Dangote Refinery Crisis: Uncovering the Shocking Mistakes Behind Africa’s Largest Oil Project

The Dangote Refinery controversy has generated substantial debate, capturing the attention of stakeholders across various sectors. Initially, I found myself inclined to support Aliko Dangote, Africa’s richest man, whom I perceived as being unjustly targeted by the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA). However, a respected voice in the discourse, Ademola Adigun, urged a shift from emotional reactions to informed analysis, prompting me to delve deeper into the issue.

Crude Supply-Feedstock: A Critical Oversight

One of the primary issues hampering the Dangote Refinery’s operations is the crude supply feedstock arrangement. When constructing the refinery, there was no concrete plan in place for securing feedstock. This oversight is striking, considering the refinery’s status as the largest single-train refinery globally. Typically, securing a feedstock agreement is fundamental to such a large-scale project. Contrary to some claims, the Nigerian National Petroleum Corporation (NNPC) arrangement during the refinery’s construction phase was not a feedstock agreement but rather an equity participation deal. NNPC’s involvement, which included a $1 billion loan for 20% equity, did not address the crucial need for a steady supply of crude.

Currently, Dangote is sourcing feedstock on an ad-hoc basis, with NNPC Ltd. providing 39 cargoes so far. This uncertainty in crude supply is a significant operational challenge, impacting the refinery’s efficiency and output.

Crude Oil Pricing: Complex Market Dynamics

Dangote’s assertion that International Oil Companies (IOCs) sell crude to him at $6 per barrel above the international price has been contentious. The truth lies in the complexity of crude oil grades and market dynamics. Different grades of crude oil, such as West Texas Intermediate (WTI) from the US, have varying prices. Dangote’s refinery requires a blend of various grades, including Bonny Light and WTI, to produce petroleum products. This blending process necessitates sourcing different grades globally, complicating the pricing narrative.

Moreover, the market margin for crude oil sales varies widely, typically ranging from $1.5 to $20 per barrel. Dangote’s claim overlooks the fact that his refinery benefits from a preferential margin of $0.5 per barrel from the Nigerian government, a favorable deal compared to international standards.

The issue of crude oil supply also intersects with the Production Sharing Contract (PSC) between IOCs and the Nigerian government. These contracts ensure that IOCs produce and share crude with the government, leaving Dangote outside these established agreements. The Petroleum Industry Act (PIA) further stipulates that crude oil supply to local refineries operates on a willing buyer, willing seller basis, reinforcing the market-driven nature of the sector.

Downstream Operations: Licensing and Monopoly Concerns

Licensing issues add another layer of complexity to the Dangote Refinery’s operations. While the refinery has the necessary construction license, it lacks comprehensive operational licenses, creating regulatory challenges. Dangote’s push for monopoly, where all oil marketers are directed to source from his refinery, raises significant concerns. Such a move would undermine the principles of deregulation and healthy competition, crucial for the sector’s growth and sustainability.

Furthermore, Dangote Refinery operates within a free trade zone, exempting it from paying taxes to the Nigerian government. This arrangement, coupled with the sale of petroleum products in foreign currency, presents a potential loss of revenue for the government and complicates the financial dynamics for local marketers.

Financial Strains and Operational Viability

Financial stability is another critical issue. Dangote requires at least $1.8 billion in working capital to keep the refinery operational. Securing this funding is challenging, especially given the recent downgrade of Dangote Industries Limited by Fitch Ratings. The downgrade highlights liquidity issues, currency devaluation impacts, and a lack of concrete steps to refinance maturing debt, painting a precarious picture of the conglomerate’s financial health.

Dangote’s initial reliance on perceived easy access to funds through favorable relationships with previous Central Bank of Nigeria (CBN) leadership now seems shortsighted. The shift in leadership dynamics and tightening financial scrutiny have exposed the vulnerabilities in Dangote’s financial strategy.

A Path Forward: Strategic Divestment and Pragmatism

To navigate these challenges, Dangote needs to adopt a pragmatic approach. Soji Adekunmbi, a public policy analyst, suggests strategic divestment as a viable solution. Divesting shares in the refinery can provide much-needed capital and spread financial risks. Historical precedents, such as Saudi Arabia’s public sale of Aramco shares and Bill Gates’ divestment from Microsoft, illustrate the effectiveness of this strategy.

Selling shares to Nigerians not only aligns with broader economic inclusivity but also stabilizes the financial foundation of the refinery. Given the intricate and capital-intensive nature of the oil and gas sector, Dangote’s reliance on a monopolistic mindset from his cement business is untenable in the deregulated petroleum landscape.

Conclusion: Balancing Support with Critical Analysis

While my initial support for Dangote was driven by perceived injustice, a deeper understanding of the issues reveals a complex interplay of operational, regulatory, and financial challenges. The Dangote Refinery’s success is pivotal for Nigeria’s economic development, but it requires a balanced approach, blending support with critical analysis. Dangote’s visionary spirit and entrepreneurial drive are commendable, but navigating the petroleum sector demands strategic pragmatism and adherence to market principles.

As the debate continues, it is essential to sift facts from emotions, ensuring informed discussions that contribute to sustainable solutions. The Dangote Refinery stands at a crossroads, and its future depends on addressing these multifaceted challenges with clarity, pragmatism, and strategic foresight.