Mondiu Jaiyesimi: An assessment of Dangote’s oil refining plans

In the area of competition, we simply
can’t blame him for the signs of
monopoly we find in his areas of
business, the responsibility lies with
the government to protect the
interest and welfare of consumers by
promoting competition…
The news that Alhaji Aliko Dangote, the
richest man in Africa has decided to take
the bull by the horns and invest in the risky
oil refining business can only be met with an
optimistic response. Especially from more
than 90% of the Nigerian populace who have
recently been made to bear the brunt of
high fuel prices due to the controversial
removal of subsidy on imported petrol
products.
Dangote is already an accomplished
businessman with a lot of financial muscle;
and albeit the jury is still out on his close
relationship with the present and past
governments coupled with his ability to
ruthlessly monopolize the industries he
invests in, we cannot totally disregard his
contribution to the Nigerian economy in the
areas of job creation and the availability of
locally produced commodities without us
having to depend on imported substitutes.
In the area of competition, we simply can’t
blame him for the signs of monopoly we find
in his areas of business, the responsibility
lies with the government to protect the
interest and welfare of consumers by
promoting competition and prevent the
abuse of monopoly power.
The Nigerian billionaire plans to build an $8
billion refinery that will produce 400,000
barrels per day by the end of 2016.
Currently, we are only able to produce below
the 445,000 barrel per day mark through
the combined efforts of our four refineries
in Port Harcourt, Kaduna and Warri.
However, the EIA states that the
operational capacity of these four
refineries averaged only 24% in 2011.
According to OPEC, our local oil
consumption stands at 267,000 barrels per
day which means that the proposed refinery
will have the capacity to cater for our
domestic consumption needs and also have
substantial surplus to export to neighboring
countries.
Obviously, this is not taking into account
the plans by the federal government to
construct three Greenfield refineries in
Lagos, Kogi ad Bayelsa to be in operation by
2017 and the refurbishment of the existing
infrastructure. If we are able to get this
right, Nigeria can easily become a net
exporter of refined petroleum products in
ten years. That is however a big “if” taking
into consideration the myriad of factors
currently plaguing the industry.
Potential benefits to the Nigerian
Economy
Refineries are expensive to maintain, they
require top class management in the hands
of experienced professionals who are aware
of the diverse operational and financial
risks encountered in their day to day
running. This is where we are failing and it
has provided the right platform for
saboteurs to ensure none of the existing
refineries work at full capacity. This has led
the country to depend heavily on importing
refined petroleum products; a move which
has been highly beneficial to a few strong
parties.
Breaking the Jinx
If Dangote can successfully pull this off, it
will immediately quell the myth that we can
never get our refineries working at full
capacity or that we can’t refine 100% of
the oil we need for domestic consumption.
As many stakeholders have argued, this will
also strengthen the fact that the private
sector has a key role to play in solving key
macroeconomic problems in the country.
Competition
Few hands can compete with Dangote in his
commodity refining and importation
business industries which he has
successfully ended up monopolizing.
However, the oil and gas sector is a
different ball game as there are many
experienced personnel and interested
parties in the sector who can also come
together as formidable forces. They also
have technical expertise and financial
wherewithal to attract and partner with
foreign investors in investing in petroleum
refining in the country. The burgeoning host
of indigenous energy companies in the
country will be looking to leverage on the
refining business if this move pulls through.
According to Forbes, Nigerian Abdul-
Samad Rabiu is already constructing a
$500 million cement plant in Edo state to
rival Dangote cement. This gives us a hint of
how successful and highly lucrative
businesses can encourage competition which
will automatically lead to job creation.
Cost effectiveness and job creation
This development has the potential
of benefiting from economies of scale given
the proposed capacity of the refinery.
Depending on how regulation and other
factors work out, we could find ourselves
refining oil at a much cheaper rate which
will put a serious dent to the prospect of
importing petrol from foreign refineries. If
the constituted authorities can be muster
the courage to support this, this could spell
the end of an era of massive corruption and
rent seeking behavior witnessed by the
parties benefiting from the importation of
refined petroleum products. With more
transparency, this can also ultimately lead
to the reduction in pump prices in the long
run if we consider how we would be
eliminating the transportation cost of
exporting the crude and importing the
finished product which is a key component
of the pricing model. As this could drive the
creation of another profitable and engaging
industry in Nigeria, we should be looking at
prospects of job creation and acquisition of
key skill sets and competencies in this
important area of the downstream sector.
It has already been mooted that over 2,000
jobs will be created and this number can
only grow through potential spin-offs and
further investment.
Challenges
We are eagerly waiting to see how the
Nigerian government will react to this
development given its failure to solve the
problems plaguing our existing oil refineries
for decades now costing the country
trillions of Naira. A lot of Nigerians will be
keeping tabs on this development and it is
logical to suggest that giving his cordial
relationship with the government, Dangote
might just be the man to open the flood
gates and help reduce the bottlenecks
associated with licensing and other
regulatory requirements. It will also be
interesting to see how the oil importers and
power brokers will respond to this
considering the might of the opposition they
will be facing this time. Dangote has all the
ingredients to survive this battle as he has
friends in high places and also knows his
politics in a volatile business environment
like Nigeria.
Pricing will also be an interesting issue as
the initial cost outlay of this project and
other factors might prevent us from
immediately benefitting from a reduced
pump price. It will also be interesting to see
the role the NNPC will play considering its
association with the International Oil
Companies in the area of supply and also the
PPPRA when it comes to setting prices. The
next five years will be an interesting one.
Fingers crossed.
————————–
Mondiu Jaiyesimi is an Energy
Economist passionate about energy and
public policy, empirical research and energy
finance. He studied Energy Economics and
Policy at the University of Surrey and has
done extensive research work in Liquefied
Natural Gas markets, UK energy markets,
shale gas revolution and energy demand in
developed countries.
He currently engages in independent energy
consulting focusing on energy modelling,
climate change and trends in oil and gas
supply in Africa and other emerging
markets. He is a member of the
International Agency for Energy Economics
and the British Institute of Energy
Economics. He currently works with
Deloitte, London.

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