lithium production in terms of infrastructure as well as a diverse and risk prone political constellation.      

Within the region there are several countries which have already been tapped as potential producers or have already developed some degree of extraction capacity. Among these are Mali, Ghana, the DRC, Zimbabwe, Namibia and South Africa, at this stage most of these countries are at some stage of exploration, development or pre-production, currently only Zimbabwean mines are fully operational. 

The political instability in some of these countries is a primary concern in the future of lithium production. Mali stands out in this regard with the withdrawal of the French intervention force in 2022, after nearly 10 years, and the ensuing power vacuum. In other countries such as the DRC political risk has been largely tied to corruption in governance which limits competition potential as well as human rights and environmental concerns which emerged around cobalt mining.

Zimbabwe offers a perspective into the most developed lithium operation in the region. In early 2022, Zimbabwe’s fully operational Bitka mine was acquired by the Chinese Sinomine Resource Group. Also in 2022, Premier African Minerals, the owners of the pre-production stage Zulu mine, concluded a $35 million deal with Suzhou TA&A Ultra Clean Technology Co. which was set to see first shipments in early 2023. This was followed by a similar $422 million acquisition of Zimbabwe's second pre-production mine Arcadia by China’s Zhejiang Huayou Cobalt.  

Zimbabwe’s government responded to this mining boom by banning raw lithium exports stating that “No lithium bearing ores, or unbeneficiated lithium whatsoever, shall be exported from Zimbabwe to another country.” This move is intended to keep raw ore processing within the country, and despite initial appearances will not apply to the Chinese operation, whose facilities already produce lithium concentrates. Yet, this policy does demonstrate the active role that the government is able to play in the market, and their willingness to harness this economic windfall.

Even the most developed lithium mining operations in the region must pay close attention to the political situation unfolding around them. As competition over this strategic resource becomes more acute, the role of soft power will likely play a key role in negotiating favourable terms and preferential treatment in the exploitation of lithium reserves.