CEM ANALYSIS, ENERGY | Nigerians’ eagerness for the Dangote Refinery to come on stream has never waned since the commencement of the project. There are two reasons why Nigerians have eagerly waited for the Dangote Refinery to come into operation. The first reason is that at least, with local refining, supply will be free from international logistics that has often impacted fuel availability. The second reason is that Nigerians’ hope for lower fuel pump price may be realized since dollar rate was thought would not have too much impact in determining price of liter of fuel.
Now there is palpable fear among Nigerians that the much-awaited Dangote Refinery may not offer them cheaper fuel following issues that has filtered out recently especially crude importation plans which is aimed at keeping the refinery running in full capacity.
Dangote Refinery has bought two million barrels of crude (WTI Midland) from US crude trading company, Trafigura Group to be delivered by the end of February; according to Bloomberg quoting traders familiar with the transaction.
This is in line with the Refinery‘s plan to source feedstock from both domestic and import and this marks the first time the refinery is importing crude to keep its operation optimal that began production of diesel and aviation fuel recently.
Dangote Refinery targets an initial processing rate of 350,000 barrels per day before gradually escalate production rate towards its full capacity within a set period. One would expect that at least this initial 350,000 barrels of crude should be wholly sourced locally.
Nigeria’s daily crude production currently stands at 1.7 million as announced in October last year by the federal government. With this, it ordinarily means that domestic production should satisfactorily service the refinery even at full capacity operation.
Surprisingly, Devakumar Edwin, the Group Executive of Dangote Refinery has declared in an interview with S&P Global Commodity Insight that the refinery cannot rely solely on Nigeria crude supply. Not being able to rely on domestic crude production is a disturbing part of this whole discuss.
In the same interview, Devakumar Edwin said the refinery will sell fuel in dollars. His reason is that the refinery is located in a free trade zone. While Nigerians struggle to accept this against their expectations, not being able to wholly source crude from Nigeria by Dangote Refinery is way beyond expectation.
It is disturbing for the fact that imported crude will definitely be more expensive when cost associated with freight is built into the landing cost which will surely raise price of finished products.
Nigeria’s OPEC crude oil quota for next year is 1.5 million barrels per day (bpd) with the 1.7 million barrels daily crude production, but Nigeria should be able to supply crude for local refining. The government even said it plans to produce 1.8 million bpd to ensure supplies to the Dangote plant and other refineries that are being upgraded.
An X user named Daniel Regha asked the question that many Nigerians are asking; he said “Nigeria has crude oil but no working refineries, but now, Nigeria has a refinery & Dangote plans to import crude from the United States (reportedly). So what happened to our crude oil? …..”
NNPCL’s crude deals weakens supply to Dangote Refinery
In the same interview with S&P Global Commodity Insight, Devakumar Edwin revealed that NNPCL has said that it had committed its crude to other entities, though Devakumar did not disclose the other entities.
However, NNPCL had disclosed last month that it had entered into a $3bn crude oil-for-loan deal with Afreximbank. This deal which is Nigeria’s largest crude oil prepayment facility, allowed the company to pledge future oil production to the bank as repayments for the loan.
According to the information by Afreximbank, it is a 5-year facility which carry a margin of 6.0% per annum above the 3-month secured overnight financing rate (SOFR). Though, the transaction structure has an embedded price balance mechanism where 90% of all excess cash from the sale of the committed barrels (after debt service) will be released while the balance of 10% will be used to prepay the facility.
Though this is expected to shorten the final maturity of the facility and to free cashflow from future pledged cargoes for use by Nigeria, what goes off from the 5 years was not established in the information by Afreximbank. Therefore, no one is sure how long Nigerian crude is going be unavailable to the Dangote Refinery and other modular refineries based on this deal.
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According to Punch quoting NNPC sources, the company had entered into crude oil contracts with a number of other entities, a development that made it impossible for the organisation to meet Dangote’s need earlier. Neither the number of other entities with such contracts with NNPCL nor the durations involved was disclosed.
Local crude supply and PIA provision
It should be noted that supplying domestic refineries is required under the Petroleum Industry Act (PIA). Under the provisions of Section 109(2) of the PIA, the 2021 legislation gave authority to the NUPRC to impose domestic crude supply obligations, although at the prevailing international market price.
Public Affairs and Corporate Communications, of Nigerian Upstream Petroleum Regulatory Commission (NUPRC) Olaide Shonola was quoted by Premium Times to have said that This provision was introduced “because it would send wrong and unbecoming signals to the international business community if operators of domestic refineries in one of the world’s largest crude oil-producing countries start importing feedstock for their production.”
On November 1 last year, NUPRC, said it was “determined to enforce the domestic crude oil supply obligations” for Nigerian refineries. NUPRC head Gbenga Komolafe said modular refineries were facing challenges on feedstock.
The commission took some steps in furtherance of the provision of the Section 109(2) of the PIA 2021by developing and signing the Production Curtailment and Domestic Crude Oil Supply Obligation (PC&DCSO) Regulation 2023.
With this provision in place and in the spirit of patriotism, it was not expected that NNPCL which is the official federal government’s crude trading company would allow Dangote Refinery or any other refinery to import crude into the country for domestic refining.
There are about 52 exploration and production companies in Nigeria that are by this provision under obligation to supply feedstock for domestic refining. If NNPCL’s forward crude deals impedes on its capacity to supply domestic feedstock, what about the other companies?
Will Dangote fuel be cheaper than imported fuel?
Nigerians still await the final truck out of refined product from the multi-billion dollar Dangote refinery. Until then, the level of its positive impact on the Nigerian’s economy remains in uncertainty in the face of the sales of fuel in dollars and the importation of crude.
If Dangote Refinery will sell fuel to Nigerians in dollars, then prevailing exchange rate will determine the final pump price from the product by marketers. If the refinery imports crude, dollar price per liter to marketers will be determined by cost of crude, cost of freight and cost of refining.
It should be noted that cost of freight has significant share in the current price per liter of imported fuel, therefore if crude is not sourced locally to be able to knock out freight cost, the possibility of price reduction or significant reduction for the locally refined products is not guaranteed.
