Good morning Africa Briefers,

This week we’ll be taking a closer look at recent developments in Nigeria, as a massive oil refinery is due to open in the coming weeks. We’ll reflect on its implications for the West African state and then broaden our scope to look at similar such cases across the continent in which governments and businesses have been trying to add value to export-bound, unprocessed raw products and materials.

Within the next few weeks, the world’s largest single train oil refinery, situated just outside of Lagos, will - at last - go live (FT). The project was devised by Nigeria’s richest and Africa’s second-richest man, Aliko Dangote (Forbes). Dangote amassed his wealth, estimated at US$10.4bn by Forbes, on various businesses spanning basic food products like sugar and salt, to, mostly successfully, cement (FT).

The beginning of operations at the site marks the end of a construction process that took seven years longer than planned and which cost US$20bn - more than twice its initial budget (FT). The refinery was formally opened in May by then-President Muhammadu Buhari, with whom Dangote had a close relationship, in one of his last acts in office, but it could not begin operations at the time, leading some to speculate that the act served only to appease Buhari, who had been highly supportive of project (FT). At the opening ceremony, Dangote claimed that the site would be ready to bring crude to market by July earlier this year, but this deadline was then shifted to November (FT), and, more recently, December (Leadership).

But in spite of these delays, the start of production seems close at hand. Dangote announced earlier this week that the refinery, which also boasts a deep sea port, a power plant, and a fertiliser unit, would be listed on the Nigerian stock exchange and would soon start refining around 350,000 bpd (barrels per day), beginning with diesel, then jet fuel, and finally gasoline as production ramps up (ECP; Reuters; New Telegraph; S&P Global). This figure represents about half of the refinery’s maximum capacity of 650,000 bpd, a target which Dangote aims to meet by the end of next year, although the IMF has cast some doubt over the likelihood of this ambition (Reuters; FT; New Telegraph). 

At the heart of the uncertainties regarding this project are two concerns. Firstly, Nigeria has a poor record when it comes to refining oil. Of the country’s four other refineries, none are functional, despite Nigeria pumping 1.67mn bpd this quarter (Reuters), although President Bola Tinubu signed an agreement with Saudi Arabia earlier this month to obtain assistance in repairing the sites (VOA). This reputation for having refineries slip into disrepair has meant some commentators are pessimistic that the Dangote Refinery will be any different.

Secondly, and most importantly, oil supply in Nigeria has been infamously patchy, with significant oil theft, insecurity surrounding some wells, corruption, metering errors, production shut-ins, and poor infrastructure limiting the quantities, reliability, and efficiency of production in the country for many years (Stears; Reuters; The Conversation; Guardian).

However, Dangote Group and other investors with stakes in the refinery, including the state oil firm NNPC which has a 20% stake (FT), and the national government more broadly have taken steps to mitigate some of these issues. Oil theft in particular, which is commonly cited as the biggest reason Nigeria has not been able to capitalise as well as she might from her natural resource wealth, has become an issue of huge political importance in Nigeria. Since coming into office in May, President Bola Tinubu has claimed cracking down on oil theft to be a political priority for his government, and there are indications that his new approach has borne some fruit, with Nigerian oil production having grown significantly since the second quarter of this year (Reuters; Leadership).

While the jury is still out on whether this trend will continue and if Nigeria’s supply issues can be improved to the extent that is required to fill the Dangote Refinery’s capacity, things seem to be heading in the right direction. While there have been some claims in the media that Dangote’s close ties to the four previous Nigerian governments and his weaker relationship with Tinubu have meant that the NNPC has been less willing to supply his refinery fully, Dangote has insisted there is nothing to worry about. It appears that despite some mudslinging in the media in recent weeks - including some spats with rival tycoons - the supply issues seem to have been resolved, if only for the time being (FT; Vanguard; New Telegraph).

Despite her substantial oil reserves, Nigeria currently spends vast sums of money importing fuels and other refined oil products from wealthier nations: Belgium and the Netherlands together account for almost 50% of Nigeria’s fuel imports (World Bank). Over a 4 year period from 2015-2019, Nigeria’s refined petroleum imports cost US$58.5bn more than its petroleum exports (CNN; Punch), while last year alone the government spent US$23.3bn on petroleum imports (Reuters). In addition, Nigeria - as other countries in West Africa - has suffered from fuel shortages in recent years, with disruptive implications for business and public services.

The opening of the Dangote Refinery may thus remedy some of these issues. In an interview with S&P Global, the Executive Director of Dangote Group said that when ramped up to full capacity, the refinery will provide 100% of Nigeria’s petroleum demand with just 50% of its capacity, obviating the need for imports and enabling the export of the remaining 50% to other West African states, with ensuing fuel price reductions for these countries (CNN; FT).

There are also financial benefits of the refinery to Nigeria; Dangote has projected US$25bn annual revenues from the site once it is at full capacity (FT). Given that the Nigerian state oil firm NNPC has a 20% stake in the refinery, the government will see a sizable share of the refinery’s revenues (FT). There will also be substantial flows of foreign exchange that will flow into the country from the refinery’s sales and foreign exchange savings accrued from not needing to make international oil purchases (S&P Global).

In broader context, the refinery - which Dangote himself has called a “national project” (FT) - is also important because it aims to domesticate value-addition processes. As many commentators have noted of the refinery, it makes little sense for Nigeria to export unrefined crude oil only to re-import it again at a much elevated price when the processing that adds value to the product could take place domestically.

The lack of capacity to add value to raw materials has been a point of contention for African politicians, economists, and scholars for decades, and it is seen as a crucial aspect of the economic structures that exploit cheap African natural resource wealth and make African economies dependent upon those elsewhere for expensive processed goods (Mavhunga 2023).

In recent years though, there has been movement on these issues, and more African governments are taking steps - difficult, complicated, and fraught as they are - to increase the amount of value-adding processing that takes place in their respective countries (UNCTAD).

For instance, plans are in the works for Uganda to build her first oil refinery, following the construction of an oil well in Lake Albert (Offshore Technology). In Namibia meanwhile, the government has announced plans to prohibit the export of minerals from the resource-rich country without them undergoing some process of value addition (Africa Report). In Ivory Coast and Ghana, the respective governments are implementing strategies to grind and process cocoa beans locally, increasing the value of the export before it is exported to be made into chocolate elsewhere (Swiss Report; NYT).

Whether these plans to restructure the economic relations between African states and the rest of the world will be successful remains to be seen, but there certainly appears to be momentum in efforts to strengthen industry and domesticate value-addition processes.

That’s all from us this week!

Cheers,

Josh