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