June 26, 2024/CSL Research
According to a business day news report, the highly anticipated launch of Dangote Oil Refinery’s petrol supply operations in July may face delays due to a shortage of crude oil. The 650,000 barrels per day (bpd) capacity refinery, located in Lekki, Lagos, was expected to commence operations this July, aiming to reduce Nigeria’s dependence on imported petrol.
However, based on the news report, the refinery has yet to secure the necessary crude oil volumes to begin refining premium motor spirit (PMS) as planned. Jide Pratt, country manager of Trade Grid expressed scepticism about meeting the July deadline, noting that the issue of crude supply remains a significant challenge, and questions regarding the sale of PMS in USD are yet to be addressed. He suggested that operations might be more realistically expected to start between August and September, with a worst-case scenario extending to December.
Dangote Petroleum Refinery can meet 100% of Nigeria’s requirement of all refined products, gasoline, diesel, kerosene, and aviation jet, with surplus for export. We expect local refining
to significantly impact Nigeria’s foreign exchange market through import substitution in the long term.
Additionally, a notable influx of foreign exchange is expected through the export activities from the refinery. To jump-start operations, NNPC, which owns a 20% stake in the refinery had an agreement to supply 6 million barrels of crude oil as feedstock to the Dangote refinery in December.
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 1.46mbpd in 2023 and crude oil production has averaged 1.3mbpd in 2024.
However, a significant amount of Nigeria’s production is encumbered through swap agreements. Nigeria has entered into several swap agreements over the years, primarily to secure refined petroleum products in exchange for crude oil. These swap agreements are typically with international oil companies and trading firms. However, NNPCL disclosed in August 2023 that it entered a US$3bn crude oil-for-loan deal with the African Export-Import Bank.
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. Nigeria currently has five operational modular refineries, with several others in various stages of development.
Beyond the availability of crude feed, another significant obstacle to the smooth operation of the Dangote Refinery will likely be centered around pricing and subsidies. As a commercial
entity, the refinery’s operations will be adversely affected if it adopts the credit sales pattern necessitated by a subsidy regime, given its running costs and interest payments.
