As Dangote refinery begins…

Sometimes when I think about the macro-economic reality of Nigeria, I can’t help but imagine what would have been if the sale of the Port-Harcourt refinery to the BluStar Consortium in 2006 was not reversed in 2007:

“The Nigerian government needs to understand that the Dangote refinery is an arsenal it has for rebalancing its macroeconomic table.”

• Will Nigeria have spent about $24 billion on failed turn-around maintenance programmes?
• Will the state national oil company still be expending nearly 100 billion naira per year in OPEX for moribund refineries that are not refining one barrel of crude oil?
• Will Nigeria maintain this OPEC strategy that seeks to fulfil export quotas to international offtakers (that the government has consistently failed to meet over the last several years)?
• Will under-recovery on landing PMS constitute such a major part of the budget that at its peak rose to 32 percent and has now instead been transferred to the SOE to pay?
• Will Nigerians be the unfortunate victims of substandard transportation fuels dumped through transshipment?
• Will the balance sheet of the SOE show modified carry agreements to international traders through vendor supply swap programmes?
• Will the Central Bank have its net external reserves below the Guidotti level (where it is unable to meet up with its balance of payment obligations for 1- year)?
• Will the FG, in its medium-term expenditure framework, divert its fiscal strategy paper to concessionary loans, Eurobond programmes, and costly central bank overdrafts in violation of the Act that establishes the CBN in such a way that it raised the non-discretionary CRR, mopped up the public sector CRR, triggered a quantitative easing programme that was not backed by any assets or reserves, thereby leading to a 92 percent drop in the value of the naira, and exchange rate-backed inflation?

All these were unintended consequences of the government not fixing its backward integration drive by handing over crude oil refining to the private sector. Instead, the government pursued a strategy of crude oil exports and used the FX gotten to meet up with its balance of payment obligations, which kept the exchange rate strong until the crude oil output dropped, and NNPC pivoted from Oil Processing Agreement (OPA) to Direct Sale, Direct Purchase, that drastically reduced what the Central Bank was getting as inflows from about $35bn per annum to nearly $5bn per annum.

Some people have argued that if the incumbent President had kept the peg on the naira and waited for the commercial refinery in Lagos to start working before changing the exchange rate strategy to a float from a fixed band as a means to reduce the black market premium and incentivise inflows to the autonomous FX markets, maybe Nigeria will not experience the trilemma of weak exchange rates, hyperinflation, and high interest rates—that has opened never before seen fair value floating gains and FX revaluation gains by banks who hold loans on their balance sheets. My response to this is – As at the time the President took over power in 2023, the Central Bank’s Balance sheet was in a state of technical insolvency, the banks were owed forwards of nearly $7bn, with SWAPS to external asset managers of nearly $8bn (at an APR of 9 percent), impairment losses on loans its development finance department gave that was still floating.

The government had a choice of either declaring bankruptcy protection from its creditors as a means to avoid paying interest on its domestic and external loans like Ghana did or removing a major part of subsidies that I estimate to be at least 17 trillion naira per annum.

The Nigerian government needs to understand that the Dangote refinery is an arsenal it has for rebalancing its macroeconomic table. At full capacity utilisation, the refinery can fully backwardly integrate the $28bn Nigeria spends importing nine (9) products that form its energy basket. Here are steps that need to happen for 40 percent of demand pressure to disappear from the markets and for the rates to adjust back to the 1,150-1,200-naira range that will reduce the exchange rate-induced inflationary pressures:

• The FEC needs to ensure that the Lagos refinery gets the 20-m barrels of crude oil feedstock he needs monthly.
• The FEC needs to intervene to ensure that the ‘take or pay’ program for offshore blending plants is brought to a close to pivot the markets from importing ‘dirty fuels’ to full backward integration through import substitution.
• The FEC needs to resume the naira-based crude oil sales program that is backed by sections 109 of the PIA, with special emphasis on sections 11-12 of the production regulations guidelines gazette produced by NUPRC to govern the DCSO framework
• The FEC needs to begin the long-term work of pivoting Nigeria’s OPEC strategy from export quotas to ensuring that producers upstream meet up with the DCSO quotas before they are granted export permits to lift products.
• The FEC needs to audit the current daily consumption volumes, which were 21 mL in 2002, 25.9 mL in 2003, and 26.7 mL in 2009, and have grown at a compounded average growth rate (CAGR of 11 percent) before the sudden abnormal spike of 234 percent (that is not backed by any empirical evidence or data) between 2010 and 2024. This is important to reduce the financial burden the SOE has to carry in modified carry agreement structures to enable vendor supply swap programs with international traders that currently have an outstanding loan of $6.8 billion owed. Winding down imports and adjusting to full backward integration through import substitution that the Dangote Refinery provides will reduce the demand pressure on the FX markets by 30 percent.
• The FEC needs to start the larger process of unbundling NNPC, especially as it regards sending it to the equity capital markets, and allowing its new shareholders to appoint a market-based management and board that can pivot the financial model for structuring joint venture final investment decisions away from ‘carry’ to shared, to enable the SOE to jointly set financial terms for brownfield and greenfield projects by contributing its own share of CAPEX for EPC through project financing. This is the long-term key to raising daily output.

It’s important to note that the Dangote Refinery is the single largest private sector investment that Nigeria has seen in the last 40- years, and the potential it holds to solve not only the demand for transportation fuels but also the need for key enterprise products that other manufacturers need for their supply chain in base oil, polypropylene and polyethylene granules, refinery gases that can be blended into LPG, bitumen binders for mixing asphalt, petroleum coke, et al. is critical to unravelling a new phase of real sector development in Nigeria’s industrial complex.

Kelvin Ayebaefie Emmanuel is an Economist.