Dangote Oil Refinery

Overview

Dangote.com describes the Dangote Oil Refinery as a 650,000 barrels per day (BPD) integrated refinery project under construction in the Lekki Free Zone near Lagos, Nigeria. It is expected to be Africa’s biggest oil refinery and the world’s biggest single-train facility.

The Pipeline Infrastructure at the Dangote Petroleum Refinery is the largest anywhere in the world, with 1,100 kilometers to handle 3 Billion Standard Cubic Foot of gas per day. The Refinery alone has a 400MW Power Plant that is able to meet the total power requirement of Ibadan DisCo.

The Refinery will meet 100% of the Nigerian requirement of all refined products and also have a surplus of each of these products for export. Dangote Industries Limited invested about $12 Billion. Dangote Petroleum Refinery will create a market for $11 Billion per annum of Nigerian Crude. It is designed to process Nigerian crude with the ability to also process other crudes. The benefits of this refinery to Nigeria's economy and environment can not be over emphasized. In the following sections we will review some of these benefits and disbenefits for our readers.

Job creation

Reuters reports that unemployment in Nigeria jumped to 27.1% in the second quarter of 2020. Working on the assumption there are approximately 200 million people in Nigeria, that would mean there are approximately 54 million people without jobs in Nigeria. Our research found conflicting estimates of how many jobs Dangote's oil refinery would create. The Punch quotes the COO of Dangote Industries Limited has estimating that the refinery will produce 300,000 direct and indirect jobs in the first quarter of 2019. Hydrocarbon Technology reported that the project is expected to generate 4,000 direct and 145,000 indirect jobs. NS Energy also reported that the integrated refinery and petrochemical project is expected to generate 9,500 direct and 25,000 indirect jobs. Whatever the number of jobs stipulated, one thing is for sure, jobs are going to be created both during and after the construction of this oil refinery.

Increase in Nigeria's FOREX reserves

​Nigeria is currently suffering from scarcity in FOREX, which is one of the reasons the foreign exchange rate for Naira is low when compared to other African countries with a lower GDP than Nigeria. The Central bank of Nigeria reports that FOREX reserves have slowly reduced over the last 5 years as shown in the chart below. Overall the value of Nigeria's export has fallen by $38 billion over the last five years, going from $97.6 billion to $59.5 billion. While importation fell by only by $4.05 billion over . This means Nigeria is importing commodity in dollars more than it is selling commodity in dollars, hence the reason their FOREX reserves are depleting. Once Dangote's oil refinery starts operating, there will be no need to import fuel into Nigeria. This means there will be less demand on Nigeria's FOREX reserves and hopefully over time an increase in the value of Naira.

Environmental impact of Crude oil refineries in Nigeria

Dangote's oil refinery solves Nigeria's problem of dirty fuel imported from europe. A report from the Guardian showed that international dealers export to Nigeria around 900,000 tonnes a year of low-grade, “dirty” fuel, made in Dutch, Belgian and other European refineries. They also found that hundreds of small-scale artisanal refineries produce large quantities of illegal fuel from oil stolen from the network of oil pipelines that criss-cross the Niger delta.

What's worst is that the international resource watchdog group Stakeholder Democracy Network (SDN) undertook a laboratory analysis which showed that the black market fuel in Nigeria was highly polluting but of a higher quality than the imported diesel and gasoline from Europe. The average “unofficial” diesel tested exceeded the level of EU sulphur standards 152 times, and 40 times the level for gasoline. Dangote's oil refinery will remove the need for Nigeria to import fuel. It is also reported that the fuel being produced by this refinery will meet Euro V regulation.

Nigeria joined the Paris climate agreement in 2015 which was signed by 198 countries that agreed to prevent global temperatures from rising above 2 degrees celsius as from 2020. Carbonbrief.org reports that Nigeria pledged to reduce its greenhouse gas emissions by 20% by 2030, when compared to “business-as-usual” levels. This pledge rises to 45% on the condition of international support. Logically one would expect that such a commitment would mean that Nigeria would gradually shift away from using fossil fuel and embrace a more greener and sustainable source of energy. That simply hasn't happened. Nigeria already has four oil refineries that are either not working or partially working. Over the last 60 years the Nigerian government has failed to maintain and keep these refineries operational.

If Nigeria can maintain and operate more than 20 power stations since the early 60's such as Kainji, Jebba and Shiroro Power stations, why can't they maintain their existing oil refineries?

BBC's answer to this was that, previous efforts to repair Nigeria's dilapidated refineries and build new ones had been scuppered to protect the interests of powerful fuel importers, some of whom have been linked to a subsidy scam costing the country billions of dollars a year, correspondents say. It should be noted that although Dangote's refinery will undoubtedly create jobs in Nigeria and boost the economy, it will definitely increase carbon emissions in the country. More importantly it requires a large carbon footprint to build such a refinery.

Market competition in Nigeria's oil refining sector

From an economic point of view, the benefits of job creation, cleaner fuel and a stop petrol importation, might be outweighed by a lack of competition and wide spread monopoly of the oil refining sector in Nigeria. While Dangote Oil Refinery is a public private partnership, Dangote Industry Limited owns controlling shares in the refinery, not the Nigerian government. This could mean that Dangote Industries have the power to drive the prices of fuel up or down. It is unconfirmed if the Nigerian government have put control measures in place and retain the power to regulate fuel prices in Nigeria.

Oilprice.com reports that Nigeria's four other oil refineries are old, in dire need of refurbishment and utilise below 30% of its capacity. This means that on completion of Dangote's oil refinery, it will have little or no market competition. In September 2020 Reuter reported that Nigerian conglomerate BUA Group had selected France’s Axens to build its 200,000 barrel per day (bpd) refinery and petrochemicals plant in Akwa Ibom. Barring any complications, Dangote's 650,000 barrels per day oil refinery will be competing against BAU's 200,000 barrel per day oil refinery. Yet having two functional oil refineries is Nigeria does exactly scream market competition. Plus, with Nigeria's history of corruption and recent civil unrest, there most likely won't be a long list of investors lining up to u all build new oil refineries in Nigeria.

Market competition is what drives prices down for customers, ensuring they get better value for money. Imagine if MTN was the only mobile network in Nigeria. Mobile tariffs would be higher because customers don’t have any other alternatives. Nigeria needs more than one or two privately funded oil refineries to promote market competition and protect the end user's interest.

Conclusion

Dangote's Oil Refinery is a plus to Nigeria's economy both in terms of job creation and boosting the countries GDP. Whatever money was spent on importing fuel will now be recycled within Nigeria and that is a boost to their economy. The environmental benefits are also a plus for Nigeria as the fuel imported from Europe has been found to be dirty. This is bad for Nigeria's air quality and the health of its people.

In terms of disbenefits, this oil refinery will definitely increase carbon emissions in Nigeria as this is unavoidable. The key question for the Nigerian government is how does this oil refinery fall within factor into Nigeria's commitment to reduce carbon as per the Paris climate change agreement. There doesn't seem to be any strategy in place and it is clear that the demand for crude oil world wide is reducing as most countries try to adopt a renewable and green energy sources to reduce carbon emissions which are damaging their environment. Nigeria's economy is largely dependant on crude oil exportation, what happens in 20 years when the demand for crude oil is zero or nothing.

The question about market competition has to be addressed to ensure consumers get fair prices. The government needs to create competition for Dangote's oil refinery, by either fixing their existing four oil refineries or encouraging other investors to build something similar. Although we will advise against more oil refineries as they simply are not sustainable for Nigeria's future economy.