Mita Chaturvedi

Mita Chaturvedi is a Research Analyst at Onyx Capital Advisory. Prior to joining Onyx, she completed her Master's degree in Finance and Economics from the London School of Economics.

Dan-got(e) Fuel?

5 min read

Nigeria’s Dangote refinery has recently acquired 1 million barrels of oil from the state-owned Nigeria National Petroleum Corporation (NNPC) Ltd – its second crude oil cargo in December 2023. The refinery, whose existence once faced notable threats in the face of delays and budget overruns, obtained its first batch of 1mbbls of crude oil from Shell on December 7th. The refinery is years behind schedule but remains a monumental accomplishment for Nigeria, who despite being Africa’s largest oil producer, continues to import most fuels over a lack of satisfactory refining ability. The nation is thus banking on the new refinery to convert it into a net exporter of fuels

Current Processes

Nigeria pumped out 1.18mbbls of crude oil in April 2023 and is forecast to produce 1.46mbbls of crude in 2023, exporting around 1.45mbbls.

Source: Statista and CEIC Data

In line with this, the country has also had to import nearly all of its refined products. Nigeria is the world’s third-largest importer of motor gasoline. To meet its national demand for gasoline, the country currently imports around 1.25 million metric tons of the fuel every month – which has burned a hole in the country’s foreign reserves. Importing fuel from Europe proves costly in the local Nigerian naira due to which buyers of gasoline were kept afloat via expensive government subsidies which were curtailed by President Bola Tinubu on 30th May this year.

Source: Statista (Dated from July 2019 to September 2023)

The Refinery

Nigeria has 99 problems but sweet crude ain’t one. The country hopes the refinery can solve its fuel-imports problem by capitalising on the fact that Nigeria produces light and sweet grades of crude – which can be converted into lighter fuel relatively easily compared to sourer crude grades. The Dangote refinery’s crude distillation unit has been designed to process 12 crudes at a given time and is engineered to handle grades specific to the Nigerian Escravos, Bonny Light and Forcados. All three of these are sweet crudes of light and medium API gravities. Initial objectives for the plant were to satisfy all of Nigeria’s refined product demand by the end of 2023 – as per Aliko Dangote, after whom the plant has been named. However, once fully operational, the plant is envisioned to yield 327kbpd of gasoline, 244kbpd of diesel, 56kbpd of jet fuel and kerosene along with 290kbpd of LPG.

What would a working Dangote refinery mean for crude?

Nigeria predominantly produces sweet oil and exports this to the rest of the world. The refinery has already begun utilising up to 200kbpd of crude oil starting last month, an amount that will increase as it ramps up processes. With Nigeria presently exporting nearly all of its crude, this could have a noteworthy impact on global crude exports. US crude imports from Nigeria alone amounted to 105kbpd in 2022. With an ultimate capacity of 650kbpd, a functioning Dangote refinery has the potential to increasingly tighten the supply of sweet crude. While the refinery is yet to reach full capacity, efforts by participants like Shell and the NNPC to supply it with crude alongside expectations of crude from nearby oil producers in Angola and Chad could trigger this tightness in the near term.

Dated from January 2018 to December 2023

Tightening supplies for sweet crude could bring about bullish tides for the benchmark Dated Brent. The front Dated spread recently entered contango territory over concerns that lacklustre demand would forge a supply overhang in oil. Previous notable peaks in the front spread were reached on 9th October this year, when the spread reached a yearly apex of $1.84/bbl on the back of volatility arising from the Israel-Hamas war and concerns over it impacting oil supply. Before this, we observed an even more substantial summit nearing $6/bbl in 2022 over the Russia-Ukraine war. While the gradual rise in the Dangote refinery’s functioning is not a macroeconomic shock and will thus likely not result in heights as severe as these, the market may price in a small rally in spreads with each announcement accentuating increasing withdrawals of Nigerian crude.

Oil Products

The fundamental reason for the push for the Dangote refinery has been to loosen Nigeria’s overdependence on exports of oil products. Off the refinery, production of motor gasoline in Nigeria is anticipated to swell up to 249kbpd in 2026 from near nothing now, and to over 300kpbd within the decade. Commensurate to this, gasoline imports are expected to halve to 154kbpd by 2026. While rapid population growth could lead to imports gaining speed over domestic production, this is not expected to take place until 2046.

If Nigeria meets its domestic motor gasoline requirement by the year’s end, European gasoline could face a significant supply glut, bringing in bearish tides for benchmark Euro gasoline contract EBOB.

Dated from January 2018 to December 2023

EBOB has a seasonal structure in that its value rises significantly over the summer, on the back of the summer driving season, and dwindles in the winter. However, given Nigeria’s tropical climate, we may see EBOB spreads weaken substantially – something that could be worsened if Nigeria begins to export gasoline to other African nations over time.

To conclude, oil trading flows the way we know them could be significantly disrupted by a functioning Dangote refinery. Still, while the refinery would undoubtedly bring massive relief to Nigeria, it remains to be seen whether operational and logistical hurdles will stretch out the existing timeline for the Dangote refinery. Notwithstanding this, 2024 already looks brighter for Nigeria, which is expecting to export gasoil for the first time next year. The country currently produces roughly 3500 barrels per day of gasoil – a figure predicted to rise to 211kbpd in the next three years. Even if the Dangote refinery manages to meet Nigeria’s domestic fuel demand in the coming year, the dynamics of the market will be one to watch.

Onyx’s policy is to only publish Research that is impartial, independent, clear, fair, and not misleading. Any views expressed are those of Onyx’s at the time the Research was prepared. Past performance is not indicative of future performance. Such Research is solely produced and published by employees of Onyx and based on publicly available information. Analysts are required to ensure that they have a reasonable basis for their analysis, predictions, and recommendations. Onyx maintains strict controls regarding the undertaking of personal transactions in financial instruments to mitigate any conflicts of interest.

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Mita Chaturvedi is a Research Analyst at Onyx Capital Advisory. Prior to joining Onyx, she completed her Master's degree in Finance and Economics from the London School of Economics.