Dangote Refinery, Africa’s largest refinery, is set to begin crude oil import from the United States in February. This significant shift, which reflects the increasing competitiveness of American barrels on the global stage, also marks a departure for Dangote Refinery, which has traditionally sourced crude exclusively from Nigeria.
According to reports from Bloomberg, Trafigura Group has brokered a deal to supply Dangote Refinery with 2 million barrels of WTI Midland crude expected to be delivered by the end of next month, marking the first instance of the refinery purchasing non-Nigerian crude.
This move, which signals a response to the changing oil industry, where the United States is gradually becoming a major player in the global supply chain, has raised a lot of questions.
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The Dangote refinery, boasting a substantial capacity of 650,000 barrels per day, commenced operations earlier this month.
Initially targeting a processing rate of 350,000 barrels per day, the refinery aims to gradually scale up production toward its full capacity. While the facility primarily sourced domestic crude through a supply agreement with the trading arm of the state-owned Nigerian National Petroleum Company Limited (NNPCL), this recent deal with Trafigura showcases a strategic move to diversify crude sources.
About a month ago, the refinery received its first shipment of Nigeria’s Agbami crude, facilitated by a trading unit of Shell, marking a significant step in utilizing domestic resources. Subsequent deliveries included Nigeria’s Amenam, Bonny Light, and CJ Blend streams.
However, this strategic shift towards importing US crude has raised questions about the NNPCL’s ability to meet its contractual obligations with Dangote Refinery. The NNPCL is obligated to supply crude oil worth $1 billion to the refinery as part of its payment for the acquisition of a 20 percent equity stake in the project.
Dangote Refinery’s turn to the US for oil purchase has raised fresh questions about the NNPCL’s capability to fulfill its contractual obligation with the plant.
However, the federal government’s ownership of crude oil has declined over the years, with a daily average share dropping from 414,463 barrels in 2020 to 205,184 barrels in 2023. This means that the Nigerian government owns less than 250,000 barrels out of the 1.3 million barrels produced per day.
For most PSC (production sharing contracts) deep offshore, companies take a larger percentage. In addition, the NNPCL is pledging proceeds of future crude oil production for loans while insecurity and crude oil theft have made onshore production unattractive. The situation has forced the NNPCL to rely on offshore production where Nigeria gets less share due to production costs.
This backdrop, which has raised several questions, has forced the newly-launched Dangote Refinery to source crude oil outside Nigerian shores.
“How can you pledge crude oil to OPEC off takers when you cannot supply a commercial refiner in Nigeria, crude oil?” energy expert, Kelvin Emmanuel asked.
He noted that out of the 510,000 barrels of crude oil obtained by NNPC from Joint Ventures (JV) and Production Sharing Contracts (PSC), approximately 425,000 barrels have already been committed under various Fuel Supply Agreements (FSAs).
“How can you commit to delivering crude to OPEC off takers when you’ve a commercial refiner in Nigeria that is unable to get the 300k barrels of crude oil you exchanged as equity ($1.7bn in feedstock) contribution for shares in the refinery?” he further asked.
Against this backdrop, the prevailing sentiment among many observers is that the prospect of obtaining cheaper petrol from Dangote Refinery has been diminished. The belief is that the cost of the refined products from the refinery will be influenced by international market dynamics rather than being insulated or influenced by local factors.
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