DANGOTE REFINERY AND THE NIGERIAN ECONOMY

Kanya Williams writes the refinery will reduce pressure on foreign exchange demand in avoidable cost of imports

Had the first products of Dangote Refinery come out as planned in 2022, the energy woes potentially poised to sustain the continual harm of the Nigerian economy now and in the future would have been averted.

A behemoth economic problem that has defied solution in Nigeria is energy poverty. Entrenched Premium Motor Spirit and Electric Power deficits are the historic energy commodities that have proven to underpin the persistent collapse of key fiscal and monetary instruments, year-in-year-out. Aviation fuel and diesel have recently entered the infamous paucity of the Nigerian petroleum products market. Recall that the Nigerian aviation industry nearly collapsed last year due to an unplanned and unforeseen spike of Jet-fuel prices and scarcity of the same commodity. Equally, diesel’s parallel behaviour with Jet-fuel threw several small and medium scale enterprises out of business and is behind the intimidating operation cost of services such as hotel businesses, banking services, etc. As we have not seen any increase in supply of these critical petroleum products, the outlook of the Nigeria’s energy posture in 2023 and beyond looks depressing. This is more so as the fundamental dynamics driving the potpourri of these petroleum products are rising against the insufficient supply posture. Population, standard of living, technology, energy intensity, efficient energy uses, climate change, government policies, financial markets are the crucial drivers of energy production and consumption. In Nigeria, these are fast changing against its energy landscape. Therefore, the Dangote Refinery, or any of its kind, should be made available now.

The Dangote Refinery in every economic, technological, locational, and timing sense, stands precisely, capable, and surely set to address the knotty problems of petroleum products in Nigeria. If you get the opportunity to visit, the first hope-lifting item you see is the distilling column. At 112.5 meters high, global industry experts have submitted that it is the highest in the world, comparing it with Rocket Saturn V which took the first man to the moon and the Eko Tower Black Pearl in Lagos. Does size matter? Yes, it does. Because Oil and Gas engineers attest that a tall column has better efficiency, better precision components separation and a higher throughput rate.

The stunning part of the Dangote Refinery in addition to the distilling column is its Nelson Complexity Index (NCI). The NCI measures the sophistication and capabilities of an oil refinery to produce a variety of choice petroleum products from a barrel of oil. From this configuration, the refiner can produce a range of economically valuable products from the lightest to the heaviest to serve captive or identified markets. From the Oil & Gas Journal, the NCI is measured on a scale of 1 – 20 where small numbers represent refineries that are simple in nature and fuel. This is to say, the higher the number, the higher the capacity of the refinery to deliver a variety of products from the heaviest to the lightest. The Dangote Refinery has a stand-above global average NCI of 10.5 and according to Marples, R. E. (2000), this is higher than the US average NCI of 9.5 and Europe’s average of 6.5.

Combined with a 3,000 tons regenerator which is the world’s heaviest regenerator according to Odeleye, Femi (2019), the refinery is set to run a range of critical refining processes from the basic NCI Crude Distillation Unit operation to various Residue Fluid Catalytic Cracking (RFCC) upgrading technologies. Expected output covers every drop of petroleum liquid requirement in the Nigerian economy in terms of volume, quality, and ease of access.

The complexity index design of this refinery will enable it to operate five processing units with the sixth unit – catalytic unit – upgraded into four components comprising, hydro refining, reforming, cracking, and hydrocracking. These are in addition to the basic distillation capacity, asphalt, vacuum distillation, thermal processes, alkylation/polymerize and oxygenates. From these, light petroleum products with compounds as low as C7 down to C4 consisting of methane, ethane, propane, butane, hexane, heptane, octane in which the Nigerian delightful Petroleum Gas, Liquified Petroleum Gas and the notorious Premium Motor Spirit will abundantly flow. All variety of Jet fuels with compounds from C8 to C15 come from the middle column of the refinery. These include Jet A-Fuel, Jet A-1Fuel, Jet B-Fuel and JP-4. The much-needed diesel which pump price shot up from about 350/liter in March 2022 to above 800/liter, are well provided for in the column compounds from C13 up to C25. The refinery also provides for heavier oils C25 to C70 and residue C70 to C900 of the column, to replace imported paraffin wax, petroleum jelly and vaseline, motor oil, asphalt, bitumen and tar. Interestingly, the refluxing and reboiling capabilities of this refinery fixes product overlap that causes poor product quality.

Key economic concerns this facility is set to address are the perennial and entrenched Premium Motor Spirit supply issues such as scarcity, adulteration, and the overheated/never ending subsidy debacle. Aviation fuel and diesel fuels driving domestic commerce have been struggling to secure sustainable, sufficient, and economically viable supplies since the beginning of last year. In the last five years, there has been an import upsurge of bitumen and tar for increasing construction work demands. This signifies the expanding requirements of the basket of petroleum products in the Nigerian economy. A feasible and viable refinery of this technology and economics is now more than ever, a critical asset in the trajectory of the Nigerian Energy Market.

The main beneficiaries of this refinery are the Fiscal and Monetary Authorities in terms of their policy formulations and implementations to improving foreign trade balance and defending the value of local currency.

The National Bureau of Statistics (NBS) states that the import value of other oil products import in the third quarter (Q3) 2022 stood at 1.615 trillion, comprising a massive 28.10 per cent of total imports. NBS data also confirm that this indicates an increase of 9.11% from the value recorded in Q2, 2022 of 1.480 trillion. Potentially, the run-rate to end of 2022 import value translates to 6.2 trillion of other petroleum products imported into the Nigerian economy in 2022. Other products could mean, petroleum products from crude oil exchange that might not have been captured by NBS.

Had the Dangote refinery begun supply of these products earlier, the 2022 trade position of the country’s international trade balance would have improved by ₦6.2 trillion or 28.10 per cent. Economist have argued that trade surpluses are positive contributions to a nation’s Gross Domestic Product (GDP). Therefore, the balance of trade is being explicitly added to the calculation of the nation’s GDP, using the expenditure method of calculating gross domestic product (GDP). Because the American Bureau of Economic Analysis stands on this established economic principle, the US Department of Commerce utilizes this method.

Even though the Dangote Refinery Gate Price is NOT expected to be denominated in Naira, there lies a substantial foreign exchange savings that will translate into a massive reduction of the pressure on the Central Monetary Authority mandate of defending the Naira. This is found from extracting the foreign exchange components of the landing cost of PMS before under/over recovery administration is carried out. These components include freight charges, traders margin of US$10/30,000mt, Ship-ship charges, receipt losses of 0.3 per cent, NPA $28,000 per day demurrage after 10 days allowance, $10.5/mt NPA handling charges, cost of stock financing for the imported products, US$2.50/mt and lithering expenses. A group of researchers have established that these components usually comprise 27 per cent of the total pump price of any petroleum product. In financial terms, this translates to N1.674 trillion that was brought to the foreign exchange market to buy foreign exchange for payment of imported petroleum products that a domestic refinery would have saved.

With a target performance of 50 million liters PMS and 17 million liters of diesel and aviation fuel per day, the Dangote refinery is set to reduce the pressure of foreign exchange demand by an estimated $3.857 billion in avoidable cost of imports. This is established from the PPPRA landing cost template, quarterly petroleum products import from NBS and average official exchange rate from the CBN. The multiplier effect of Its target 135,000 permanent jobs for Nigerians and displacement of plastics imports in the fiscal space are part of the economic springboard this refinery brings to the Nigerian economy. This refinery in a sum, is one edifice that will turbo-charge the engine of the Nigerian economy, unstrap the strings holding the development of the economy and wade off external and domestic headwinds against efficacies of fiscal and monetary instruments.

It is when the refinery comes to be, that we may realize the harm the poor management of the petroleum industry has done to the development of the Nigerian economy, since the end of the civil war. Every business endeavour (big, medium, small and micro), every corporate, institutional and individual aspiration, every genuine well intentioned government policy has been harmed by the poor management of petroleum products, chiefly, PMS.

Seeing that the greatest burden of foreign exchange has been borne by the Central Monetary Authority in terms of avoidable pressure on the Naira, it is only fair to give credit to the current management of Central Bank of Nigeria under Godwin Emifiele, on the policies especially diaspora remittances and the recent race to $200 billion initiatives that have clearly helped in holding the Naira below N1000/US$ at the black market today.

Dr. Williams writes from the United Kingdom