THE BIG OIL DEAL: What Nigeria will gain by investing $2.76bn in Dangote Refinery

By EMEKA OKOROANYANWU

In what oil experts applauded as a great move, the Federal Government of Nigeria recently gave the nod for its oil conglomerate, Nigerian National Petroleum Corporation (NNPC) to acquire a 20 per cent stake in the Dangote 650,000 barrels per day (bpd) refinery for $2.76 billion.

Located in the Ibeju Lekki area of Lagos State, on 2,635.58 hectares of land, the $19 billion refinery, promoted by Africa’s richest entrepreneur, Alhaji Aliko Dangote, which is expected to come on stream early next year, is the largest single train of its kind in the world today and on completion, will become Africa’s biggest oil refinery.

Upon streaming, the country will be saving a minimum of $10 billion per annum from petroleum products import even as the ammonia component of the fertilizer plant, which has already commenced production will produce 2.8 million metric tons of Urea in a year. The Dangote refinery is expected to produce up to 50 million litres of petrol and 15 million litres of diesel a day.

Nigeria’s Minister of State for Petroleum Resources, Timipre Sylva who announced the approval said, “The Executive Council has also approved the acquisition of 20 per cent minority stakes by the NNPC in the Dangote Petroleum and Petro-Chemical Refineries for $2.76 billion.”

Since the announcement by the minister, Nigerians of diverse backgrounds have applauded the move, saying it would help stabilize the volatile local downstream oil sector. Apart from the over N145 billion revenue expected to be earned by the Federal Government in the venture, it would also share in the after-tax profit of the refinery expected to be in the region of $10 billion per annum. In this case, Nigeria will earn between $600 million to $1 billion from its 20 per cent stake in the Dangote venture, enough to shoulder about 5 to 8 per cent of the country’s annual budget burden.

What Nigeria has done in investing in the Dangote Refinery is akin to what obtains in other climes where leading National Oil Companies (NOCs) are acquiring stakes in refineries across the world to secure a guaranteed home for their crude oil production.

For instance, Saudi Aramco, Saudi Arabia’s national oil company, has been buying up stakes in refineries outside its shores. The company currently owns and has stakes in five refineries abroad with a total refining capacity exceeding 2 million barrels per day.

They include the 280,000 capacity barrels per day Fujian Refining and Petrochemical Co, China, the 635,000bpd Motiva Enterprises LLC, USA, S-Oil Refinery, South Korea which has a capacity of 669,000 bpd, the Showa Shell Refinery, Japan, with a capacity of 445,000 bpd and the Rapid Refinery, Malaysia with 300,000 bpd.

In 2019, Saudi Aramco started talks to acquire a 20% stake in Mukesh Ambani Group’s oil refining unit (Reliance). Reliance has a refining capacity of 1.2 million barrels per day. The deal was delayed due to the fallout of the pandemic, but talks have recently restarted.

Also, in 2017, Rosneft, an oil company controlled by the Russian government, acquired a 49% stake in India’s Essar refinery. The Essar refinery has a capacity of 400 thousand barrels per day.

Acquisition of a stake in Dangote Refinery would enable the NNPC to get a guaranteed home for up to 60% of its crude, based on a 55% share of the country’s 2 million bpd oil production.

Apart from a guaranteed home for its crude, the investment has its financial attractions. One, with the impending signing of the Petroleum Industry Bill by President Muhammadu Buhari, the NNPC will be transitioning from a parastatal to a private company owned by Nigerians. The new NNPC will go to the capital market to source for capital to fund its investments and will have to deliver adequate returns to sustain its operations.

Acquiring a stake in the Dangote refinery will benefit NNPC in such ways as acquiring a stake in an attractive asset with state of the art process technologies capable of producing high-quality products (Euro V specification), operating at high-cost efficiency, and flexibility to swing production to optimise for petrol vs. diesel production while minimising the production of low-value products (e.g. LPFO); dedicated marine facilities for off-take of crude and loading of petroleum products. The facilities are capable of handling Very Large Crude Carriers (VLCCRs) and can load and discharge up to 300m litres per day.

Nigeria will also benefit from the Dangote Refinery 830,000 ton propylene plant, about 10 times the capacity of Eleme Petrochemicals, a storage capacity capable of holding 20 days of the refinery’s crude requirement and 11 days of Nigeria’s gasoline consumption, a 450MW dual-fuel power plant capable of using gas or oil and strategically located at the Lekki Free Trade Zone next to the large domestic market of Lagos, and access to road and sea infrastructure which give a logistics advantage in serving other domestic and export markets.

The entire enterprise will ensure energy security as the refinery is capable of meeting Nigeria’s gasoline requirements while generating revenue in hard currency from the export of diesel, jet fuel, polypropylene, et cetera, add an attractive business to its portfolio from which it could earn annual dividends of over $600 million while paying only 36% of the acquisition costs upfront (the remainder will be paid from a combination of its dividends from the investment and discount on crude it will sell to the refinery.)

It will also achieve significant savings in its fuel import costs to ensure the security of fuel supply. NNPC usually has ships laden with gasoline waiting in the high seas. This comes at an annual cost of up to $1.2bn due to demurrage on the ships, financing costs, lightering costs, transit losses, security costs, et cetera. Securing the gasoline supply from Dangote Refinery will enable NNPC to eliminate these additional costs. These savings alone, without taking any dividends into account, will enable the NNPC to recover the investment in about two years.

Added to this is the advantage of acquiring an early foothold in a business with significant growth potential. Given that only South Africa and Cote d’Ivoire have functional refineries, there is potential to leverage the Dangote Refinery investment to build a regional refining hub that could serve the entire Sub-Saharan Africa market.

Dangote at this time desires a partnership with NNPC given the critical role the oil conglomerate plays in the sale of Nigerian crude oil and distribution of petroleum products in Nigeria. It is vital to seize this opportunity now before the Dangote Refinery realises that it may not need NNPC when other suitors would have come with more mouth-watering offers.

It is important to note that the global oil industry will surely undergo significant changes in the next 10 years with Shale oil increasing production steadily, a continuous climate change advocacy, and COVID-19 fallout that may cause volatility in the balance of global crude oil supply and demand. There will also be periods of stress where oil companies are left with stranded cargoes as happened in 2020 when prices dropped to negative $38 in one day. Therefore, investing in the Dangote Refinery is a sure way to hedge against the expected volatility in the crude oil market.

As the Dangote ultra-modern refinery has an export potential of $6 billion per annum, it will increase the foreign exchange reserves of the country by about 40 per cent annually, while also forcing down the price of premium motor spirit (PMS) and save money for the country. The facility will equally generate between 200,000 and 250,000 direct and indirect employment after completion.

Dangote Refinery is a 650,000 barrels per day (bpd) integrated refinery and petrochemical project under construction in the Lekki Free Zone near Lagos, Nigeria. It is expected to be Africa’s biggest oil refinery and the world’s biggest single-train facility upon completion in 2022.

Dangote Oil Refinery, a company owned by the Nigeria-based Dangote Group, is developing the project with an estimated investment of $12 billion.

The Dangote refinery will process a variety of light and medium grades of crude to produce Euro-V quality clean fuels including gasoline and diesel as well as jet fuel and polypropylene.

The integrated refinery and petrochemical project is expected to generate 9,500 direct and 25,000 indirect jobs.

Estimated to hold 37 billion barrels of proven oil reserves, Nigeria is the second biggest oil-rich country in Africa, after Libya.

However, Nigeria is dependent on imported refined fuel products due to a lack of domestic refining capacity. The Dangote Refinery will increase Nigeria’s refining capacity two-fold and help meet the increasing domestic fuel demand while generating foreign exchange through exports.

The refinery complex is being developed on a 2,635ha site on the Lekki Free Zone near the Lekki Lagoon, along the coast of the Atlantic Ocean.

The geographical location of the refinery is ideal for easy transhipment of refined petroleum products to the international markets.

Dangote has already built a jetty near the project site to receive heavy equipment for the refinery construction.

The processing facilities for the Dangote refinery include a crude distillation unit (CDU) and associated facilities, a mild hydrocracking (MHC) unit, a residual fluid catalytic cracking (RFCC) unit, a naphtha hydrotreater, and a gasoline hydrodesulfurisation (HDS) unit as well as alkylation units.

The refinery complex will also house sulphur recovery and hydrogen generation facilities and a polypropylene unit. Comprising two steam methane reformer (SMR) units, the hydrogen generation facility will generate 200,000Nm³/h of hydrogen and steam to produce sulphur-free fuels.

The other processing units at the refinery include the STRATCO® alkylation unit, the MECS® sulphuric acid regeneration (SAR) unit, the MECS® DynaWave® sulphur recovery unit, and the BELCO® EDV® fluid catalytic cracking unit. The refinery is designed to produce up to 50 million litres of gasoline and 15 million litres of diesel a day.

The Dangote refinery is expected to produce 10.4 million tonnes (Mt) of gasoline, 4.6Mt of diesel, and 4Mt of jet fuel a year.

It will also annually produce 0.69Mt of polypropylene, 0.24Mt of propane, 32,000t of Sulphur, and 0.5Mt of carbon black feed.

The infrastructure facilities for the refinery complex include a pipeline system, access roads, tank storage facilities, and crude and product-handling facilities.

A marine terminal, including a breakwater, jetty and harbour, has also been developed as part of the project.

Other facilities developed to support the project include an administrative building, guardhouses, fire station, and pump stations.

The refinery complex will also house a fertilizer plant, which will utilize the refinery by-products as raw materials.

A group of local and international banks led by Standard Chartered Bank has agreed to provide a $3.3bn syndicated loan facility for the project.

The United States Trade and Development Agency is providing an N251.3bn ($0.997m) training grant for the human resource development for the refinery operation.

Engineers India is the engineering, procurement, and construction (EPC) contractor for the project.

Honeywell UOP was contracted for the supply of catalyst regeneration and dryer regeneration control systems, column trays, heat exchanger tubes, a modular CCR unit, and catalyst coolers among other equipment.

C&I Leasing was contracted to provide transportation and installation services for mooring systems and subsea pipelines of the refinery.

Hang Xiao Steel Structure Company got a $112m contracts to provide steel structure for the refinery.

Jan De Nul Group was engaged to carry out land reclamation works.

MAN Diesel & Turbo was contracted to supply two compressor trains, while Air Liquide Engineering & Construction was contracted for supplying the SMR units.

Fabtech (18 columns), Schneider Electric (process automation systems), SOFEC (Catenary Anchor Leg Mooring buoys), and WABAG (raw water treatment plant) are the other suppliers involved in the Dangote refinery project.