EIU: Further Delay to Dangote Refinery Will Have Negative Effect on Nigerian Economy

Emmanuel Addeh in Abuja

The Economist Intelligence Unit (EIU) has said any further delay to the commencement of petrol production at the Dangote refinery will have a negative effect on Nigeria’s economic projections.

The London-based EIU is the research and analysis division of the Economist Group, providing forecasting and advisory services through research and analysis, such as monthly country reports, five-year country economic forecasts, country risk service reports, and industry reports.

EIU said in its latest report on Nigeria, “Delays to the Dangote refinery’s ramp-up in petrol production – we expect full capacity to be reached only in 2026 or later – would perpetuate a nexus between the public finances and the management of the naira.

“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.”

EIU argued that ongoing fuel imports would reduce the current-account surplus from the 1.9 per cent of Gross Domestic Product (GDP) that it currently projected for 2025, potentially leading to lower foreign reserves and the return to a more rigid and unstable foreign exchange system.

It added, “The Dangote fuel refinery is potentially transformational for Nigeria, which has always been an oil exporter and fuel importer. This fact is often regarded as a failure and an embarrassment by politicians, businesses and the media alike, but the new refinery has the ability to change this.

“However, a highly anticipated start to petrol production at the facility has met delays. We expect a major ramp up to take place in 2025, but recent events make it likely that reaching full capacity will not happen until well into 2026, and there is a downside risk of peak production being delayed further.”

EIU said the Dangote refinery had been producing since January 2024, and had since March been exporting varying volumes of fuel oil, naphtha, nitrogen fertilisers, gasoil, jet fuel, and diesel.

The report regarding the refinery, “It has a 650,000 barrels per day boilerplate capacity, which is enough to supplant fuel imports entirely (Nigeria consumed 514,000 bpd in 2022) and detach the pump price of fuel in Nigeria from exchange rate fluctuations.”

With petrol de facto subsidised by the government, EIU pointed out that locally produced fuel would have significant benefits for the fiscal position, as well as the currency, given that petroleum products account for between 15 per cent and 20 per cent of the country’s goods import bill.

EIU stated, “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 report said Dangote refinery had bought some oil cargoes from abroad, but added that currency mismatches would render an import dependent model unsuited to selling petrol locally in naira, as the government wanted.

EIU reiterated that International Oil Companies (IOCs) operating in Nigeria had been demanding a $3-4/barrel premium over the price that they are getting elsewhere, probably reflecting the cost of diverting supplies away from their regular buyers or because their oil is committed in long term contracts.

It stated, “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 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 long-term view of full capacity.”

EIU said another reason to expect delays was the question of installed capacity at the refinery.

On the non enforcement of the DSCO, it stated that there was a dispute swirling between the refinery’s management and the Downstream Petroleum Regulatory Authority (NMDPRA) after Farouk Ahmed, the latter’s chief executive, claimed that the Dangote refinery was only 45 per cent complete mid-July.