WHILE ELEPHANTS DUEL, QUEUES ELONGATE, AND EXCHANGE RATES REMAIN STUBBORN.

The recent focus on the oil and gas sector’s enduring struggles again highlights the sector’s significant impact on the country's economy. These challenges have profound fiscal and monetary implications, affecting GDP growth, foreign exchange reserves, government revenues, inflation, and ultimately the cost of living for citizens.

The three government-owned and operated refineries (450kbpd) built between 1965 and 1980 are a backdrop to these issues. Over the years, they have not met expectations despite several trillions of Naira of public funds spent on their operations and maintenance. More recently, in March 2021, when the refineries’ production had become abysmal, the administration awarded a $1.5-billion rehabilitation project to revamp the 210kbpd Port Harcourt refinery. The promise was to complete the first phase by September 2022 and return the plant to 90% of nameplate production. The second phase was scheduled for completion by March 2023, and the final phase by December 2024. The project aimed to reduce the several billion dollars spent annually on importing PMS and the over 10 trillion Naira spent on subsidies from 2006-2018. Local production was expected to ensure availability, reduce forex demand, and significantly improve exchange rates. However, three years later, the nation still holds its breath for the refinery's return to production.

The “commissioning” of the new $19.5-billion private Dangote refinery (650kbpd) in 2023 thus marked a significant step towards boosting local production. Despite the challenges of our business environment, which ranks 131 in the ease of doing business, this substantial investment is commendable. While the refinery is believed to have received favorable conditions from the government, particularly regarding forex and waivers, it is important to note that incentives are not uncommon. Governments all over the world often provide favorable conditions to pioneers in strategic sectors or to attract large investments, provided the same conditions are available to others who meet the rules. Similar incentives enabled over $50 billion in returns to the Nigerian government from NLNG.

With its massive capacity, the Dangote refinery has the potential to significantly reduce the nation's reliance on imported petroleum products, thereby improving the country's forex reserves and strengthening the economy. Despite concerns about the refinery's single-train specification and capital cost overruns, this development would contribute to the future of the oil and gas sector. The refinery has reportedly already produced and exported Jet AI (C9–C16 carbon ranges) and Diesel (C9-C25), by-products of the crude fractional distillation process at boiling points between 170 to 360 °C. However, lighter gasoline or PMS (C4-C12) with a lower boiling point between 40°C to 200°C has yet to be produced, and the regulator (NMDPRA) recently reported that this aspect of the production process is only 45% complete.

However, the Dangote refinery recently fired the first public salvo, accusing the regulator of indiscriminately issuing import licenses and allowing the importation of toxic fuels with high sulphur content. It also alleged that some NNPC workers were involved in a blending plant in Malta and were using fake test certificates to import toxic products. It further accused the IOCs of frustrating the refinery by not selling crude oil to it at the “right” price. The outburst was unexpected; long-term input supply purchase agreements (SPA) are typically in place before a major project like this takes the Final Investment Decision (FID). It is, therefore, unusual that post-completion is when the refinery seeks competitive and secured supply. The project appears to have had a plan for “open-sourcing” and may now be struggling with that strategy, but it cannot blame others for its choice. Part of the problem is the insufficient crude oil volumes. Nigeria’s upstream industry has been in a “decline” since 2008 (around the start of PIB discussions), leading to over 60% drop in investment levels. Combined with security concerns, bunkering, and inadequate infrastructure, this has led to production being only at 50% of the 2.5mbpd production capacity. This is further complicated by the government having forward-sold a significant percentage of its volume for loan repayment. Completing the outstanding divestment deals (Seplat, Renaissance, Oando, etc.) will reinvigorate the sector's recovery and growth, and positive signals have been seen recently.

The regulator, in turn, accused the Dangote refinery of producing petroleum products with sulphur content above the stipulated West African standards. Public commentators also charged Dangote with unwholesome business practices, including pushing for monopoly in the sectors in which he operates. This is not applicable in this specific sector because BUA is constructing a 220kbpd refinery in Akwa Ibom, expected to be completed by the end of this year. In addition, the 210kbpd NNPC Port Harcourt refinery is expected to return to operation soon, along with a growing list of modular refineries (Waltersmith, etc). Hopefully, the 240kbpd Warri and Kaduna refineries will be privatized in the near future, allowing private sector investors to rehabilitate and manage (operate/maintain) the plants. These other refineries have a combined refining capacity of over 670kbpd, more than the 650kbpd Dangote refinery, making the monopoly accusation unfounded.

While the spat between the elephants (Dangote refinery, IOCs, NNPC, and NMDPRA) entertains the public, the petrol queues remain long, and the expected forex savings remain a mirage, compounded by the government having to continue with subsidy (open secret). When the PMS subsidy was “removed” in 2023, part of the argument was that local refineries (Dangote, NNPC Port Harcourt, etc.) would soon come on stream, enabling pump prices to decrease and local employment to rise. In addition, progress on adopting CNG and LPG as alternatives has been slow and minimal. Amidst this turmoil, it is the masses that suffer.

The Dangote refinery will likely succeed; as with such a significant investment ($19.5 billion), the owners will do all it takes to strive for its success, a hallmark of the private sector. Additionally, NNPC owns 7.2% of the refinery, aligning its interests with its success. Thus, the elephants will likely resolve the issues. However, it is important to appreciate that the country's progress is one of an economy that is private sector-led. Therefore, the government must continue to work on creating a conducive business environment for local and foreign investors and support critical businesses. This will entail ensuring consistent policies and fair application and eliminating any conflicts of interest among public officials that hinder the country’s progress, as recently seen in the P&ID case. The citizens deserve that public and private stakeholders work towards a better country, and bold leadership focused on doing the right things is essential.