The refining business becomes more attractive relative to production when oil prices fall.
Royal Dutch Shell Plc reported on Thursday that a fall in earnings from the upstream part of the business, pumping oil and gas, was offset by better results in refining and chemicals.
This relationship between crude price and refining margins is proving to be an added incentive for the Dangote group as it seeks to replicate the success of India’s Reliance Industries Limited in its quest to curb Nigeria’s imports of petroleum products by building the countries first new refinery in 25 years.
The Refinery plant located in the Lekki district of Lagos will be able to process 500,000 barrels of crude a day, and is expected to come on-stream in late 2017 or the first half of 2018.
Dangote selected Engineers India Ltd. to do most of the detailed engineering work for the new plant.
“The site is being cleared, the plant is being designed. We are close to the beginning of detailed engineering,” George Nicolaides, Dangote Industries’ operations director for petroleum refining, said in an interview at the Platts African Refining Summit in Cape Town last November.
Aliko Dangote, Africa’s richest man and owner of the refinery announced in 2013 that the Dangote group had agreed on a $3.3 billion loan with 12 Nigerian and foreign lenders to build the refinery as well as a petrochemical and fertilizer complex costing a total of $9 billion.
Dangote selected Engineers India Ltd. to do most of the detailed engineering work for the new plant.
Dangote Group will put $3 billion of its own equity into the project, and is seeking a further $2.25 billion from development funds for the project.
The loan has a 7-year tenor or maturity while Dangote Industries will have to start repayments after three years, sources privy to the deal said at the time.
Nigeria imports 80 percent of its fuel needs and the lack of refining capacity is a major brake on Africa’s biggest economy.
The country is Africa’s top producer of crude oil, but four state refineries with a combined capacity of 445,000 barrels a day are operating at a fraction of that because of poor maintenance and aging equipment.
While the refinery does make economic sense especially with plunging oil prices, issues of subsidy on petroleum products sold in the Nigerian market are still unresolved.
The government spent nearly N1 trillion ($6.3 billion) in 2013 on such subsidy payments and it is unclear if Dangote’s new refinery will be a beneficiary of such payments in the future even though most analysts expect them to be phased out by 2017 anyway.
“Supplying the local market is the primary objective,” Nicolaides said. “Naturally we can move product to the region. The government is being very supportive, very enthusiastic about this project. We are not looking for or wanting any particular subsidies.”
The refining business benefits from lower crude prices in a number of ways.
Refiners make some products, such as asphalt, that are insulated from oil price fluctuations.
They may also export their fuels to higher paying foreign markets; cheaper gasoline (as a result of falling oil prices) can encourage people to drive more.
Brent crude extended its decline last month, touching $45.19 a barrel on Jan. 15.
Nigeria with a population of 180 million people grew Gross Domestic Product GDP steadily at about 7 percent per annum over the past 10 years.
Analysts say the country’s energy thirst is rapidly increasing (from the currently extremely low 300kb/d level), which should make the current fuel subsidy regime unsustainable in about 3 years, just as Dangote’s new Refinery is coming on stream.
Refining “is an excellent business to get into,” Dangote said in a recent interview, suggesting it will be in a position to make a profit, by selling at international rates to fuel marketers.
Dangote’s new refinery would immediately double Nigeria’s refining capacity, reduce dependence on the NNPC’s decrepitplants as well as cut imports from refiners owned by the International Oil Companies by up to 50 percent.
PATRICK ATUANYA
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