Dangote Refinery: Sifting facts from emotions, By Richard Akinnola

President of Dangote Group, Aliko Dangote

While several groups of people, including one of my constituencies – the civil society – have made pilgrimages to the humongous site of the Dangote Refinery, unarguably the largest private refinery in the world, l decided on sifting facts from emotions. The issue has even reverberated in the hallowed chambers of the House of Representatives, where the adhoc committee set up to investigate the issue, among other issues in the upstream and midstream petroleum sections, was dissolved recently.

When the Dangote refinery controversy blew up, naturally as one wired to support anyone l perceive to be oppressed, this time, Dangote, l lined up in support of the richest man in Africa.

I perceived he was being unduly treated by the downstream and midstream regulators, the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA). For days, l had heated arguments with people of opposing views on this matter. However, one person l respect cautioned that people should not be too emotive on this matter but seek knowledge. I took that as a challenge.

Subsequently, in an attempt not to look foolish out of emotive consideration, l opened my mind to critically study the issues involved and even the nitty gritty technical details of the oil and gas system. And because l owe an obligation to educate people, l had to open up myself to information, researching on this issue and the petroleum sector, devoid of emotions.

While several groups of people, including one of my constituencies – the civil society – have made pilgrimages to the humongous site of the Dangote Refinery, unarguably the largest private refinery in the world, l decided on sifting facts from emotions. The issue has even reverberated in the hallowed chambers of the House of Representatives, where the adhoc committee set up to investigate the issue, among other issues in the upstream and midstream petroleum sections, was dissolved recently.

In a report today by Daily Nigerian, the Speaker of the House of Reps, Abbas Tajuddeen, dissolved the committee over alleged compromise by some of its members, who had exculpated the richest man in Africa, even before the assignment kicked off.

From my findings, there are three major critical issues that are affecting the operations of Dangote Refinery.

1. Crude Supply Feedstock 

It appears that when Dangote was building the refinery, there were no proper arrangements on ground on how he would get feedstock for the refinery, which is the largest single train refinery in the world. Nobody builds and opens a refinery of this magnitude without agreements to get feedstock. Dangote didn’t have a feedstock agreement for his refinery.

I have read where some people claim that he has an agreement with NNPC Ltd, but that arrangement was not for feedstock. What happened with the NNPC Ltd. arrangement was that during the building phase, the Dangote Refinery project got stuck and NNPC Ltd got the approval of the President to take equity in it.

Subsequently, the NNPC got a loan and paid $1 billion as part of the 20 per cent equity, while the rest was to be paid in crude supply.

The lack of feedstock was part of Dangote’s problem and he is now sourcing feedstock when the refinery has been powered. So far, NNPC Ltd has given him 39 cargoes.

2. Crude Oil Prices 

Dangote’s claim that international oil companies (IOCs) are selling crude oil to him at $6 per barrel above the international price doesn’t seem to be true. What l discovered is that crude oil has different grades. What he got from the US is WTI and the price is not the same as others. Another key issue under pricing is that the margin of sale of crude oil is different because it is an international business. There is what is called market margin and it is usually from $1.5 to up to $20 per barrel.

There are several crude grades and Dangote Refinery blends different grades of crude for its products. So, when Dangote said he is importing from the United States, it is because he needs it as part of the grades to be used to blend in his refinery to produce petroleum products. His refinery needs several percentage of Bonny light, WTI and others to be able to blend very well. But he is using the fact that he imports from US to give the impression that he is importing oil from several countries, when in actual fact he is actually sourcing different crude grades to blend.

Another critical point of under pricing is that the marketers buy this crude grades and add their own margin, which ranges from $1.5 to $20, but the Nigerian government is giving it to Dangote at a margin of $0.5 per barrel, which to me seems to be a good deal for him.

One other contentious issue is that Dangote is also persuading the regulator to convince the international oil companies to give him crude, but the IOCs cannot do that because they have Production Sharing Contracts (PSCs) with the Nigerian government. Through the PSCs, the IOCs produce, give Nigeria government its share and take their share of the crude and sell to marketers. Dangote didn’t enter any agreement with the IOCs to give him feedstock. What people must also know is that these IOCs borrow money from banks, invest in equipment, drill the oil fields, give government its share and take theirs, by selling, recovering their costs and make further investments.

Also, Dangote wants to use the local refinery obligation to obfuscate issues but this is not working for him because the local refinery obligation, according to the PIA, is based on a willing buyer and willing seller arrangement. This means the product must be available, and the parties must agree on the price in line with Section 109 of the PIA, which deals with the National Crude Oil Requirement of Refineries. The section states that the Nigerian Upstream Petroleum Regulatory Commission shall base the allocation of the domestic crude oil supply obligation applicable to the respective lessees on the National Crude Oil Demand Requirement Supply Curve, which is the curve of crude oil or condensates that can be supplied on a voluntary basis at the prevailing international market price.

3. Downstream

On the controversial issue of licensing of Dangote Refinery, while it has the license to build the plant, the refinery does not have licenses that cover other parts of its operations.

For monopoly, Dangote is asking the regulator to direct all oil marketers to get petroleum products from his refinery. But the question to ask is: Can Dangote guarantee Nigeria three billion litres of petroleum products per day, in strategic national reserves for 32 days, and not sell it? As a business entity, for Dangote to keep these products in strategic national reserves without selling them will lead to huge losses for him.

For the regulator to give Dangote that monopoly that he asking for means that the business of other oil marketers would be killed and this is against the policy of deregulation, because marketers should be allowed to import, so that there can be healthy competition.

Another critical point to note is that Dangote Refinery operates in a free trade zone and he will be exempted from paying tax to government. This is a loss of revenue to the government. The petroleum products from the refinery would be sold in foreign currency, instead of naira, to Nigerians, as oil marketers who want to buy from there will fill form M (Importers form) in the bank.

Another contentious issue is the sulphur content in the petroleum products. It was reported in the media that the NMDPRA has a minimum of 11 staff members in Dangote Refinery and all other local refineries. The test of the petroleum products from the refinery are done daily and sent to the regulator. This means the regulator knows what they are saying when they stated that the product is inferior.

One worrisome aspect of the whole arrangement is that Dangote will need a minimum of $1.8 billion working capital to operate the refinery and no bank would be willing to give it to him because he appears to be in a financial tight corner.

This was further confirmed with the recent International Fitch ratings, which downgraded the Dangote Industries Limited, reflecting the precarious liquidity position of the business conglomerate.

The report stated, inter alia, that the group’s liquidity position, “followed lower than expected disposal proceeds, operational and financial underperformance compared to our prior expectations, also affected by local currency devaluation, and lack of contracted backup funding to repay its significant debt facilities maturing on 31 August 2024….We view the lack of DIL’s audited accounts for 2023 as a corporate governance issue. The RWN reflects uncertainty related to the group’s ability to refinance maturing debt.

“Lack of tangible steps to refinance or repay the maturing debt would lead to further downgrade while we do not expect a positive rating action until the company’s liquidity position improves substantially.”

I love Dangote and his can-do spirit –  the reason l initially was emotive when this controversy broke out, as l felt he was being unduly treated. But my study of the whole scenario has changed my perspective. I want him to succeed but he too has to do the needful. The monopolistic mindset which he carried from his cement business cannot work in the deregulated petroleum sector. More importantly, he needs a pragmatic approach to solve his liquidity challenges in this petroleum sector, which, with the benefit of hindsight, he underestimated, based on the seeming hand-in-gloves relationship he had with the previous leadership of the Central Bank of Nigeria, where it appeared he had “easy” access to funds.

Soji Adekunmbi, an Abuja based public policy analyst, in an article in The Cable, proffered solutions to Dangote to enable him navigate the humongous financial quagmire he seems to have found himself, when he posited: “A few options are available to Dangote but the most viable of them is that he should consider divesting some of his shares in the refinery. It may seem a difficult option but it is the best for him given the circumstances.

There are business entities who took a similar path when confronted with some of the challenges seemingly facing Dangote. In Saudi Arabia, the Saudi government sold Aramco, the national oil company to the public when it faced difficulties.

Even Microsoft founder, Bill Gates sold off a majority of his stake in the company retaining a mere five percent interest in the business. Gates took that route after facing anti-trade court cases following Microsoft’s monopolistic nature, which had caused the collapse of several IT companies.

Dangote should do the needful by selling shares to Nigerians as it is obvious given the intricate nature of business in the oil and gas sector particularly the huge capital outlay required to keep a business going, he cannot pull it off alone.”

Richard Akinnola, a  journalist, author, and lawyer, is executive director of the Centre for Free Speech.