Dangote Refinery: Understanding Nigeria’s economy through corporate survival biology

1. In any economy, the petroleum refinery business faces significant economic, regulatory, technological, and market challenges. In Nigeria, these major challenges become more profound when a private party is involved. The brief history of the Dangote Refinery so far is a testament to that conclusion.

As this refinery has defied the odds and become a global success story and a reformer of the Nigerian economy in many respects, its robustness to withstand perturbations that threaten corporate survival and to sustain the positive upscaling of the Nigerian economy is sacrosanct.

Kelvin Emmanuel and Dan Kunle on Arise Exchange Television have been educating us extensively on the significance of the Dangote Refinery to the Nigerian economy. Chika Mbonu discusses the refinery’s impact on financial markets. A discussion with Dr Victor Abuul, a distinguished graduate of electric power in the UK, clearly highlighted the refinery’s importance to Nigeria’s electric power supply. Ayodeji Adegboyega is optimistic that the Nigerian foreign exchange market is poised to enter a “more hopeful phase” as the refinery hits full nameplate operation. A renowned, highly successful Nigerian businessman, an oil & gas kingpin, a banker, and a successful industrialist, Olufemi Peter Odetola, forecasts a significant strengthening of the Naira to N1000/US$ on account of the full operation of the Dangote Refinery. In the publication Dangote Refinery and the Nigerian Economy by Kanya Williams, a wide range of positive impacts of the refinery were identified. But no one demonstrates the refinery’s key impact on Nigeria’s core economic fundamentals better than Bismark Rewane of Financial Directives.

These authors and industry experts have made it clear that the main beneficiaries of this refinery are the fiscal and monetary authorities, given their statutory mandates to safeguard the value of the naira and to achieve focal macroeconomic variables such as inflation, economic growth, and employment.

The appeal to view the Dangote refinery through the optical prism of the biology of corporate survival is to establish how strongly connected the refinery’s survival is to policy formulation and implementation aimed at improving the foreign trade balance and defending the value of the local currency, albeit achieving macroeconomic goals by the monetary and fiscal institutions.

The Biology of Corporate Survival stems from extensive research, with evidence that companies are like biological species and that business thinkers have sought to draw business lessons from the dynamism and complexity of the biological environment to inform strategy formulation and implementation around business ideas that keep firms alive. It was first published in the Harvard Business Review in 2016, authored by Martin Reeves and Simon Levin. It is a deeper dive into business management strategy beyond classical approaches. Many firms still pursue classical approaches to managing corporate survival, even in these times of increasingly complex, diverse, and dynamic business environments that are more interconnected than ever and far less predictable. The classic approaches to strategy were designed for more stable times, emphasising analysis and planning focused on maximising short-term performance rather than long-term robustness.

The discoveries of Reeves and Levin that led to the publication and subsequent application of the biology of corporate survival compel me to raise this issue regarding our dear refinery for public response, especially from the managers of the Nigerian economy. After investigating the longevity of more than 30,000 public firms in the United States over a 50-year span, the authors discovered that businesses are disappearing faster than ever before. Public firms have a one-in-three chance of being delisted over the next five years, whether due to bankruptcy, liquidation, a merger or acquisition, or other causes. That is six times the delisting rate of companies 40 years ago. Reeves and Levin state that “although we may perceive corporations as enduring institutions, they now die, on average, at a younger age than their employees do. And the rise in mortality applies regardless of size, age, or sector. Neither scale nor experience guards against an early demise.”

In the context of the biology of corporate survival, as narrated above, is there any guarantee that this refinery will continue to operate and help the Nigerian economy over the next forty years, assuredly?

The Dangote Refinery is Nigeria’s first fully private capital-funded refinery experience. This monolith is built around a single individual, a mechanism that creates and accentuates a key-man risk factor. This key-man risk mutates and appears in most corporate mortality issues, as noted in the key findings of Reeves and Levin, especially in a sensitive industry such as petroleum refining. The risk of corporate failure in the distant future therefore stares us in the face, glaringly. Apart from the findings of Reeves and Levin, the global market is replete with examples of corporations like Dangote Refinery that had it good for only a brief moment, only to die out the next.

Following the key-man factor is the risk to economic survival, which encompasses liquidity, solvency, and financial concerns. The economic survival of a petroleum refinery depends on crack spread, which comprises the percentage of the product slate the refiner is choosing to produce multiplied by the vector of spot prices for the refined products minus the sum of the spot price for crude input and the variable cost of refining the crude oil input in the production at a point in time. The refinery must generate a positive crack spread to survive. In the case of Dangote Refinery, all of these financial numbers are in foreign currencies, and the sale of PMS in Naira has added a foreign-exchange component to the matrix that needs to be addressed. The survival of the refinery in this regard is closely linked to our foreign exchange policy, as various experts report in this analysis. The connection between monetary policy and Dangote’s foreign exchange management is intricately intertwined, such that any strategy from either side, no matter how tangential, will affect our foreign exchange market. It is, therefore, not out of place to suggest that the monetary authority should foster a mutually symbiotic relationship with the refinery to share data and intentions regarding Nigeria’s strategic management of its foreign exchange market.

The Dangote Group of companies generates foreign exchange through several operations, including the export of urea and cement. Refinery products such as propylene are also exported. This complex arrangement requires a clear understanding on the part of the monetary authority. Does the group generate enough self-sustaining foreign exchange to meet its foreign exchange obligations without recourse to the Nigerian foreign exchange market? The establishment of net foreign exchange generation and spending by Dangote Refinery should be a mandatory disclosure to the monetary authority as part of its foreign exchange management.

In terms of industry regulations, the refinery faces headwinds that the Petroleum Industry Act is not commensurately supportive of as it ought to be. Neither free trade zones nor local content is of substantial value as a strong lever for a private firm’s continued survival amid the complexities that every corporation must contend with in petroleum refining. As with the monetary authority, the fiscal authority needs to create the same relationship with the refinery for the purposes of ensuring the refinery, and hopefully others like it that may come on board, see us through decades of positive economic impacts.

The PIA speaks much more about tax extraction than about tangible offers to promote the growth of specific companies of this nature. Refinery economics are affected by geopolitical risks, market volatility, and seasonal demand fluctuations. Sudden spikes in product prices affect margins, most often beyond the GAAR of operators. And even when the spikes favour improved margins, they often mask underlying reliability issues that stay unaddressed due to cost constraints. Conversely, prolonged periods of low margins discourage investment in preventive maintenance, increasing the probability of operational failures. External pressures such as market disruptions, economic downturns, and regulatory changes influence longevity, but internal factors—including leadership transitions, organisational culture, and decision-making processes—also play a critical role in determining whether a company will survive. These are the inescapable issues that the fiscal authority should ensure any regulatory regime addresses, with the foremost goal of ensuring companies in Nigeria’s petroleum refining industry survive.

This refinery, in terms of economic importance in the current economic cum political dispensations of Nigeria, is not the Dangote refinery but a Nigerian refinery and should be seen as such.

Derivable gains from this refinery cover nearly every aspect of the Nigerian economy. However, the essential impacts are the moderation of foreign exchange pressure on the market and easing the fiscal constraints through reduced PMS imports and savings on pump prices. If we apply the global spot price of PMS today, which is US$1.95, to the refinery’s reported domestic daily supply of 40.1 litres, according to NMDPRA, this will translate to a daily forex demand easing of US$78.20 million and a quarterly pressure relief of US$7.037 billion, maritime and foreign logistics costs not included. In the fiscal space, Dangote’s daily average PMS price, conservatively put at N800/litre, translates to N20/litre, saving the refinery as it survives. N20/lit translates to N72.18 billion in quarterly savings for fiscal payments in subsidy underrecovery.

These gains will continue only if the refinery beats every industry perturbation and remains robust. If the Dangote Refinery does not succeed, it could trigger a dramatic economic upheaval—comparable to a volcanic eruption or earthquake—that may erase current progress and undermine future opportunities. First to burn are FX market gains reversals, followed concurrently by increased fiscal spending and erosion of the company’s positive impact on the nation. This is why the conversation about this refinery should take a different perspective, and it is that perspective I am bringing: the Dangote refinery in the Nigerian economy, through the lens of the biology of corporate survival.

And to succeed, every stakeholder, most especially the monetary and fiscal managers of the country, refinery, and other midstream regulators, is to establish a special, strong and active participatory and supportive relationship with this significant private economic initiative that has positively affected key Nigerian macroeconomic variables, the Dangote Refinery.

Kanya Williams; United Kingdom. [email protected]