March 20, 2024/CSL Research
Based on news reports, last week, Mele Kyari, the Group Managing Director of NNPCL, made an announcement regarding the commencement of operations at the Port Harcourt refinery in approximately two weeks. Kyari disclosed that mechanical works had been completed on the Port Harcourt refinery. He mentioned that crude oil has already been stocked in the refinery, and regulatory compliance tests are underway. Kyari also highlighted the completion of mechanical work on the Warri refinery, reiterating that the Kaduna refinery will be operational by December. Responding to the start of operations at the Port Harcourt refinery, Abubakar Maigandi, the National President of IPMAN, stated that marketers had been informed and were prepared to start lifting products. He expressed optimism that once products start flowing from the plant, there would be a slight reduction in the cost of petrol.
Nigeria’s hope of attaining self-sufficiency in the domestic oil refining space appears set to happen in 2024, with the expected commencement of operations at the Dangote refinery, the newly refurbished Port Harcourt refinery and several completed modular refineries. Dangote Petroleum Refinery alone can meet 100% of Nigeria’s requirement of all refined products, gasoline, diesel, kerosene, and aviation jet, with surplus for export. To jump-start operations, NNPC, which owns a 20% stake in the refinery had in December 2023, agreed to supply 6 million barrels of crude oil as feedstock to the Dangote refinery. The Management of the company announced it would commence operations at 350,000 bpd capacity and was scheduled to start production of diesel and aviation fuel by mid-January 2024, after which Premium Motor Spirit production will follow. The refinery is expected to reach its full 650, 000 barrels per day capacity by the end of 2024.
Whilst there are positive expectations around the impact of achieving local refining capacity, we believe the availability of feedstock (crude) may present a major challenge. Nigeria had average crude oil production of 1.47mbpd in 2023, and production in February decreased by 6.33% m/m to 1.54 million barrels per day (mbpd) in February 2024, down from 1.63mbpd in January 2024, with a significant amount of that production encumbered through swap agreements. The lack of crude has stalled the operations of several modular refineries, with the likes of Duport Edo Refinery, Walter Smith Refinery, and Niger Delta Refinery reported to be producing limited volumes due to inadequate feedstock.
We concur with Abubakar Maigandi’s assessment that attaining self-sufficiency in local refining may not lead to a significant reduction in the cost of petrol. However, having adequate local refining capacity would enhance the availability of the product, ultimately putting an end to the recurring fuel scarcity issues the country has faced over the years. Moreover, we believe that achieving sufficient local/export refining capacity would have a positive impact on foreign exchange (FX) liquidity. While the exact details of how the local refining will affect FX liquidity are complex and challenging to ascertain, our focus is primarily on the export aspect of the business, which we anticipate will bolster FX liquidity.
