April 16, 2024

Why Dangote Refinery may prefer to import crude from US

Adebayo Obajemu

There have been so much hue and cry about Dangote Refinery importing crude oil from the US rather than buying from NNPCL.

To many, this turn of events is hardly surprising given that Dangote is primarily in business to reduce costs, make money thus the propriety of Dangote Refinery’s action makes economic sense.

The dynamics of the step to some becomes even more befuddling given that the Dangote Refinery Lekki, the largest single-train refinery globally, is owned by Africa’s richest individual, Alhaji Aliko Dangote, and the Nigerian National Petroleum Company Limited (NNPCL), as the latter has 20 percent stake.

Business men are in business to make money, and they will always go to where they can get a good bargain , thus choosing to go the US way , specifically to import from West Texas Intermediate (WTI) Midland, is not any cue from Harvard’s textbook formula but born of a mingling of pragmatism, reality and market dynamics.

The Dangote Refinery’s decision to import crude oil from the US, particularly WTI Midland, came to the fore when it got 2 million barrels from Trafigura, one of the world’s largest oil traders.

It’s no a rocket science that The price of crude oil is central to determining the profitability of oil refineries, as has direct effect on feedstock costs, which a sizable proportion of refinery expenses. Fluidity and flux in crude oil prices have direct impact on overall economics of refining operations, influencing profitability alongside fuel costs, operational expenses, and compliance with emissions regulations.

Refineries which are in business must as a matter of utmost economic importance clinically study and analyse crude oil prices and their relationship with market prices for refined products to assess profitability .

We must note that signifying the price difference between refined products and crude oil, is a simplified but useful measure for estimating refinery profitability. A higher crack spread shows larger profitability and fosters refineries full maximization of capacity utilisation. On the obverse, lower crack spreads may fuel refineries to scale back capacity due to cost considerations.

In this whole matter too is the issue of cost-effectiveness. The major drive for going to US to buy crude springs from cost consideration: It’s cost effective compared to Nigerian premium grades like Bonny Light, Agbami, Qua Iboe, and Brass River. It’s true that Nigerian grades when benchmarked against Europe’s North Sea’s Brent, WTI Midlands supplies a more economically viable option. During the procurement duration , WTI Midland was significantly more affordable in terms of cost, thus providing a window for the Dangote Refinery to realise substantial cost efficiencies.

Within a panoply of different factors, it appears the important differential in price between Nigerian and US WTI Midland crude is a major deciding factor. Nigerian barrels of similar quality to WTI typically command a premium over Brent. For instance, on Wednesday, February 7, 2024, WTI closed at $73.86, whereas Brent crude closed at $79.29, indicating a $5.43 spread. In contrast, Nigeria’s premium grade, Qua Iboe, traded at $81.14, showcasing a $7.28 difference. It’s noteworthy that all Nigerian crude grades exceeded the $80 mark during this period.

The significant rise in US crude oil production has spurred American firms to offer significant discounts on WTI Midland crude in the global market. This important concession may have spurred the Dangote Refinery to opt for US crude over Nigerian grades.

The acquisition of 2 million barrels of US crude by the Dangote Refinery marks a strategic move aimed at optimising its operations and enhancing profitability. This significant procurement underscores the refinery’s commitment to securing cost-effective feedstock for its operations. By opting for US crude, particularly WTI Midland, the refinery not only diversifies its crude oil sources but also capitalises on the favourable pricing dynamics of American crude in the global market. This acquisition aligns with the refinery’s goal of achieving operational efficiency and competitiveness in the oil refining industry.

While transportation costs are a factor in importing crude oil, they are offset by the significant cost differentials between US and Nigerian grades. The Dangote Refinery’s decision to import US crude despite transportation expenses indicates that the economic benefits outweigh these costs.

The absence of Nigerian shipping companies involved in transporting crude oil to the Dangote Refinery underscores the logistical challenges within Nigeria’s shipping industry. The refinery had to rely on international shipping companies, further highlighting the need for infrastructure development in the country’s maritime sector.

The use of large supertankers capable of carrying massive volumes of crude oil offers significant discounts to customers, mitigating transportation costs. However, Nigeria currently lacks the infrastructure to support such vessels, leading to reliance on foreign shipping companies.

The decision of Nigeria’s Dangote Refinery to import US crude, specifically WTI Midland, reflects a strategic business move driven by economic considerations. The cost-effectiveness and competitiveness of American crude, coupled with substantial profit margins, outweigh transportation expenses, making it a financially prudent choice for the refinery. However, the reliance on international shipping companies underscores the need for investment in Nigeria’s maritime infrastructure to enhance its competitiveness in the global oil market.

The United States, despite achieving record-breaking domestic oil production of 13.21 million barrels per day (bpd) of crude oil in 2023, continues to import Nigerian crude oil due to factors such as unique quality, refinery configurations, logistical constraints, contractual obligations, and market dynamics. This highlights the complexity of global energy markets where diverse factors influence import decisions.

On the whole, the Dangote Refinery’s preference of US crude marks a strategic shift in Nigeria’s oil industry, spotlighting the importance of economic pragmatism and market dynamics in shaping business decisions within the sector.