Mondiu Jaiyesimi: An assessment of Dangote’s oil refining plans (Y! Policy Hub)

by Mondiu Jaiyesimi

Mondiu Jaiyesimi (Y! Policy Hub)

In the area of competition, we simply can’t blame him for the signs of monopoly we find in his areas of business, the responsibility lies with the government to protect the interest and welfare of consumers by promoting competition…

The news that Alhaji Aliko Dangote, the richest man in Africa has decided to take the bull by the horns and invest in the risky oil refining business can only be met with an optimistic response. Especially from more than 90% of the Nigerian populace who have recently been made to bear the brunt of high fuel prices due to the controversial removal of subsidy on imported petrol products.

Dangote is already an accomplished businessman with a lot of financial muscle; and albeit the jury is still out on his close relationship with the present and past governments coupled with his ability to ruthlessly monopolize the industries he invests in, we cannot totally disregard his contribution to the Nigerian economy in the areas of job creation and the availability of locally produced commodities without us having to depend on imported substitutes. In the area of competition, we simply can’t blame him for the signs of monopoly we find in his areas of business, the responsibility lies with the government to protect the interest and welfare of consumers by promoting competition and prevent the abuse of monopoly power.

The Nigerian billionaire plans to build an $8 billion refinery that will produce 400,000 barrels per day by the end of 2016. Currently, we are only able to produce below the 445,000 barrel per day mark through the combined efforts of our four refineries in Port Harcourt, Kaduna and Warri. However, the EIA states that the operational capacity of these four refineries averaged only 24% in 2011. According to OPEC, our local oil consumption stands at 267,000 barrels per day which means that the proposed refinery will have the capacity to cater for our domestic consumption needs and also have substantial surplus to export to neighboring countries.

Obviously, this is not taking into account the plans by the federal government to construct three Greenfield refineries in Lagos, Kogi ad Bayelsa to be in operation by 2017 and the refurbishment of the existing infrastructure. If we are able to get this right, Nigeria can easily become a net exporter of refined petroleum products in ten years. That is however a big “if” taking into consideration the myriad of factors currently plaguing the industry.

 

Potential benefits to the Nigerian Economy

Refineries are expensive to maintain, they require top class management in the hands of experienced professionals who are aware of the diverse operational and financial risks encountered in their day to day running. This is where we are failing and it has provided the right platform for saboteurs to ensure none of the existing refineries work at full capacity. This has led the country to depend heavily on importing refined petroleum products; a move which has been highly beneficial to a few strong parties.

 

Breaking the Jinx

If Dangote can successfully pull this off, it will immediately quell the myth that we can never get our refineries working at full capacity or that we can’t refine 100% of the oil we need for domestic consumption. As many stakeholders have argued, this will also strengthen the fact that the private sector has a key role to play in solving key macroeconomic problems in the country.

 

Competition

Few hands can compete with Dangote in his commodity refining and importation business industries which he has successfully ended up monopolizing. However, the oil and gas sector is a different ball game as there are many experienced personnel and interested parties in the sector who can also come together as formidable forces. They also have technical expertise and financial wherewithal to attract and partner with foreign investors in investing in petroleum refining in the country. The burgeoning host of indigenous energy companies in the country will be looking to leverage on the refining business if this move pulls through. According to Forbes, Nigerian Abdul-Samad Rabiu is already constructing a $500 million cement plant in Edo state to rival Dangote cement. This gives us a hint of how successful and highly lucrative businesses can encourage competition which will automatically lead to job creation.

 

Cost effectiveness and job creation

This development has the potential of benefiting from economies of scale given the proposed capacity of the refinery. Depending on how regulation and other factors work out, we could find ourselves refining oil at a much cheaper rate which will put a serious dent to the prospect of importing petrol from foreign refineries. If the constituted authorities can be muster the courage to support this, this could spell the end of an era of massive corruption and rent seeking behavior witnessed by the parties benefiting from the importation of refined petroleum products. With more transparency, this can also ultimately lead to the reduction in pump prices in the long run if we consider how we would be eliminating the transportation cost of exporting the crude and importing the finished product which is a key component of the pricing model. As this could drive the creation of another profitable and engaging industry in Nigeria, we should be looking at prospects of job creation and acquisition of key skill sets and competencies in this important area of the downstream sector. It has already been mooted that over 2,000 jobs will be created and this number can only grow through potential spin-offs and further investment.

 

Challenges

We are eagerly waiting to see how the Nigerian government will react to this development given its failure to solve the problems plaguing our existing oil refineries for decades now costing the country trillions of Naira. A lot of Nigerians will be keeping tabs on this development and it is logical to suggest that giving his cordial relationship with the government, Dangote might just be the man to open the flood gates and help reduce the bottlenecks associated with licensing and other regulatory requirements. It will also be interesting to see how the oil importers and power brokers will respond to this considering the might of the opposition they will be facing this time. Dangote has all the ingredients to survive this battle as he has friends in high places and also knows his politics in a volatile business environment like Nigeria.

Pricing will also be an interesting issue as the initial cost outlay of this project and other factors might prevent us from immediately benefitting from a reduced pump price. It will also be interesting to see the role the NNPC will play considering its association with the International Oil Companies in the area of supply and also the PPPRA when it comes to setting prices. The next five years will be an interesting one. Fingers crossed.

————————–

Mondiu Jaiyesimi is an Energy Economist passionate about energy and public policy, empirical research and energy finance. He studied Energy Economics and Policy at the University of Surrey and has done extensive research work in Liquefied Natural Gas markets, UK energy markets, shale gas revolution and energy demand in developed countries.

He currently engages in independent energy consulting focusing on energy modelling, climate change and trends in oil and gas supply in Africa and other emerging markets. He is a member of the International Agency for Energy Economics and the British Institute of Energy Economics. He currently works with Deloitte, London.

 

Op-ed pieces and contributions are the opinions of the writers only and do not represent the opinions of Y!/YNaija.

Comments (2)

  1. Weldone bro, your article is so timely and on point, you made it sound so simple. One thing is certain, the rent seekers will ensure he never succeeds. They get a lot of free money from imaginary importation which Dangote intends stopping. I pray they do not end up setting up committee to probe his past activities and some agencies sent after him… LL naija

Leave a reply

Your email address will not be published.

cool good eh love2 cute confused notgood numb disgusting fail