Refinery delays contribute to Abuja’s fuel challenge

By Simon Ferrie
Nigeria’s downstream status quo changed forever with the end of fuel subsidies, but the flagship Dangote refinery has still yet to start operations
May was a critical month for Nigeria, with the election of President Bola Tinubu and the official inauguration of the mammoth Dangote refinery near Lagos. But while months later the refinery has yet to begin operations, government reforms have already turned the country’s downstream sector upside down.

There has been a persistent lack of clear information emerging from the 650,000b/d refinery project. Prior reports of Dangote starting operations have “always been a bit exaggerated”, said Andon Pavlov, lead analyst for dirty products and refining at data analytics firm Kpler, adding that “we currently anticipate a gradual launch towards the end of Q1 or early Q2 [next year], with a lot of questions remaining unanswered.”

Similarly, Janiv Shah, senior analyst at consultancy Rystad Energy, suggested the refinery startup had been delayed to “around Q2 next year, and could be even later”, an estimate roughly shared by David Wech, chief economist at analytics firm Vortexa, although he stressed it is “impossible to predict when the refinery might start up” and that there is a persistent “risk of significant delay”. Shah suggested the plant’s crude distillation unit (CDU) and fluid catalytic cracker will likely be commissioned only towards the end of this year, although he too stressed the risk of further delay. And Wech cautioned it is “impossible to tell how complete the units might be”.

“We currently anticipate a gradual launch [for the Dangote refinery] towards the end of Q1 or early Q2 [next year]” Pavlov, Kpler
Startup date aside, there are plenty of other concerns and questions about Nigeria’s new refinery. The facility comprises one large CDU. Wech noted that any issues with that unit “will take the entire facility offline”. It is also still not clear where the refinery will source its crude, although Nigerian National Petroleum Company (NNPC)—the country’s former NOC and now officially an independent company—is an equity holder in the project and has an extensive upstream portfolio.

Pavlov noted that plenty of Nigerian crude is already contracted under term agreements, so questioned how Dangote will be able to secure enough feedstock. The supply issue is further complicated, as the CDU “will most probably need to run on a mixture of different crudes”, he added. Given the difficulties around the project, “it still remains to be seen whether the refinery can run at nameplate capacity at all. I personally suspect we will not know the answer before 2025 at the earliest”, said Pavlov.

Despite the problems, the refinery could still have a significant global impact once it ramps up operations. Dangote will be the “biggest flow change factor for the product markets next year”, stated Wech, who suggested that, at full capacity, the refinery’s gasoline output could be around 200,000b/d. Those gasoline flows will likely compete in the Atlantic basin with European supply for US market share, he suggested. And on the diesel supply side, Dangote may be poised to compete with refiners in India and East Asia.

Subsidy withdrawal
Just over 100 days into the Tinubu’s premiership, and dramatic change is underway in Nigeria’s downstream sector. The new government took the controversial and unpopular—but many have suggested necessary—step of ending long-running public fuel subsidies, a move some suggest was intended to coincide with the expected startup of Dangote. The refinery is supposed to correct Nigeria’s glaring and structural lack of functional refining capacity, and end—or at least significantly reduce—the crude-rich nation’s heavy and expensive dependence on product imports, particularly from European refiners clustered around the ARA hub.

Instead, Nigerian consumers are now facing significantly higher fuel prices, without any fresh domestic supply to help offset the end of subsidies. “The administration is under real pressure,” said Gail Anderson, research director at consultancy Wood Mackenzie, who explained Abuja’s “response so far has been to try and shore up the naira with a $3b NNPC loan to lower the cost of imported products”. The loan was agreed between NNPC and multilateral African lender Afreximbank, with the former NOC stating it is intended “to support ongoing fiscal and monetary policy reforms aimed at stabilising the exchange rate market”.

“Nigeria’s public finances have been in a tight situation for quite a while, and for the government to decide to undertake this unpopular step it must have meant that all other desirable options have probably been examined”, said Pavlov, suggesting that, if no other viable courses of action are available, the government is perhaps unlikely to reverse course and reinstate subsidies again.

“The administration is under real pressure” Anderson, Wood Mackenzie
And the higher fuel prices are already hitting home. “I believe there has been quite a lot of demand destruction,” said Anderson. Already there has been a “sharp declining trend” in West African gasoline imports, noted Pamela Munger, senior market analyst at Vortexa. This assessment was shared by Kpler’s Pavlov, who agreed that “imports have been reduced considerably, with a lot of the previous smuggling [of formerly subsidised fuels] into neighbouring countries now mostly stalled, from what we understand”.

In addition to draining public coffers, one of the key criticisms of Abuja’s subsidy programme was that it was a boon for smugglers and encouraged the illegal re-export of fuels to other West African countries, rather than supporting Nigerian requirements. The end of that smuggling alone may constitute demand destruction in the region, even before considering the impact of higher prices on domestic Nigerian consumption itself.

“There is certainly an expectation that the refinery will deliver plentiful lower cost product to the local market,” said Anderson, “but on the other hand, Dangote will be looking to maximise margins, so that could mean a lot of trading. It will be fascinating to see how it plays out and whether it actually solves Nigeria’s fuel scarcity.”

In mid-August, the Ministry of Petroleum Resources launched a technical committee “to fashion ways and means of integrating artisanal oil refiners into mainstream crude refining”. This may demonstrate the government is feeling the pressure over fuel availability, given these “artisanal” refineries are extremely dangerous and illegal operations, with many located in the Delta and utilising stolen crude. The committee is examining how to support, fund, improve and integrate this informal sector “to boost in-country refining capacity at the required specifications”, including through the development of prototype “standard refineries”. However, given the highly improvised nature of these plants, it seems very unlikely they might be able to help make up for a shortfall in fuel supply, at least not to “required specifications” and certainly not without a significant environmental impact, crude wastage and risk to life.

Freight impact
The drop-off in flows has already had a significant impact on the freight market, where gasoline shipments from Europe to West Africa were once one of the benchmark routes for tankers—particularly in the Medium Range (MR) vessel class—transporting clean products. Historically, European refiners have been able to dump low-specification products in West Africa. But recent policy changes in the Netherlands have also tightened quality requirements for fuel exports, further contributing to the drop-off in Europe–West Africa gasoline flows, explained Ioannis Papadimitriou, senior freight analyst at Vortexa, who noted that tonne-day demand for clean tankers has declined “for the fifth consecutive month… to reach multi-year lows”, while MR-class vessels have been moving out of the Atlantic basin and heading east of Suez.

Source: Petroleum Economist

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