Nigeria to commission Dangote refinery, but crude supply a concern

Nigeria's Dangote Petroleum Refinery will be commissioned on Monday amid hopes of an end to the country's recurring fuel shortages, but a lack of crude supply poses a major risk to it achieving full production.

Despite being Africa's biggest oil producer, Nigeria imports petrol, diesel and processed petroleum products because its refineries have been run down over the years.

The government of outgoing President Muhammadu Buhari sees the 650,000 barrels a day (bpd) refinery as the answer to repeated fuel shortages, the latest of which hit the country in the run-up to February's disputed presidential election.

Built by Africa's richest man, Aliko Dangote, the massive complex is one of Nigeria's single largest investments. It has a 435MW power station, deep seaport and fertiliser unit.

The cost of the refinery grew to $19bn (R367.35bn) from initial estimates of between $12bn (R232.01bn) and $14bn (R270.68bn), after years of delays.

Dangote expects to begin refining crude in June but London-based research consultancy Energy Aspects said commissioning was an intricate process and expects operations to start later this year, reaching 50-70% next year, with a staggered process of other units into 2025.

The refinery needs a constant supply of crude but Nigeria's oil production has been declining due to oil theft, vandalism of pipelines and underinvestment. In April, production fell under 1-million bpd (barrels per day), below Angola's output.

Lower production would affect state-owned oil company NNPC's ability to fulfil an agreement to supply Dangote refinery with 300,000 bpd of crude, said economist Kelvin Emmanuel, who authored a report on oil theft last year.

NNPC, with a 20% stake in the refinery, has production sharing agreements with oil majors like ExxonMobil, Shell and Eni and is entitled to a portion of the crude, which it also swaps with traders for petrol and diesel.

The refinery has not signed an agreement to buy from oil majors in Nigeria. That could see Dangote importing crude from traders like Trafigura and Vitol, Emmanuel said, at a time local refining was expected to save foreign exchange and keep prices lower.

“There are risks with supply of crude oil feedstock. I know that his [Dangote's] risk mitigation is to import oil and if he does that there is a risk to the price because he cannot be buying in dollars and sell in naira,” said Emmanuel.

Nigeria runs a petrol subsidy that the finance minister has said could run past June, when it was expected to be scrapped. The subsidy took nearly a third of Nigeria's national budget last year.

Energy Aspects, however, said in the long run, the Dangote refinery could end Nigeria's gasoline deficit, reshape the Atlantic basin gasoline market and export diesel that meets EU specifications.

Reuters