Much Ado about NNPC’s 20% Stake in Dangote Refinery

Energy

The pleasant news of the Petroleum Industry Bill passage by the National Assembly almost drowned the continued concerns and discourse being generated over the propriety or otherwise of the move by the Nigeria National Petroleum Corporation’s acquisition of 20per cent stake in Dangote Refinery and Petrochemicals. Regardless of the heat this historic downstream deal is generating, the share purchase move by NNPC may be a good sign that it is ready and equipped to play in the PIB space. Chris Paul reports

The week ended on two positive notes: the passing of the PIB by both chambers of the National Assembly and the signing of the term sheet between NNPC and Dangote Refinery.

Since the PIB is a process that may actually kick-start in the medium term, the NNPC-Dangote deal is of immediate concern and therefore, the major focus of this story. Nigerian state oil company NNPC, on Tuesday, signed the term sheet with Dangote Group to buy a 20per cent stake in the company’s oil refinery under construction in Lagos. According to the NNPC GMD, Mele Kyari, NNPC is talking with banks to borrow on the back of its cash flow to buy the stake in the 650,000 barrel per day (bpd) refinery.

Worth an estimated $19 billion, Dangote Group had previously revealed NNPC and three other firms had approached it regarding a stake purchase. For Kyari, having a stake in what would be the largest oil refinery in Africa is worth the cost. However, the deal is still a proposition that is subject to cabinet approval.

Constrained by gasoline price caps, NNPC which is the sole importer of fuel in the country is being forced to sell the product at a loss. That was why he raised the alarm about its revenue security and warned government that its remittances to the government could drop to zero, due to fuel subsidy costs.

Although, it has not yet deliberated on it, union groups in Nigeria, such as Nigeria Labor Congress (NLC) have fought against any price increases. Although Kyari is hopeful of a deal to shed the subsidy costs within the coming months, he admitted, “The reality is that we can’t afford it.”

“But if you don’t do something smart, you could end up with prices that Nigerians can’t afford,” he added.

Of course, there is a lot of sense in the NNPC GMD’s blunt look at the issue, given that as at 2016, Nigeria had spent N4.69trillion on petrol import, demurrage per annum.

Representing the main source of export value, Nigeria’s oil sector contributes about nine percent of the country’s GDP.

Nigeria, the first to discover hydrocarbon in the whole African continent, is the eleventh largest oil producer worldwide.

Immediate past Minister of State for Petroleum Resources, Ibe Kachikwu, said 20 million metric tonnes of Premium Motor Spirit (PMS) also known as petrol, valued at N3.35 trillion was imported into Nigeria from January to December 2016.

Between January and March 2021, the import of petrol into Nigeria amounted to N688 billion. In the last three quarters, import value of oil experienced slight increase. But the highest value was recorded in the third quarter of 2018, when an estimated N855 billion Naira of petrol were exported to Nigeria.

Desperate for solutions to save N4.69 trillion yearly from massive importation of petroleum products and be delivered of the refineries challenge, NNPC had planned to formally engage a pool of financiers after cost estimates were firmed up in June, 2019.

As indicated in a document detailing federal government’s plans to rehabilitate the refineries, Nigeria spent N1.34 trillion yearly due to shipping and demurrage caused by inadequate port receipt facilities. Obviously, federal government’s plans to make NNPC a net exporter by end of 2019, is not happening; for now.

Plans by the President Muhammadu Buhari administration for the nation’s downstream sector kicked off, in its first few months in power.

In a June, 2017, video podcast, the former Minister of State, Kachikwu told Nigerians that NNPC had taken up the responsibility of a last-resort importer producing petroleum products in an unstable environment as prices continue to take a big hit.

“The country’s target is to cease the importation of petroleum products by 2019 and get advantages in terms of foreign exchange conservation, job creation and stabilise the market place in terms of pricing.

“On our refineries, we are currently seeking financing, and not concession nor sale of the refineries for it’s absolutely important to do whatever is needful in order to get the country’s refineries upgraded, enhanced, and get the Greenfield refinery builders supported, and especially get any individual to co-location refinery ownership interest,” Kachikwu added.

The Petroleum Ministry also promised creation of an enabling environment for private sector-led Refineries.

In other words, its plans to have all the four refineries working as a major route to making Nigeria self-sufficient in domestic production and supply of Petroleum products in 2019 have collapsed.

Supporting and creating an enabling environment for the private sector-led Refineries initiative, is the major surviving part of its downstream plans; for which Dangote Refinery has become a highly visible beacon and poster boy.

By the time it becomes operational, the refinery alone will out produce Nigeria’s three major refineries – the Kaduna, Warri, and Port Harcourt refineries with a combined nameplate capacity of 445,000 bpd.

The locally refined petroleum products will not serve only the Nigerian market (thus reducing the forex expended on importation of these products). Beyond serving and supplying the fuel and forex needs of the country, the Lekki-based refinery will also serve international markets, earning more forex for the nation.

The state of health of the forex soul of Nigeria would be greatly enhanced in the shortest term possible once the 650,000 barrels per day Refinery facility begins to work. Economic experts have posited that in a matter of months, Dangote Refinery could crash the dollar, so dramatically; it is not impossible that the dollar falls to $1-N100.

Barring any unforeseen circumstances, Dangote refinery may be Nigeria’s most impactful project in the short term. Owned by the Dangote Group, the Dangote Refinery is an oil refinery, with the capacity to process about 650,000 barrels per day of crude oil, making it the largest single-train refinery in the world. Having invested over $7 billion, which is just over 60per cent of his total net worth, the Group Chairman, Aliko Dangote is currently valued at $11.6 billion, according to Forbes.

Followed by Egypt’s Bashandyoil fossil crude oil refinery, which produces 300,000 barrels per day, in terms of production capacity, the Dangote refinery is the largest in Africa. Incidentally, both facilities are under construction. Dangote comes a distant second to Paraguana Refinery, South America’s largest refinery. Considered the world’s third-largest refinery and located in Venezuela, its production capacity is 956,000 barrels per day.

Using the Nigerian parallel market rate of N500 to $1, Dangote Refinery $19 billion investment represents N9.5 trillion. Representing approximately 48per cent of the value, the value of Dangote refinery is almost half of the equity market capitalisation; when weighed on the Nigerian Stock Exchange equity market capitalization crucible.

Although altogether they are more valuable, the refinery takes up 72per cent of the total value of the Stocks Worth Over One Trillion (SWOOT); which includes Nestle Nigeria, Airtel Nigeria, Dangote Cement, BUA Cement and MTN have a current valuation as of the close of last days of June market at ₦13.3 trillion.

Dangote refinery is bigger than the market capitalisation of all the top banks put together; represented by the acronym “FUGAZ”, which includes First Bank of Nigeria, United Bank of Africa, Guaranty Trust Bank, Access Bank and Zenith Bank, by 389per cent.

Ranked 30 and displacing OMV, an Austrian multinational integrated oil, gas and petrochemical company, Dangote refinery is the largest oil and gas company in Africa with South Africa’s Sasol coming in at second position with a market capitalization of $9.75 billion. According to companiesmarketcap.com, Sasol is ranked 44th in the world.

Outperforming all major refineries belonging to well-known Oil companies like ExxonMobil, OMV, Royal Dutch Shell, Total S.A and Vitol; in Europe, Dangote Refinery comes next to JSC Antipinsky Refinery, the only refinery in Russia. It outperforms the Dangote refinery with a capacity of 896,500 barrels per day.

At 345,000 barrels per day, only the Chinese Sinopec Zhenhai Refinery comes close to the capacity of the Dangote refinery.

The production capacity of the Dangote refinery also outperforms big OPEC nations’ refineries like Saudi Arabia.

Ras Tanura Refinery, Saudi Arabia’s largest refinery; controlled by Aramco, with a production capacity of 550,000 barrels per day is still lower than Dangote’s Refinery.

But, in the United Arab Emirates (UAE), the Dangote refinery’s capacity is also second to the Ruwais Refinery (Abu Dhabi Oil Refining Company), which produces 817,000 barrels per day.

In Iran, the Dangote refinery is higher than Abadan Refinery, which has the largest capacity in that country with 450,000 barrels per day.

Producing at only 605,000 barrels per day, the ExxonMobil Jurong Island Refinery, which is the largest in the Singapore, is lower in terms of production capacity.

In North and Central America, Dangote’s refinery outperforms all major refineries on the continent, even in big oil states like Texas.

Owned by Motiva Enterprises, an American company that operates as a fully owned affiliate of Saudi Aramco, Port Arthur Refinery is the refinery that comes close to the capacity of Dangote’s Refinery, in Texas; with a capacity of 636,500 barrels per day.

Dethroning Anglo American Platinum, the world’s largest primary producer of platinum, accounting for about 38per cent of the world’s annual supply, which is currently valued at $13.05 billion, Dangote Refinery will be ranked the 5th largest company on the continent.

Surpassing Cincinnati Financial Corporation, an American insurance company that offers property and casualty insurance, Dangote Refinery will be ranked #422, in America.

That being said, the refinery will be bigger than some popular and well-known companies such as Domino’s Pizza ($18.11 billion), United Airlines ($16.91 billion), GameStop ($15.15 billion), American Airlines ($13.60 billion), McAfee ($12.03 billion) and Western Union ($9.40 billion).

Ranked #34, in the United Kingdom (UK), Dangote’s refinery is bigger than the likes of EasyJet, which is currently valued at $5.95 billion. In China, the refinery will be ranked #92 in the country, being more valuable than China’s Hua Xia Bank, which is currently valued at $14.74 billion. In Saudi Arabia, it will be ranked #9, taking the spot from the Saudi British Bank, which is currently valued at $17.25 billion.

When it commences production, Dangote Refinery will be the largest refinery in Africa, the fifth-largest company by market capitalisation on the continent, and the largest single-train refinery in the world.

Competing with world refining superpowers in countries such as the United States, China and Saudi Arabia, the Refinery will put Nigeria in the spotlight for crude oil refining.

Group Executive Director (Strategy and Capital Projects), Dangote Industries Limited, Devakumar Edwin said the refinery is a strategic win for the Nigerian economy, with the capacity to create at least 250,000 jobs when it is fully operational.

With the size, name-plate, the possibilities and opportunities that abound in the Dangote refinery, without a doubt, the 20per cent stake is a major investment by the NNPC.

Since the bottom line is for the Nigerian people is to assured of available and affordable supply of Petroleum products, it is imperative that the national oil company removes all impediments on its way to accomplishing this deal.

There is a need, therefore, for the corporation to break as many protocols and procedures to ensure Dangote refinery and other private Refineries in the country are assisted in whatever way possible; applying certain processes that will aid their coming on-stream earlier than planned.

It will make the country wet enough for the product will be cheaper and available; forex crisis will be a thing of the past; and both Government and the governed can have more than enough hard currencies for use.

Most importantly inflation will go down as the cost of foodstuffs will come down considerably.

All said, the 20per cent stake in the Dangote refinery deal is an excellent move by the NNPC; but it needs to be expedited; if possible, with the speed of light.

So, part of the strategy is to borrow money from banks to finance the stake.

The loan must reflect the 20 percent of the $19 billion-investment that is building the Refinery.

Already, the corporation is making progress on securing $1 billion from financial institutions such as the Afro Exim bank among others.

However, Kyari keeps affirming that Nigeria’s money will not go into the deal. But he forgets that in the event that he defaults, God forbids, it is not Aliko Dangote or Dangote’s Refinery that will pay or service that debt but Nigeria.

The issue that could arise in future, here, which may inform the fears of the Dangote Refinery team could be that a new government after this may come and devise all sorts of regulatory tactics to bully the refinery to pay off the loan on behalf of government.

In any case, must the stake be 20 per cent? Kyari has said Dangote did not come asking them to buy the 20 per cent stake in his refinery. According to him, the whole idea to acquire that amount of shares, is NNPC’s.

Whatever the arrangement that needs to be arrived at, to set up Dangote and other near-ready refineries to hit the ground running, should be done quickly, to save Nigerians, Nigeria and the economy.

Nigerians can no longer wait; just as the Nigerian economy is anxious to bounce back to life on the platform of this all important deal.

Just as the government has made so many firsts in the development of the country and the economy, the PIB being the latest feather on that cap, acquiring stakes in the Dangote and other indigenous refineries, should be an opportunity the Buhari administration should grab, preserve and protect jealously.

In all of these, the issue to consider is the trillions of naira that will be spent on the ever skyrocketing cost of subsidising fuel. Where will it come from, next year? It will be too complicated and risky to tell Nigerians to pay N256 per liter in these hard times. Worse still, should the downstream sector continue in its state and fuel importation persists, there may be no money, (as Kyari had warned), to pay into the Federation account. In other words, over 60per cent of revenue will not be going into the federation account.

But the NNPC has the opportunity of a life time to save the country all the billions of dollar needed to develop other sectors of the economy. So, it should not allow itself to be sucked into needless or avoidable complications in the bid to get this deal working.

In any case, if the $3.9 billion facility will be an issue, the corporation can convert it into crude Oil barter arrangement; which would become the guarantee that can help the Refinery Owners source for more money.

The ongoing crisis in the country, made worse by the growing insecurity, is more than enough headache for any government; adding fuel issues may blow up the whole country and there may be no nation or economy to manage, in the event of a conflagration of the crisis brewing in the underbelly of the Nigerian State at the moment.

It only makes sense, therefore, for NNPC to take the lowest hanging fruit and run with it. As things stand today, private refineries that are nearing completion and those under construction such as Dangote Refinery, are the low hanging fruits waiting for government to pluck and place the nation on a socio-economic redemptive course.

Once Buhari assents to the already passed PIB, this government would have won the elusive upstream regulatory framework gold to its list of unsung or disregarded laurels. However, come 2023, the upstream gold belt will neither do it nor calm already frayed nerves in the country; to a great extent.

Properly managed, perhaps this deal with Dangote Refinery may actually be the economic Special Purpose Vehicle (SPV) that will deliver cheaper and available fuel for Nigerians; while taking the naira back to the place of strength and its pride of place.