March 2, 2024

Dangote Oil Refinery under fire over purchase of US crude

Purchase contradicts Kyari’s reason for Nigeria’s 20 percent stake

By Adebayo Obajemu

Dangote Oil Refinery has been under fire for the purchase of 2 million barrels of crude from the US, this has raised questions about why a petro- country like Nigeria isn’t using its own supply to feed the giant plant.
Many Nigerians who spoke to EnergyDay wondered why Dangote chose to buy from US instead of Nigeria.
Dr. Omoyo George, a medical doctor said, ” Why did Dangote go for US’ crude instead of Nigeria? Was it cost? As for me, the action sounded like lack of patriotism .
This view was shared by Bamidele Anjorin, an insurance executive, who told this medium that ” I believe cost and other considerations must have been the reasons, but whatever they may be, country first, this billionaire ought to have considered buying from Nigeria first.”

The Refinery which was built to a capacity of 650,000 barrels a day has long been seen by Nigerians as a welcome end to a legacy of sending the nation’s crude abroad for processing, and a reliance on costly foreign fuel.

However, the purchase, widely reported has led tongues wagging as to why the Refinery did not buy crude oil directly from Nigeria.

Many have wondered why Dangote has taken that decision given that the country is the largest producer in Africa and heavily dependent on petroleum for revenues. It’s important to note that Dangote has been tapping local supply too.

One of the reasons given by Meles Kyari, Group Managing Director of NNPC Ltd for Nigeria buying 20 percent stake in the Refinery was to force Dangote’s hands to buy crude locally.

Recall that in 2021, Kyari, had said the decision to buy the 20 per cent stake in the Dangote refinery was to ensure the plant buys crude from Nigeria.

Mr Kyari, who then appeared before the House of Representatives Committee on Finance on at the interactive session on the Medium Term Expenditure Framework (MTEF) in Abuja, said the refinery had no obligation to buy crude from Nigeria prior to that decision.

He explained that the 20 per cent stake valued at $2.6 billion was tied to the refinery buying crude oil from Nigeria, adding that without the equity, Dangote refinery could buy cheap crude from Venezuela and import it to the country.

The GMD disclosed that the country had no strategic storage and this equity stake would ensure that the country had a seat on the board of the company.

He also said to the committee that Aliko Dangote, the billionaire owner of the refinery, was against the 20 per cent equity.

“He (Dangote) has the right to buy oil from anywhere. So you can’t force him to buy. We structured our equity participation that this refinery must buy at least 300,000 crude from us. This guarantees your market,” Mr Kyari said.

“Today, every country is struggling to secure market for their crude oil. This refinery does not owe us any responsibility if we don’t have this arrangement. That is why we tied our participation to the fact that this refinery must buy from us.

“This refinery is a very complex refinery, complex in our industry because it can crack any crude. So, it can buy any cheap crude from anywhere, and bring it into this country and leave you to your crude.

“We simply saw this opportunity, we said are not going to take any government money to put into this. We are borrowing money from the AfriExim consortium to pay for our initial payment and also tied his subsequent payment to him buying from our production.”

“Our decision to take equity in the Dangote refinery was a very calculated and conscious decision. First, there is no resource-dependent country like ours anywhere and with a national oil company will have a venture of this size and magnitude with its very clear security implications that is situated in a free trade zone. Literally, this refinery is not in this country.

“Today, we import 100 per cent of our refined products into this country. You now have a venture that will produce close to 50 million litres of petroleum products in this country where energy security is an issue in this country. From my personal knowledge, the U.S. keeps stock on the ground that government owns it and that government pays for it and keeps it.

“As we speak today, we don’t have any strategic storage or arrangement. So no country will allow any venture of this nature to exist without having a seat on its board.

“Secondly, this company is situated in the free trade zone. The meaning of this is that there are several incentives granted to this business. If you look at our investment, total investment, of about $2.7 billion, not $5 billion, the total stake of 20 per cent is $2.7 billion, if you are to build 20 per cent of that capacity, which will be around 130 barrels per day capacity refinery.

“It is simply impossible to build a refinery of that capacity with that amount of money. This is not just a refinery, but a refinery with a petrochemical component. So somebody has done all the ‘jaki work’ (grunt work) for us, and we are taking a stake in it.”

Mr Kyari said further to the committee that the decision to have a stake at the refinery was at the instance of the NNPC, adding that “Mr Dangote may not be excited with it”.

He said, “I can confirm Mr Chairman, taking stake was at the instance of the NNPC.

“I believe up to this moment, Mr Dangote does not want us to take equity in this plant.

“This is a very informed policy decision that will guarantee security because we will have a seat—we will have right to 20 per cent of the production from this facility.”

So what happened that poisoned Kyari’s optimism that Dangote will buy crude wholly locally?

Price? may be?

“We must take into account the fact that burgeoning output in the US has helped to deepen the discount of US crude West Texas Intermediate Midland — at the point of export — in the global oil market.

That’s seen American gush out into the world, often undercutting supplies that are more local.

Normally, Nigerian barrels that are comparable quality to WTI trade at a premium to Brent.

This means that, even with the additional cost of hiring an oil tanker, it may still have been more profitable to purchase a US cargo on the open market than one from Nigeria”, this is the submission of Bloomberg.

Sourcing crude from outside of Nigeria has always been a possibility, according to Elitsa Georgieva, executive director at Citac, an energy consultancy specializing in the African downstream sector.

“However, given the proximity to local crude fields and the fiscal efficiencies of sourcing domestic crudes, there would need to be significant economic incentives to drive the processing of foreign crudes,” she said.

Supply and availability:

Nigeria may be the continent’s biggest producer, but output has fallen as much as 50% over the past decade.

The OPEC member has been facing up to the gradual withdraw of majors from onshore and shallow water fields that have been taken over by local companies with fewer resources.

Crude theft and attacks on pipelines in the Niger Delta have also curbed production, particularly onshore, while a lot of what does get pumped is far offshore and often owned by foreign firms.

Much of Nigeria’s oil actually belongs to those international companies, or is supply that foreign firms have committed to purchase.

The result — a lack available-to-buy domestic barrels — may “necessitate” imports, according to Georgieva.

Crude Properties:

While Dangote imported US barrels, in reality they could be from anywhere and the company has made it clear in the past that it could import.

WTI Midland is rich in gasoline. On Saturday, Dangote told his cement distributors that gasoline production would begin at the end of March at the refinery.

Traders say that some grades from elsewhere were mentioned, but ultimately Dangote found WTI Midland to be best suited to its needs.

One trader of West African oil also pointed out that Dangote might be testing the US crude so that it is able to use the grade if necessary in future.

NNPC Deal:

NNPC, the national oil company, previously agreed to buy a 20% stake in the refinery and to pay for it with large amounts of crude. According to the company’s most recent financial statements, the company committed 335,000 barrels a day to acquire the stake.

Known supplies of Nigerian barrels in December and January fall well below that flow rate, although those deliveries were still when the plant was in the earlier stages of ramping up, according to data from traders compiled by Bloomberg.

For the pact to remain in place, NNPC may need to step up its supplies to the refinery.

Dangote and NNPC declined to comment.

( With additional information from Bloomberg )