Market News

By Paul Burkhardt and Ruth Olurounbi  

(Bloomberg) -- When Aliko Dangote,  Africa’s richest person, dreamt up building a mega oil refinery in Nigeria more than a decade ago, his pitch to the country was that it would process domestic crude and finally make fuel affordable for citizens of the continent’s largest producer.

Politicians sang its praises as the 650,000 barrel-a-day refinery, which stands on a massive plot outside the commercial capital Lagos, finally went into production earlier this year.  They celebrated the vision of Dangote, a powerful businessman whose companies make up around a fifth of the nation's stock exchange.

The $20 billion plant carries the promise of changing the ruinous economic calculus of exporting crude that is refined abroad and re-imported at tremendous cost. But a standoff with the government is testing the relationship of Dangote — long a savvy political operator — with President Bola Tinubu and highlighting the challenge of changing the status quo of a dysfunctional industry that rewards powerful interests.

“I knew that there would be a fight, but I didn’t know the mafia in oil, they are stronger than the mafia in drugs,’’ Dangote told a conference in the Bahamas on June 12 hosted by Afreximbank, offering rare criticism from the business establishment of the corruption that plagues Nigeria’s oil industry. “If we knew what we were really going to get into we would not have started at all.’’

For decades, the continent’s biggest crude producer has sent barrels to Europe to be refined, and shipped back in a process rife with high levels of corruption and bribery. That's turned Nigeria into the poster child for the resource curse, and meant politicians and other powerful actors have grown rich off its resources rather than the state.

Intruding into that lucrative supply chain was always going to make enemies.

“In a system where for 35 years, people are used to counting good money, and all of a sudden they see that the days of counting money has come to an end. You don’t expect them to pray for you,’’ the normally reticent Dangote told the Bahamas conference.

Two weeks before the plant went into operation, Dangote’s offices were raided by the country’s Economic and Financial Crimes Commission.

Soon after turning it on, Dangote discovered that domestic oil producers, including foreign giants, local firms and the national oil company, couldn't provide the crude he needed, and before the end of January he was importing US barrels to the plant. Oil supply can often be tied up in long-term contracts, making it hard to find barrels at short notice, and Nigeria’s production has fallen in recent years — to 1.4 million barrels a day last month from around 2 million barrels a day in 2019.

Last month he had a public spat with the state-owned Nigerian National Petroleum Company, which rebutted his claim it failed to meet its payment obligations to increase its stake in his mega refinery to 20% from 7.2%. The payment was to be made in crude.

Then a regulator accused him of attempting to create a monopoly for the refinery, by trying to suspend diesel and aviation fuel imports and questioned the quality of his products. The monopoly accusation touched a nerve, recalling longstanding criticism of his cement business, which has a 60% share of Nigeria’s market.

That goaded him into a rare press conference on July 20 when he announced a steel plant that was in the pipeline would be scrapped to avoid drawing more complaints. He also alleged that some NNPC officials were personally profiting from importing blended petroleum from a plant they set up in Malta with some oil traders.

“We all know these areas. We know what they are doing,’’ he said.

NNPC Chief Executive Officer Mele Kyari denied the claim days later in a statement on X.“To clarify the allegations regarding blending plant, I do not own or operate any business directly or by proxy anywhere in the world with the exception of a local mini Agric venture,” he said.

What came next has been a bit more conciliatory.

The government on Monday offered to  sell Dangote 445,000 barrels a day of crude in naira rather than dollars, in a move that would ease pressure on the nation’s strained foreign exchange reserves. The offer “has the potential to make one part of the situation easier — which is access to cash for crude feedstock — it also looks like an attempt at rapprochement,” said Clementine Wallop, director for sub-Saharan Africa at political-risk consultant Horizon Engage.

“However, it doesn’t address the bad blood resulting from these weeks of dispute,” she said. It’s also not yet clear that Dangote will accept the offer.

The matter was important enough that Tinubu tasked a close adviser with developing the proposal for Dangote, bypassing a number of officials in the process, according to people familiar with the situation who asked not to be identified because the information is not public.

The move stemmed from the president’s frustration with the slow progress by the NNPC to increase refining capacity at state-owned refineries that have barely functioned for decades, as well as a lack of transparency around the volume of gasoline imports, the people said.

Government spokesman Temitope Ajayi pushed back on analyst fears that the agreement could be difficult for the NNPC to fulfill because it has committed several cargoes of crude to forward sales and pledged other barrels for loans.

Those commitments “will not affect the supply to Dangote and other modular refinery producers,” he said. “The government is also focused on ramping up crude production with a target to get to over 2 million barrels within next few months."

To do that, it will need to stamp out oil theft that diverts millions of barrels a year — no small task given the structural challenges and vested interests involved. 

It also must address a costly fuel subsidy that Tinubu said in his inaugural speech that he had ended. But popular outrage led the government to cap pump prices for gasoline since August, and this week cost-of-living protests ramped up on the streets of some Nigerian cities, making it even more difficult to let the price float.

“Basing its operational competitiveness on a consistently unreliable Nigerian state is a strategy that will backfire in the long run for the Dangote Refinery,” said Cheta Nwanze, partner at Lagos-based research firm SBM Intelligence.

Dangote’s project would be the foundation of a wider effort by the NNPC to increase its own domestic capacity by fixing existing refineries that in recent years have only managed a small fraction of the output they were designed to deliver. Taking a stake in the Dangote plant in return for crude was part of that plan.

But the past few weeks have seen that plan crumble. Still, Dangote remains confident.

“We will end up winning,” he said in the Bahamas. “You know why? Because the population and the government will be on our side because what we’re doing is right.’’