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The promise and risk of Dangote refinery 17 Oct 2024

Nigeria’s inability to use its considerable petroleum resources to meet its domestic energy needs has long subjected the country to supply shocks and price volatility. Although Nigeria is one of the world's largest producers of crude oil, the country has had a long-standing issue with local refining capacity and relies heavily on imported refined petroleum products to meet local consumption demand.

The four state-owned refineries operated abysmally at about 25% to 30% of their capacities over the past few decades. More recently, they have been out of operation. The total capacity of the existing private refineries, including Edo Refinery and Petrochemical Company and Walter Smith Refinery, prior to the commencement of operations by Dangote Refinery, was insignificant, hence the heavy reliance on imported refined petroleum products, putting significant strain on public finance and causing macroeconomic instability.

To stabilise the price of imported petrol in the country and make the product affordable, the government introduced the petrol price subsidy. However, the programme has proved unsustainable because of the associated corruption, upswings in the prices of crude oil in the international market, and the huge financial outlay to fund it amid competing government priorities.

In recent time, the country began to use swap agreements – refined product exchange agreement (RPEA) and offshore processing agreement (OPA) – to meet domestic demands. Although the agreements have ensured product availability, they have also shown some harmful effects. These include diminished state capacity to catalyse growth in the downstream sector of the oil industry and the country has amassed huge debts currently estimated at over $6 billion under the agreements.

The attempt to end the petrol subsidy regime in 2023 has turned out to be a significant turning point in the economic landscape. The price of the product has skyrocketed, driving up cost-push inflation and eroding the welfare of the citizens as well as operational sustenance of businesses. The subsidy removal saga, alongside other harsh economic policies including the devaluation of the naira, has undeniably exacerbated economic hardship in the country.

It was in the middle of this untoward situation that the Dangote Refinery commenced operations, in particular the production of petrol last month. The excitement this generated was, therefore, understandable. But the thrill has subsided as the launch of petrol sale by the refinery heralded another sharp increase in the pump price of the product, leaving Nigerians frustrated and powerless.

The Dangote Refinery is an integrated refinery with a capacity to refine 650,000 barrels of crude oil per day. It is the world’s largest single train refinery, projected to be able to more than meet the total domestic demand for petrol with the excess supply to be exported. The refinery, therefore, represents a significant milestone in Nigeria’s quest for energy self-sufficiency. It is expected that the refinery founded by the Nigerian foremost industrialist and one of Africa’s richest entrepreneurs, Aliko Dangote, could reduce the local demand for foreign exchange by 40% – thereby helping to drive down the exchange rate of the naira – while guaranteeing steady product supply in the domestic market.

However, overreliance on the Dangote Refinery is problematic. Except the state-owned refineries – into which billions of dollars have been sunk for turnaround maintenance – come back on stream and other private sector refineries are not muscled out, the Dangote Refinery could operate as a monopoly. Its sustained and durable market power could give rise to price gouging. Its profit motive and market power could exert excessive influence on the local price of petrol in Nigeria. Whereas varying local economic and market dynamics ensure sharp differences in the local prices of petroleum products around the world, a monopoly in Nigeria could simply benchmark relatively higher prices in some foreign jurisdictions that bears no semblance with Nigeria’s situations.

It is, therefore, necessary to balance the national importance of the refinery, in the context of the pursuit of energy security by the federal government, with the need to prevent monopolistic practices by a dominant market player. Already, there has been mutual disclaimers on the price of petrol from the refinery and NNPC Limited, the Nigerian national oil company that is currently the sole offtaker of petrol from the Dangote Refinery. The lack of transparency also includes the arrangement of NNPCL to supply the refinery with crude oil feedstock. Without taking the necessary care, the country could be replacing the unknown ‘cartel’ with a known one.

To be blunt, with the sheer size of the Dangote Refinery, relative to local demand for petroleum products, it is not unfair to input a monopolistic intent to the refiney. The financial pressure that the refinery is facing, both in terms of meeting financial obligations to lenders who supported the refinery during the prolonged period of its building as well as the considerable input and operational cost for running it now, could foster a desperation to maximise revenue in the shortest time possible. This should keep the regulatory agencies on the alert to ensure fair and competitive practices.

Already, the Refinery is likely to benefit the most from the Petroleum Industry Act (PIA)’s provisions on Domestic Crude Supply Obligations (DCSO). The Nigerian Upstream Petroleum Regulatory Commission (NUPRC) has communicated its commencement of the enforcement of the Production Curtailment and Domestic Crude Supply Obligations (DCSO) regulations issued in May 2023. Section 109 of the PIA empowers NUPRC to impose domestic crude oil supply obligations on lessees of upstream petroleum operations, including imposing penalties for default. The DCSO came from policy directed at creating a national oil supply curve that will provide feedstock to backwardly integrate the production of petroleum products and reduce their importation.

These obligations are to be set based on crude oil requirements of refineries provided by the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) to NUPRC. This is designed to ensure every upstream producer would be subject to a DCSO to be set by NUPRC and only crude above the relevant obligations may be exported by the producer. This is important in ensuring supply of feedstock to the refineries. Steady supply of crude will limit the volatility in the prices of the locally refined products and remove the incentive for overpricing. Nevertheless, it, however, portends regulatory interference in private contracts. The NUPRC has disclosed that there has been local supply of 32 million barrels of crude to Dangote Refinery and other local refineries in the first half of 2024 with the Dangote Refinery taking 29 million barrels out of the total number.

Although the PIA recognises the proprietary rights of parties to agree commercial terms and crude is to be sold on a willing buyer, willing seller basis, the DCSO must be satisfied before crude export permits can be issued in a given quarter. With the size of the Dangote Refinery, most of the DCSO requirements will likely be to meet its demand for crude.

However, there is a lack of a corresponding legal domestic supply obligation on the local refineries. This is worrisome, and policymakers need to urgently address the lacuna. The Dangote Refinery’s location in the Lekki Free Trade Zone is a critical factor that suggests a multistakeholder approach to resolving the potential conflict between domestic demand and supply of products from the refinery to more profitable export markets.

Nigerian regulators, including NUPRC, NMDPRA and the Federal Competition and Consumer Protection Commission (FCCPC) as well as the Minister of Petroleum, are pivotal and must strategically navigate the new landscape shaped by the Dangote Refinery. They must delicately balance ensuring energy-security and self-sufficiency for Nigeria by supporting Dangote Refinery’s operational objectives while ensuring that the refinery does not exploit its market position and even legitimate profit motive to the detriment of Nigerian consumers.

It is essential to create and enforce robust antitrust regulations for the industry. Implementing stringent antitrust laws ensures no single entity can dominate the market to the detriment of competitors and consumers. Mergers and acquisitions within the sector must also be monitored to prevent further concentration of market power.

But the government also has a duty to stimulate growth in the industry by limiting the barriers to market entry for new players. Diversification of market participants would enhance competition, drive innovation, and ultimately lead to a more prosperous industry.

It is also important to ensure transparency within the sector. Publicly accessible data on pricing, supply chain practices, and operational efficiencies will ensure accountability and discourage monopolistic practices. The DCSO regulatory initiative would help to some extent in this regard. It entails that the domestic crude oil refining requirements of operating refineries in Nigeria will be published bi-annually by the NUPRC on its official website and in three newspapers based on the data provided by NMDPRA.

Funmilayo Odude is Partner at Commercial and Energy Law Practice (CANDELP).