Business a.m.

The Economist Intelligence Unit (EIU), a London-based research and analysis organisation, has warned that any additional delays in the commencement of petrol production at the Dangote Refinery will have adverse effects on Nigeria’s economic prospects. 

This prediction is based on the EIU’s expertise in analysing economic trends and forecasting through its various services, including country reports, five-year economic forecasts, risk service reports, and industry reports.

The organisation stated that delays in the ramp-up of petrol production at the Dangote Refinery, which it expected to reach full capacity only in 2026 or later, would have a detrimental effect on the country’s financial health and currency management. The report warns that this situation would perpetuate the interdependency between public finances and naira management, potentially leading to significant challenges in fiscal planning and currency stability.

The report stated, “As the federal government unofficially subsidises petrol (the official subsidy was scrapped in June 2023), currency losses feed into a widening budget deficit that is becoming more challenging to finance.

“This provides extra incentive for the central bank to revert to stronger management of the currency, as we already expect, but the degree of market intervention could become heavier.”

According to the EIU, persistent fuel imports resulting from further delays in the Dangote Refinery’s production ramp-up could reduce Nigeria’s current account surplus, predicted to be 1.9 percent of GDP in 2025, potentially leading to reduced foreign reserves and a return to a more inflexible and unstable foreign exchange system.

In its analysis, the EIU noted that the Dangote Refinery commenced production in January 2024 and has been exporting various quantities of fuel oil, naphtha, nitrogen fertilisers, gas oil, jet fuel, and diesel since March of that year. The EIU report further highlighted that the refinery, with its 650,000 barrels per day capacity, could completely meet Nigeria’s fuel import demands, estimated at 514,000 barrels per day in 2022, thus allowing for the decoupling of domestic fuel prices from volatile exchange rates.

The Economist Intelligence Unit explained that the government’s de facto subsidy of petrol has led to a situation where locally produced fuel, if made available through the Dangote Refinery, could significantly improve Nigeria’s fiscal position and stabilise the currency. This, it stated, is because petroleum products account for approximately 15-20 percent of the country’s goods import bill, and producing them locally could help to mitigate the pressure on the currency and the fiscal position caused by the outflow of foreign exchange.

“The Dangote Refinery was supposed to start producing petrol by June but, following setbacks, the target was postponed until July and later extended to August, which still appears to be optimistic.

“The refinery has encountered a range of problems, both practical and political in nature. The most publicly discussed issue is how the refinery can secure a reliable pipeline of crude oil feedstock at affordable prices.

“NNPC, the state oil firm, has not been able to provide enough volume. The government has promised to deliver 450,000 bpd of oil to the refinery through NNPC in a pilot scheme, sold in naira, but the state oil company is not in a position to make this a reliable arrangement.

“Crude production in Nigeria is stubbornly low, as a result of oil theft and underinvestment. Output was 1.31m bpd in July, against an OPEC+ target of 1.38m bpd. NNPC receives a varying minority share of this and, moreover, a sizeable quantity (about 90,000 bpd) is being committed as loan collateral,” the EIU report stated.

The EIU report revealed that the Dangote Refinery, though having procured oil cargoes from foreign sources, would find it difficult to sell petrol domestically in naira, as the government desires, if it continues to rely on imports due to currency mismatches.

Furthermore, the report stated that International Oil Companies (IOCs) operating in Nigeria had been demanding a $3-4 per barrel premium over the price they receive for their oil elsewhere.

It added, “The premium is judged too onerous by the refinery, which has appealed to the government to intervene. The government could enforce a regulatory provision – the domestic crude supply obligation (DCSO) – that compels IOCs to sell crude to local refineries, but the regulator has opted against doing so. Political pressures might force a change, but it is hard to say this with confidence, given the trade offs.

“The government will not want to further undermine the investment climate for IOCs by insisting on the DCSO, at a time when several of them are attempting to divest from the country.

“There are also concerns within [the] government and a web of influential industry players that the Dangote refinery is trying to establish a monopoly on petrol supply. Ensuring that the facility has access to cheap crude would cement its market power.

“Tensions between government regulators and refinery management have been palpable. The most likely outcome is for the impasse with IOCs to continue. Other issues warrant a long-term view of full capacity.”

The EIU identified two factors contributing to potential delays in the refinery’s operations. Firstly, the question of installed capacity at the Dangote Refinery remained a concern, as the refinery may not yet have the required infrastructure to meet the domestic demand.

Secondly, the report brought attention to the non-enforcement of the Direct Sale and Direct Purchase Agreement (DSCP) between the Dangote Refinery and the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA).