Ali Elias
The Economist Intelligence Unit has cautioned that further delays in crude oil feedstock to the Dangote Petroleum Refinery and Petrochemicals could hinder Nigeria’s economic recovery and put additional pressure on the naira.
Despite successfully exporting a range of products, such as fuel oil, naphtha, nitrogen fertilizers, gasoil, jet fuel, and diesel, the $20 billion Dangote Refinery has faced challenges in scaling up petrol production due to difficulties in securing a reliable supply of crude oil.
These delays are expected to have significant economic consequences for Nigeria, potentially worsening the already strained relationship between public finances and the management of the naira. The government’s unofficial petrol subsidy practice, despite scrapping the official subsidy in June 2023, has led to increased currency losses and a widening budget deficit.
This could force the Central Bank of Nigeria to revert to stronger currency management, exacerbating the economic challenges. The report highlights the need for a stable crude oil supply to the refinery to ensure Nigeria’s economic recovery and maintain a stable currency.
It pointed out that this has led to increased currency losses, contributing to a widening budget deficit that has become increasingly difficult to manage and could force the Central Bank of Nigeria to revert to stronger management of the currency.
“As the federal government unofficially subsidizes petrol (the official subsidy was scrapped in June 2023), currency losses feed into a widening budget deficit that is becoming more challenging to finance. This provides extra incentive for the central bank to revert to stronger management of the currency, as we already expect, but the degree of market intervention could become heavier.
“Meanwhile, ongoing fuel imports would reduce the current-account surplus from the 1.9% of GDP that we currently project for 2025, potentially leading to lower foreign reserves and the return to a more rigid and unstable foreign-exchange system,” the report said.
It adds, “The refinery has encountered a range of problems, both practical and political in nature. The most publicly discussed issue is how the refinery can secure a reliable pipeline of crude oil feedstock at affordable prices. NNPC, the state oil firm, has not been able to provide enough volume. The government has promised to deliver 450,000 b/d of oil to the refinery through NNPC in a pilot scheme, sold in naira, but the state oil company is not in a position to make this a reliable arrangement. Crude production in Nigeria is stubbornly low, as a result of oil theft and underinvestment. Output was 1.31m b/d in July, against an OPEC+ target of 1.38m b/d. NNPC receives a varying minority share of this and, moreover, a sizable quantity (about 90,000 b/d) is being committed as loan collateral,”
Nigeria’s oil industry faces a Catch-22 situation, where International Oil Companies (IOCs) demand a premium of $3-$4 per barrel over global prices, exacerbating the challenges. Regulators hesitate to enforce the Domestic Crude Supply Obligation, fearing IOCs might divest if forced to sell crude to local refineries.
Producing fuel locally would greatly benefit Nigeria’s economy and currency, as petroleum products account for 15-20% of the country’s import bill. The Dangote refinery, with a capacity of 650,000 barrels per day, promises to transform Nigeria’s oil landscape.
By potentially eliminating fuel imports, the refinery could shield local fuel prices from exchange-rate fluctuations and resolve the paradox of Nigeria being a major crude oil producer yet dependent on fuel imports. This development could be a game-changer for Nigeria’s fiscal position and currency stability.
“The Dangote fuel refinery is potentially transformational for Nigeria, which has always been an oil exporter and fuel importer. This fact is often regarded as a failure and an embarrassment by politicians, businesses and the media alike, but the new refinery has the ability to change this,” it emphasizes.