On the 27th of May 2023, President Buhari had the honor of commissioning the Dangote Refinery, the largest single train refinery in the world at 650,000 Barrels Per Day. Subsequently there has been a lot of discussion about the refinery and its potential to alleviate Nigeria from the import dependency for petroleum products and the solution to gasoline subsidy in Nigeria. What we have not read much about is the opportunity cost of this project to National Security.
In 1890 the United States of America passed the Sherman Antitrust Act to protect the country’s citizens and National Security from monopoly and cartels and this resulted in the breakup of Standard Oil in 1911. Antitrust laws are put in place to protect competition and ensure that the citizens are never at the mercy of a monopoly of cartel. The Dangote Refinery at 650,000 Barrels Per Day is the epitome of this danger; the refinery will produce more products than Nigeria’s current demand and the hope is that we will then export the excess production to our neighbors. This not only destroys competition and creates a monopoly, but it places too much power in the hands of one entity, with the possibility of threatening Nation Security due to an over reliance on this entity and the Government’s inability to regulate this entity such that a disagreement between the Government and this entity could result a shutdown of this refinery and the entire country is short of petroleum product supply.
The notion that this refinery solves import dependency is true, but this does not mean that it will actually solve the economic issues that we face due to importation and petroleum subsidy. There will very likely be a transfer of subsidy from the people to the Dangote Refinery. Nigeria currently produces less than 1.6 Million Barrels of Oil a day and NNPC/FGN have about 50% of this as equity barrels. This means that the FGN only has economic value from less than 800,000 barrels per day. If the Government were to give 650,000 Barrels Per Day to Dangote Refinery, then there would not be enough for the combined 455,000 Barrels Per Day of refineries owned by NNPC, more importantly the Nigerian people and the real sector will have a crisis as the Central Bank of Nigeria will be losing its largest contributor of Foreign Exchange. The Dangote Refinery started as a project that cost $10 billion and has risen to $20 billion with cost overruns and the financial implication of these overruns and project delay is over $1billion every year if we assume the $20 Billion was loaned at 5% p.a. This refinery will therefore struggle to provide cheaper products against the imported products from refineries that are 50 years old in the west and fully amortized with very sophisticated trading strategies by companies who buy from multiple producers in different regions in the world; hence they can create margins due to arbitrage and scale. Consequently, for the Dangote Refinery to compete profitably and pay its huge loans, the Nigerian Government will sell crude oil in local currency and very likely offer a discount to this refinery, this will be a transfer of the petrol subsidy we are begging to get rid of from the people to one entity.
Then we have the issues of technical reliability. There is no reason for a single train refinery for any project being embarked on at this scale. You will lose reliability and redundancy with a single train project, as the single train is shutdown if there is an issue with any of the major packages. The country losses all refining capacity every time the project has a scheduled maintenance or every time there is an issue. If this issue is not resolvable within days, then we are at the mercy of emergency procurement of petroleum products at levels the country will not be able to handle and with the cost of products at so high a premium to accommodate for time and urgency. It is for this reason that we have antitrust laws to ensure there is no reliance on one supplier for essential products.
Alhaji Dangote should never have embarked on this project as a single train refinery. It is glamorous to say that Nigeria boasts of the largest single train refinery in the world, but what we are saying is that this has never been done before; hence any issues this project has during operations will be the first of its kind without reference points and without precedence of how to solve the problems. You can therefore anticipate that even when this project comes on stream (late 2024 based other publications), we will need about 24 Months to get to full capacity as all the parties involved will be getting to understand a plant that was built for the first time ever.
Whilst trying to encourage the richest man in Africa to support infrastructure development in Nigeria, we have created a problem for the country and for generations to come. We have created the moral issues of anti-trust in the Cement, Flour, Rice, Salt and Sugar Industries and now we have very willingly transferred this to the Oil and Gas Midstream and Downstream Sectors. This systematic exposure means that we have ensured that if the Dangote Group has any problems (as can happen to any company), then the Nigerian Economy may collapse due to a crisis in the Real Sector, Energy Sector and Banking Sector, all from the potential of one entity having problems. When we add this to the National Security concerns with regards the influence on the nation’s peace and stability by one entity, then we can resolve that the problems outweigh the benefits of this investment.