Dangote refinery set to transform Nigeria’s downstream oil sector

The construction of the largest single train oil refinery in the world – a mega $12 - $14 billion project – is well underway. Where? In Nigeria. Some of you may already know about the project – but many will not.

The 650,000 b/d capacity integrated refinery and petrochemical project is being developed by Dangote Industries Limited (DIL). According to the company, the intent is for the refinery to satisfy Nigeria’s demand for petrol (gasoline), aviation fuel, kerosene and diesel, leaving a surplus for export in each of these products. The project is regarded by many as the largest industrial complex in the history of Africa.

DIL is part of the Dangote Group, a Nigerian multinational industrial conglomerate, founded by Aliko Dangote. The group is the largest conglomerate in West Africa and one of the largest on the African continent.

The importance and potential transformational nature of such an industrial development for Nigeria, West Africa and sub-Saharan Africa at large cannot be understated. For decades, although Nigeria is the largest producer of crude oil in Africa, it has always been dependent on imports of fuel and refined oil products. The refinery, once completed, will have a huge impact in replacing those imports and consequently create a massive improvement in the country’s trade balance, and a mega boost to jobs, industrial development and the country’s GDP.

Given the oil wealth at the government’s disposal it is quite astonishing that successive governments in the country have neglected the proper development of the downstream oil sector. In fact, it is criminal and a national disgrace. But the mismanagement of the country’s resources has been dogged by decades of political infighting and corruption which has effectively led to the massive underperformance of the Nigerian petroleum industry. More on this later!

So, it comes down to a private individual and company to build something that the government could and should have initiated many years ago. Dangote Group started out as a bulk commodity trading group back in the 1970s, and today is diversified through a range of products and services. These range from cement production, sugar refining – where Dangote has the second largest sugar refinery in the world, flour milling and pasta production, salt and seasoning refining, through to packaging materials, port operations, IT services, food and beverages and transportation. The group also has arms in many countries in sub-Saharan Africa.

The refinery project is located in the Lekki Free Trade Zone, and the site occupies around 2,100 hectares of land, or what had been swampland. It is an hour outside the centre of Lagos (depending on the trafiic!!), a sprawling and fast-growing city of around 21 million inhabitants. Around 7,000 employees are working around the clock on the site, while another 900 Nigerian engineers and technicians are being trained abroad for jobs at the refinery. As part of the overall infrastructure, Dangote has had to build a port, jetty and roads to accommodate the project. In addition, new energy plants - run on natural gas – are also being developed to power the refinery.

As part of the project, Dangote is also constructing the largest fertiliser plant in West Africa with capacity to produce 3 million tonnes of urea per year, at a site nearby to the refinery. Aliko Dangote has stated that the ongoing investment in refining, petrochemicals, fertiliser and gas is driven by the desire to bring innovation and efficiency into all aspects of Nigeria’s oil and gas sector.

He has also said that the company is committed to the concept of energy efficiency and innovation in the oil and gas sector. As such, the refinery is designed to meet Euro V grade, which is the highest standard in the world, hence products will be able to be exported to any part of the world.

On the issue of finance, Dangote took on a $3.3 billion syndicated loan back in September 2013 for part of the refinery (then a smaller proposed project than it is today) and fertiliser plant projects. The loan was arranged by Standard Chartered as global coordinator and Nigeria’s Guaranty Trust Bank as local coordinator. Some 12 other local and international banks were involved.  Dangote is providing the bulk of the remaining project capital.

Dangote Industries group executive director, Devakumar Edwin recently said that both units – the refinery and fertiliser plant - will probably be partly sold via initial public offerings eventually. The group is also looking to a 2019 listing of its cement business – and BAML and Standard Chartered have been quoted as two banks that might be involved in that process.

In a recent television interview that I watched, Devakumar also stated that the company was talking with a number of export credit agencies about additional financing, depending on where equipment for the plants was coming from.

As far as crude oil feedstock for the refinery is concerned, it has been designed to process a variety of light and medium grades of crude. Devakumar said last week: “It will be well diversified and able to process Nigerian crude, African crude and crude from other parts of the world.”

Dangote is also understood to be poised with its own oil production, partly to supply the refinery. It aims to pump around 20,000 barrels a day from two shallow-water blocks, known as OML 71 and 72, located in the Niger River delta in south-eastern Nigeria. Company executives have also said that once the refinery is up and running some of the cashflow will go to expanding Dangote upstream oil production.

And in mid-2018, Devakumar stated that Dangote had has been in talks with oil traders including Royal Dutch Shell, Vitol Group and Trafigura Group about them supplying crude and buying refined products, although no agreements had been signed.

The refinery is expected to produce about 50 million litres (13.2 million gallons) a day of gasoline and 15 million litres of diesel, though output can be changed according to the demand for each product. Nigeria, a country of almost 200 million people, consumes roughly 35 million litres of gasoline daily, so the surplus production would go for export.

Speaking at the Nigeria International Petroleum Summit in Abuja this week, DIL group executive director, government and strategic relations, Ahmed Mansur, said: “This high volume of PMS (gasoline/petrol) output from the Dangote Refinery will transform Nigeria from a petrol import-dependent country to an exporter of refined petroleum products. The refinery is designed to accommodate multiple grades of domestic and foreign crude and process these into high-quality gasoline, diesel, kerosene, and aviation fuels that meet Euro V emissions specifications, plus polypropylene.”

With regards to the fertiliser plant, as noted above, the complex will consist of ammonia and urea plants with associated facilities and infrastructure. In relation to fertiliser production, Mansur said: “Nigeria will be able to save $0.5 billion (per annum) from import substitution and provide $0.4 billion from exports of products from the fertiliser plant. Thus, supply of fertiliser from the plant, which is set for commissioning before the second quarter of 2019, will be enough for the Nigerian market and neighbouring countries.”

Dangote is also building two 550-kilometer underwater gas pipelines from its oil blocks in the Nigerian Delta to the refinery and fertiliser plant. The first pipeline will start to be laid this year and both will probably be completed in two years, at a cost of $2.5 billion, according to the company. The pipelines will be able to carry 3 billion standard cubic feet per day, which will be used to run the plants and sold to other businesses, including power stations.

 But in mid-2018 there were reports that the refinery plant would not meet its expected start date of 2020 for production – and one report suggested that the start-up could now be 2022. This has been disputed by Dangote however. Some analysts have been quoted that some gasoline and diesel production could take place by late 2021, but that on a project of such scale as this and with such complexity it would more likely be 2022.

Commenting on the expected delay to the full opening of the refinery, Robert Besseling, executive director at EXX Africa, tells TXF: “I believe that the latest completion timeline does take us into 2022 (despite Dangote’s own assurances otherwise), although some urea production may already come on stream later this year. The key to completion of the refinery project will be Dangote’s ability to attract further financing, which will very much depend on Nigeria’s political outlook.”

He also adds: “Politics has frustrated many major infrastructure projects in Nigeria in the past and all eyes will be on the February 2019 presidential elections and what this means for Nigeria’s ability to attract new capital inflows to finance mega-projects like the Dangote refinery."

"While current President Buhari is actively seeking fresh foreign investment and debt issuance to fund an infrastructure expansion, the policies proposed by main opposition candidate, Atiku Abubakar, are more favoured by foreign investors. These policies include liberalising Nigeria’s oil and gas sector and freely floating the naira, thereby removing the cumbersome currency restrictions that have been in place since 2015 and held up much investment.” 

So, why has it taken a country as well-endowed with resources as Nigeria so long to try to rectify the massive problem of fuel imports and where does the problem lie? Although Nigeria is a major producer and exporter of crude oil, it currently has four government-owned underperforming and decrepit refineries with a combined capacity of 445,000 barrels daily. However, those refineries — two in the oil hub of Port Harcourt, one in Warri in the Niger Delta, and the other in the northern city of Kaduna — are all operating at less than 50% of capacity.

This pathetic set-up has helped create a climate where some traders have grown rich on imported refined fuel products. And to cap this off, the Nigerian government subsidises these imports to keep gasoline and other fuel costs low, thus further exacerbating the situation. With such a scenario it is no wonder that corruption has proliferated!

When Dangote unveiled his detailed and expanded refinery plans in 2016, he said its aim was to challenge the status quo. He told reporters at the time: “This refinery is attacking the entire system. You export jobs and create poverty here, so that’s what we are stopping.”

And that status quo can partly be seen as the web of corruption where some involved in the elements of the importation scene had got rich. There are big numbers at stake. It has been estimated that through 2017 the Nigerian government spent around $5.8 billion importing petroleum products.

The plans for the Dangote refinery have not been universally rejoiced within Nigeria. Obviously, there are those fuel product importers who will eventually lose out, and there are also elements involved in some of the government’s new initiatives for smaller modular refineries who may not be keen on the Dangote mega refinery development. There have also been critics who don’t like the fact that the refinery is sited near Lagos. And of course, there are some who don’t like the potential of Dangote taking over the bulk of the Nigerian oil and gas industry – seeing this as a potential monopoly.

One can only imagine that there are numerous people with vested interests in Nigeria that do not want Dangote to succeed with the new refinery. But the will and impetus is there. Dangote also has an excellent track record of success with large-scale business and projects. It is the game-changer that will transform Nigeria – not just with refined oil, but also ultimately with other petrochemical products, and of course with the production of fertiliser which will help domestic crop production.

During a tour last week of the refinery, petrochemicals, fertiliser and port projects, the Nigerian Central Bank (CBN) Governor, Godwin Emefiele, in a speech commended Aliko Dangote for the volume of work done on the Dangote projects since his last visit over two years ago. He also enthused that the refinery and fertiliser projects would help Nigeria to create thousands of Jobs and check importation of fuel by the federal government. He described the refinery as a transformational project for Nigeria, which totally keyed into the objectives of President Muhammadu Buhari on self-sufficiency in petroleum products, conservation of forex and diversification of the economy.

Emefiele also disclosed that the CBN contributed almost about N75 billion ($207 million) to support the refinery project. He added, “You will imagine, N75 billion is just a drop compared to about $9billion that this project is costing. But we will continue to show support to individuals and companies that display the determination to help government, to support the government and support the CBN in restructuring the base of this country.” Dangote also stated that the CBN had given N50 billion towards the $2 billion fertiliser project.

In his own speech after the tour, Aliko Dangote, said the projects would definitely transform the Nigerian economy. “We have a couple of projects at hand and we will continue with these transformative projects. The biggest problem we have in Nigeria is that we currently import more than we produce, like any other African countries. But, by the time we finish our fertiliser plant, Nigeria will be the largest exporter of fertiliser in Africa. We will also be the largest exporter of petrochemicals and the largest exporter of petroleum products in the whole of Africa. This is a major transformation.”

Speaking about the strategic value of these projects, Robert Besseling at EXX Africa, tells TXF: “Once complete, the Dangote refinery would provide energy self-sufficiency for Nigeria for the first time in the modern country’s history, while offering a potential cheaper source of refined petroleum products for much of the West African region. Therefore, the completion of the refinery is of huge strategic value, especially when one considers all the potential benefits for the region’s industries, such as the $20 billion Gas Revolution Industrial Park at Ogidigben in Delta State that is set to produce fertilisers, methanol, petrochemicals, and aluminium.”

Hear directly from Dangote's Director of Corporate Communications, Mansur Ahmed at TXF Africa 2019: Project, Export & Commodity Finance this 9 & 10 April (Abidjan, Ivory Coast). Ahmed will discuss where Nigeria's greatest investment opportunities lie. Visit the TXF Africa website to view all speakers and the full agenda.
Now time to get up to speed on the markets.
  Here's our exclusive TXF Essentials subscriber content

Calmer times for the chameleon banks
BAFT Europe heralds another year of change in store, underpinned by confident banks, secure in their brands and their ability to partner rather than defend from fintechs…

2018 in review: House predictions put to the test
The TXF podcast team revisit the predictions they made at the start of last year, look at who was right and who was a little “ahead of their time”, and discuss the implications for the export finance sector at large…

How long can GCC tenors go?
State-owned borrowers in cash-strapped GCC countries – Oman and Bahrain – have been using ECA-backed debt to push out tenors to around 16-17 years. But can the private sector sponsors of the Al Dur 2 IWPP financing in Bahrain push tenors even further?...

Shop talk: VTB on Russia's $100bn infra push
Oleg Pankratov, head of infrastructure capital and project finance at VTB Capital, discusses Russia's private infrastructure funding plans with TXF. While attracting foreign investment may be expensive, the government cannot afford to put the country's $100 billion infra plan on balance sheet…

Expert briefing: Corporate treasurers, do not leave home, ever again
Eugene Buckley reflects on a well-used advertising slogan and how it applies to treasurers’ approach to blockchain and DLT when used with trade finance and balance sheet activity. Your ERP is the key…

Latin infra debt: Adjusting the risk balance
Two historical deals have cast a long shadow in capital markets financing for infrastructure in Latin America, but governments are starting to look beyond them. Is the Latin infra space ready for a shake-up in what has become the norm for balance of risk between investors, lenders, sponsors and governments?...

TXF podcast: 2019 export finance predictions extravaganza
In this episode, resident TXF podders discuss trade wars, a tightening of the credit cycle, the future of Saudi Arabia as a borrower market, and the implications of a potential $65 oil price…

 

Plus, to top things off... the news you thought you had but didn't

Bel Lavello wind farm priced
Sponsors of the 39.6MW Bel Lavello offshore wind farm in Italy - Belenergia, Rgreen Invest and Langa via project borrower Infragreen Fund - reached financial close on a…

Liberty House closes acquisition loan for aluminium smelter
Liberty House Group closed a $350 million five-year loan last month to back the $500 million acquisition of Europe’s largest aluminium smelter from Rio Tinto, Aluminium Dunkerque…

DEWA IV CSP signs
Sponsors of the $3.87 billion DEWA IV 700MW concentrated solar power (CSP) project in Dubai – ACWA Power and Shanghai Electric – have signed the debt backing the scheme. Financial close…

Java 3 IPP to close in H2 of 2019

The 800MW Java 3 gas-fired independent power project (IPP), the first IPP tender under Indonesia's new Ministry of Energy & Mineral Resources (MEMR) regulations, is expected…

Novolipetsk Steel secures €240m BBF
Vertically integrated steel company Novolipetsk Steel (NLMK) signed a four-year €240 million ($272 million) borrowing base facility (BBF) on 20 December 2018 for its subsidiaries…

PLN sounds out banks for Lumpung power project
PLN has launched the bank and EPC tenders for its $200 million 300MW Lumpung gas-fired power project in Indonesia. Both mandates will be awarded in the second quarter of 2019…

X-Elio seeks ECA/DFI funding for Mexican solar project
Spanish solar developer X-Elio is looking to tap development and commercial banks for its 200MW solar project in Mexico. Financial close is expected in May this year…

Jizan Refinery acquisition financial advisers mandated
Sponsors of the $10 billion Jizan refinery acquisition financing in Saudi Arabia have appointed financial advisers for the deal…

MET Group secures €885m RCF
Switzerland-based energy trader MET Group has secured an €885 million ($1 billion) revolving credit (RCF), with 15 banks participating in the transaction. Signed…

Bank responses to Formosa 2 RFP in
Around 20 banks have responded to the request for proposals (RFP) from Macquarie Capital and Swancor Renewable Energy for project financing for their 378MW Formosa 2…

Financial adviser mandated for Payra power financing
Siemens and state-owned North-West Power Generation Company (NWPGC) – sponsors of the the $2.8 billion 3600MW Payra gas-fired power project in Bangladesh – have appointed…

Lenders agree in principle to Super Expressway loan for MSRDC
State Bank of India (SBI), Bank of Baroda, Bank of Maharashtra, Punjab National Bank and Life Insurance Corporation of India have agreed in principle to lend up to INR300 billion ($4.2 billion)…

Pretium Resources raises $480m loan and RCF
Vancouver based Pretium Resources has raised a $480 million four-year facility. Signed in December 2018, the duel tranche deal comprises a $250 million term loan and a…

Carbon Holdings $10.9bn TPC project to close Q3 2019
Carbon Holdings’ $10.9 billion ECA/DFI-backed Tahrir Petrochemicals Corp (TPC) is set to reach financial close at the beginning of Q3 2019.  The financing comprises an 18-year…