• Friday, March 29, 2024
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Bold refinery plan aims to transform Nigerian oil

Bold refinery plan aims to transform Nigerian oil

When the ship BBC Naples docked at a jetty outside Lagos in late September, it marked a milestone for Nigerian billionaire Aliko Dangote: the vessel was the first to land at the port he had built for a $12bn oil refinery that some say could transform his country’s economy.

Mr Dangote has never lacked ambition. He has made his money selling cement, flour, sugar and salt to Africa’s largest economy — often, critics charge, with a government-assisted advantage — and beyond. But the Dangote refinery takes this ambition to another level.

There is a range of estimates about when it will be operational: in 2020, according to the company, the year after that at the earliest, according to most analysts, and 2022, according to a Reuters report in August. Never, according to sceptics.

But once operational, it will process 650,000 barrels of oil a day, a third of Nigeria’s daily production and more than that consumed by its citizens. It will also be the biggest refinery of its type in the world.

Last month at the Financial Times’ Africa Summit in London, Mr Dangote was understated. “We have achieved a lot — we’ve ordered all our equipment, and it has started coming,” he said. “There are quite a lot of challenges of doing this kind of gigantic project in Africa.”

The challenges are clear in the refinery’s staggering numbers. It will be built on 2,500ha of swampland that requires the sinking of 120,000 piles, on average 25 metres long.

The Lagos jetty extends for 230 metres and was built because no port in Nigeria is big enough to handle all the equipment it will take to build and run the refinery — including a distillation tower that will be the height of a 30-storey building. It involves the dredging of 65m cubic metres of seabed sand and the building of a 1km breakwater. It requires more concrete than the capacity of the country, so the business magnate has established his own quarries.

Nigeria does not produce industrial gas, trucks or power, so he is building all of those as well: his own gas plant, trucks in a joint venture with a Chinese company and a power plant able to produce the 480MW the refinery will need to run. By the time the project is completed, 138km of road and 180km of drainage will have been built.

At full steam, the site is also expected to produce enough plastic for all of Nigeria, along with 3m tonnes of fertiliser every year. The fertiliser plant had been expected to begin production in November, but Mr Dangote said in London it would not start until January. The refinery is expected to create 9,500 direct and 25,000 indirect jobs.

The businessman has spent $6bn of his own cash on the project, and raised a reported $4.5bn. If it fails, it may also bankrupt the man who has said his reward for completing the project will be buying his favourite football team, Arsenal.

The refinery will transform Nigeria’s refining industry. Its 650,000b/d capacity outstrips the country’s current total of 455,000b/d from four state-run refineries that often run at less than 10 per cent utilisation.

The decrepit state-run refineries “haven’t been able to justify all the investment in them for years”, says Jubril Kareem, energy analyst for Ecobank. After Mr Dangote’s refinery begins production, he says, “they could easily die a natural death because there won’t be any need for them any more — which actually a lot of people have been pushing for in recent years. Those refineries are not operating at any level that [justifies the view that] government should still fund them”.

But even when Mr Dangote produces more fuel than Nigeria needs, he may not be able to sell it at home. The country’s subsidy regime involves the state-run National Nigerian Petroleum Company importing more than $7bn of fuel each year and selling it to retailers, who must sell it to the public at the subsidised rate of N145 (40 cents) a litre.

Selling refined products at that price would be untenable for Mr Dangote, says Temilade Aduroja, energy analyst at Renaissance Capital in Lagos. “Our assumption is that the subsidy will have to go because, obviously, at N145 Dangote won’t make a profit,” she says. “The cost to produce at the refinery is more expensive than N145 — however, it’s cheaper than importing.”

Ms Aduroja says she expects the government to scrap or change the politically sensitive subsidy after February’s presidential elections. “People will adjust — a couple of years ago it was N87 and they increased it to N145,” she says. Or the government and the company could decide on a flat rate at which the state will sell crude.

The project will have fiscal implications, too. By turning Nigeria into a net exporter of refined oil it should reduce demand for foreign exchange, which is 40 per cent driven by fuel imports. And then there are taxes. “When it comes to government revenue, just imagine the amount of tax that refinery is going to be paying,” says Ms Aduroja.