For almost a decade, the West African oil market has awaited the Dangote refinery start-up in Nigeria — a massive engineering complex that promises to transform the region’s crude and refined products flows, with implications for Europe.After years of delays and cost overruns, the refinery is set to be commissioned by outgoing Nigerian President Muhammadu Buhari on May 22, easing concerns it would never be completed and setting the continent’s biggest crude producer on a path to self-sufficiency in fuels.
The 650,000 b/d facility, the biggest in Africa and the largest single-track refinery worldwide, still faces logistical challenges, including unreliable crude supply from its host country that could prevent Nigeria from permanently replacing fuel imports from the Amsterdam-Rotterdam-Antwerp hub, according to trading sources.
Once operational, it is expected to make Nigeria a net exporter of refined products, although rapid population growth will see imports exceed production again in the coming decades, according to forecasts by S&P Global Commodity Insights. In a major shift to regional crude flows, it could also nearly halve Nigerian oil exports.
Nigeria pumped 1.18 million b/d of crude in April, according to the latest Platts survey of OPEC+ production by S&P Global. However, the country lacks refining capacity, meaning it imports all its refined products whose prices had skyrocketed following Russia’s invasion of Ukraine.
Aliko Dangote, a billionaire Nigerian industrialist, says his refinery is the answer.
First proposed in 2014 and repeatedly delayed, most recently because of the pandemic, the facility’s estimated cost has swollen to $20 billion from $9 billion. However, proponents say it would create a multibillion dollar domestic market for Nigerian crude, bolster foreign exchange reserves, supply more affordable fuel domestically and boost downstream investment.
A spokesperson for Dangote Group told S&P Global that the refinery expects to process its first crude batch in June under a 500,000 b/d first phase before ramping up to 650,000 b/d in mid-2024, although experts have said it is unlikely to be operational before third-quarter 2023.
Most of the crude would come from Nigeria, which is capable of pumping 2.5 million b/d but has struggled to exceed 1.2 million b/d in recent years amid insecurity, theft, strikes and technical and operational issues at aging wells.
Crude production would remain relatively stable around 1.3 million b/d over the next decade, but exports would drop dramatically due to the refinery start-up, according to analysts’ forecasts at S&P Global. In 2023, Nigeria is forecast to produce 1.46 million b/d and export 1.45 million b/d, however by 2027, it would be producing 1.30 million b/d but exporting 656,000 b/d, according to the forecasts.
The Nigerian National Petroleum Corp., which has acquired a 20% stake in the refinery, is expected to supply 300,000 b/d of crude to the project, while nearby oil producers such as Angola and Chad also hope to do so.
“I think [Dangote] will optimize because Nigerian crude [supply] isn’t really stable,” said a trading source.
Uwadiae Osadiaye, an analyst at Lagos-based FBNQuest, told S&P Global that while the refinery would be economically “transformational,” cutting crude exports by half would drive down foreign exchange earnings.
Nigerian crude is sweet — meaning it can be fairly easily converted into fuel — and attracts a range of customers in Europe and Asia. In recent months, however, traders have struggled to offload barrels of Nigerian crude. Platts, a unit of S&P Global Commodity Insights, last assessed Nigeria’s flagship crude grade Bonny Light at a 75 cents/b discount to Dated Brent May 15, the largest deficit since September 2021.
Located near Lagos, the Dangote refinery will produce Euro 5 specification gasoline and diesel, as well as polypropylene. As a result, production of motor gasoline is forecast to increase to 249,000 b/d in 2026 from almost nil currently, and over 300,000 b/d by 2033. Meanwhile, imports of the motor fuel will more than halve by 2026 to 154,000 b/d.
With rapid population growth expected in Nigeria in the coming decades, imports will eventually exceed production again in 2042, the data suggests. From next year, Nigeria will also export gasoil for the first time, with production set to increase to 211,000 b/d in 2027 from 3,500 b/d in 2023.
Import-related fees add 15%-20% to the cost of petroleum products in Nigeria, according to Osadiaye.
The refinery also hopes to supply other African countries that currently import from Europe and the US.
“Will be a big impact,” a trader told S&P Global, adding that Nigeria could supply South Africa and Latin America with refined products.
However, others questioned whether Nigeria has the ports and logistical capabilities to export refined products long distances.
“Dangote has huge potential,” said another trader. “I just do not know how they will handle it. Logistics might be tough on them to maximize the results.”
Osadiaye countered that the Dangote Group already exports fertilizer to Latin America and has a distribution network across West and Central Africa for cement.
The Dangote refinery has also spurred “quite a bit of activity on the local refinery end,” Osadiaye said, with companies eager to position themselves in the growing sector.
BUA Group, which also produces sugar, flour and cement, is eyeing a 200,000 b/d Niger Delta refinery while the NNPC is turning around defunct refineries.
Should those investments come to fruition, Nigeria’s long-dormant refining sector could build on Dangote’s commissioning to further transform the region’s oil flows.