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Dangote Refinery and Nigerian political risk 05 Aug 2024

Dangote Refinery is both the biggest single local investment in Nigeria and the world’s largest single-train petroleum refinery. But while the mega refinery, which was announced in 2013 and built over a 10-year period, partially commenced production this past January, it has become embroiled in its own saga. The latest episode of the spectacles that the project has generated indicates severe threats to its operational success and, perhaps, ownership.

Last month, the management of Dangote Refinery accused the international oil companies (IOCs) operating in Nigeria of denying supply of crude oil to the refinery. Without a reprieve from that quarter, the request by Aliko Dangote, the billionaire founder of the eponymous refinery, for the government to ban the importation of petrol and diesel into the country was rebuffed as monopolistic. Furthermore, the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) alleged that the refinery was churning out gasoline with higher sulphur contents compared to the imported fossil fuel products, and that the refinery had been unable to meet domestic demand.

Overwhelmed by the hostilities from these formidable fronts, Dangote announced that he had to backtrack from the plan he recently announced to invest in the country’s steel sector to avoid another accusation of wanting to be a monopolist. He also said he wouldn’t mind a government buyout of his stake in his refinery, as he publicly remonstrated.  

Why the mega refinery

When the Dangote Refinery was announced in 2013, it combined a strong commercial proposition with the potential to address the country’s dependency on fuel importation, conserve the government’s foreign exchange revenue, and create domestic jobs. A combination of fiscal and market issues had advised the project. For decades, the country relied on the importation of refined petroleum products, including premium motor spirit (petrol) and automotive gas oil (diesel). Viewed as economic goods, the products were offered to the consumers at prices subsidised by the government, through the national oil company (NOC), Nigerian National Petroleum Corporation (NNPC).

But the subsidy programme was allegedly riddled with fraud. This was confirmed by a presidential committee’s investigation, which found that in 2011 alone a whooping sum of N382 billion (or $2.5 billion, based on the official exchange rate then) was fraudulently collected as subsidy payments by importers for fuel that was not delivered. With subsidy payments often falling into months of arrears, apart from gulping fiscal revenues that could have been channelled into social and physical infrastructural development projects, the programme was deemed unaffordable by the government.

Although a mass protest was organised by opposition political figures in 2012 to reject the abolition of the subsidy regime, the consensus within the government, the Central Bank of Nigeria (CBN), and the Bretton Woods Institutions – the IMF and World Bank – was that the programme should be ended. The post-subsidy regime, it was argued, would see the prices of the products deregulated, thereby encouraging private sector investment.

Moreover, the NNPC, now known as NNPC Limited (NNPCL), had continued to struggle with making its four state-owned refineries work, despite the billions of dollars that was budgeted for their turnaround maintenance (TAM) over the years. Indeed, discussions about the privatisation of the refineries had remained popular in the policy arena as well as in public discourse even after the late President Umaru Yar’Adua reversed the sales of the Port Harcourt and Kaduna refineries to Dangote in 2007.

Tendentious Monopoly  

The combined capacity of the four crude oil refineries owned by NNPC was 445,000 barrel per stream day (bpsd). Based on dodgy national consumption statistics, this was thought to only meet 60% of local demand. Despite the demand-supply gap, the local refining capacity remained stagnant, even with the licencing of some modular – or mini – refineries. The NOC was not only the monopoly in terms of local refining capacity, but it was also the dominant importer of petroleum products – and has since morphed into an exclusive importer of petrol in Nigeria in the past years.

In this market situation, coming into the refinery space with a commercial proposition is fraught with risks. The lesson from the stillbirth of the modular refinery subsector is that scale is needed to be able to exert influence in the market in order to safeguard investment and ensure profitability. It, therefore, makes sense that Dangote Refinery is the mega business that it is. The integrated refinery has the capacity to refine 650,000 bpsd. This capacity is touted as more than enough to supply the entire local demand for petroleum products, which, incidentally, counters the previous narrative of the combined capacity of NNPC’s refineries vis-à-vis local demand. Thus, it is feared that Dangote’s aim is to operate as a monopoly in the domestic market.

Troubling Claim

The recent allegation of monopolistic intent against Aliko Dangote by the government is erroneous, perturbing, and self-indicting. According to Investopedia, a monopoly is a market structure with a single seller or producer that assumes a dominant position in an industry or a sector. With NNPCL and Dangote Refinery accounting for nearly the total refining capacity in the country, they would share the capacity in the ratio of 4:6. With both companies as the potential dominant players in the market, what we have is a “duopoly,” which describes a situation where two companies own all – or nearly all – of a given product or service in the market.

The official accusation against Dangote Refinery, quite ominously, suggests NNPCL is farther from bringing its refineries back on stream than it has promised to do. Indeed, previous promises of revamping the refineries were not kept, while the government continues to sink funds into the TAM projects. The inefficiency of spending humongous amounts of money in keeping unproductive assets is a culture that the NNPCL has continued to personify.

For decades, the government had expressed no qualms about NNPC operating as a monopoly and as a regulator in the Nigerian petroleum industry. The legislative reform to unbundle the corporation, commercialise its operations, and partially privatise it took nearly 20 years to pass. But despite the enactment of the Petroleum Industry Act (PIA) in 2021, practical changes that have been implemented in the governance of the industry and the ownership structure of the NOC have been cosmetic, if not merely semantic. Even then, the government’s predilection to be a monopolist aptly describes its interest in acquiring 20% equity stake in Dangote Refinery, which it describes as a monopoly.

Lack of focus

Unsurprisingly, it has now come to light that the NNPCL only paid for 7.2% stake in Dangote’s refinery. Dangote said the agreed timeline for the payment to complete the acquisition of 20% stake by NNPCL passed without the payment made. Having not informed its counterparty of its decision to pull back from the transaction as agreed, NNPCL’s explanation that it did so in alignment with its strategic objective rings hollow. It is easily imagined the disruptive impact of this behaviour on the cashflow of Dangote as he planned the operational launch of his refinery.

While the public has expressed suspicion of malfeasance about the abortive acquisition plan, the lack of strategic focus by a state-owned corporation of the size and importance of the NNPCL is, indeed, mind-boggling. It suggests incompetence in the management of the company. The tolerance of such demonstrates a virulent compromise in the governance of the nation’s public institutions.

Political risk

Nevertheless, an explanation for the sudden change of attitude by the government towards Dangote’s refinery is excessive crystallisation of political risk. With the intra-party transition in government in May 2023, the impact of political risk on the investment and business landscape was expected to be negligible. But in reality, the opposite has been the case, what with the abrupt ending of petrol subsidy, introduction of market exchange rate, and other fiscal and monetary decisions that have exacerbated inflationary pressure.

From being a project of national importance under the last administration, officials of the President Bola Tinubu’s government seem to think less so of the Dangote Refinery. This complicates engagement of Nigeria’s political risk by investors – domestic and foreign. Changes in fiscal policy may be understandable if ideologically driven. More generally, a new government could genuinely pursue alternative economic policy options to foster higher and inclusive economic growth. But it is absolutely negative for the fortunes of an indigenous business to be whimsically or politically eroded because there is a new government.

Dealing with culpability

Despite the significant public solidarity that Dangote has enjoyed since his recent ordeal, the sentiment that he is not an innocent victim remains. In a serious anti-corruption environment, a discreet investigation of the financial incentives that his refinery attracted with the aim of ascertaining potential corruption in the process would be in order. If the investigation reveals bona fide evidence of legal wrongdoing, he and the government officials involved could then be arrested and tried in a competent court of law. Ideally, it is at this stage that the inquisition would become public knowledge.

Nevertheless, such a legal process would be handled with utmost professional care to preserve the operation and brand reputation of Dangote Refinery. While the government continues to woo foreign investors to invest in the country, it cannot at the same time act in ways that would jeopardise a $20 billion private investment in the same country by its citizen.

But until Dangote is proven culpable of a legal wrongdoing, he remains innocent and a respectable, foremost Nigerian industrialist. The kind of investment incentives that he has enjoyed over the years are not uncommon in even the most entrenched capitalist jurisdictions.

A monopoly is what government should discourage where necessary, using functional competition tools in a transparent manner. But it is not a crime to want one’s business to be big to command significant local market share and be able to compete externally. Indeed, supporting indigenous big businesses in internationally competitive industries to grow bigger is very important and one of the major ways to attain the trillion-dollar economy the government is targeting. While it is trendy to avow support for small businesses, the strength of a national economy is defined by its big businesses in today’s globalised world.

Jide Akintunde is Managing Editor of Financial Nigeria publications, and Director, Nigeria Development and Finance Forum.