Oil industry in for a shake-up as Dangote moves in

Aliko Dangote, CEO, Dangote Group of Companies

When Shell Petroleum Development Company’s (SPDC) executive director, Malcolm Brinded said recently that building a refinery in Nigeria did not make good business sense, he apparently had not reckoned with Aliko Dangote.

Africa’s richest man, Dangote has a history of being a disrupter of most industries he chooses to play in, like cement, sugar, and flour, and his foray into the oil sector with plans for a new 400,000-barrel-a-day (b/d) refinery has the prospect of shaking up Nigeria’s stagnant oil and gas industry.

The immediate area where Dangote’s refinery investment may push the government into reforming is in the elimination of fuel subsidy, say analysts.

“We are encouraged by recent plans announced by Aliko Dangote to build a new local refinery with a 400kb/d capacity, which should improve pricing terms for local producers,” said Renaissance Capital oil and gas analyst Lldar Davletshin.

“If a local refinery buys crude at world price it will then have to sell refined product with a mark-up, which would mean much higher domestic prices if no subsidy is provided,” Davletshin said.

Nigeria’s gross domestic product (GDP) grew steadily at about 7 percent per annum over the past 10 years with a population of 167 million.

Analysts say the country’s energy thirst is rapidly increasing (from the currently extremely low 300kb/d level), which should make the current fuel subsidy regime unsustainable in about three years, just as Dangote’s new refinery is coming on stream.

Refining “is an excellent business to get into,” Dangote said in an interview in May, suggesting it will be in a position to make a profit, by selling at international rates to fuel marketers.

The refinery would also shake up the entrenched international oil companies (IOCs) in Nigeria, as well as the notoriously opaque national oil company – NNPC, which has the poorest transparency record out of 44 national and international energy companies, according to Transparency International and Revenue Watch Institute.

The NNPC gets an allocation of 445,000bpd of crude oil to refine locally, but it has been selling itself this oil at cut-down prices, a practice that cost Nigeria $5 billion in potential revenue between 2002 – 2011, according to a 146-page report by Nuhu Ribadu, former head of the anti-corruption agency, EFCC.

Dangote’s new refinery would immediately double Nigeria’s refining capacity and reduce dependence on NNPC decrepit refineries as well as cut imports from refiners owned by the IOCs by up to 50 percent.

Its expected 100 percent capacity utilisation may convince the government and prove to sceptics of the need to privatise Nigeria’s four state-owned refineries.

Dangote’s new refinery, fertiliser and petrochemical complex would cost $9 billion. This compares with the NNPC $4.5 billion deal with an unknown ‘Vulcan Group,’ to build six modular refineries with a combined capacity of 180,000b/d, signed since early 2012, which has remained largely on the drawing board.

Nigeria, which is Africa’s top producer of crude oil, relies on fuel imports to meet more than 70 percent of its needs. Four government-owned refineries with a combined capacity of 445,000b/d are operating at a fraction of that because of corruption and poor maintenance.

Nigeria spent over N1 trillion ($8bn) on fuel subsidy payments last year, equivalent to 20 percent of the total federal budget, according to finance ministry data.

“Removing the fuel subsidy would be a major step forward in the reform process in Nigeria,” Samir Gadio, an emerging markets strategist, at Standard Bank, London, said, saying “clearly, this inefficiency is a major constraint on the country’s economic emergence which will eventually have to be addressed.”

President Goodluck Jonathan attempted to remove the subsidy in January 2012, but was forced by a wave of strikes and protests to partially reinstate it, at a reduced price of N97 per barrel. Another attempt by the government at deregulation would only come after the elections in 2015, according to FBN Capital.

The oil and gas industry accounts for 70 percent of the Federal Government budget and 90 percent of the nation’s dollar earnings. The Petroleum Industry Bill aimed at reforming the industry is currently stuck in the National Assembly, although Dangote’s move to establish a refinery may have already set in motion a reform of the industry.
- BusinessDay