Oil can be both a blessing and a curse. In Nigeria, however, it has mostly been the latter. Just a decade after crude was first discovered in Oloibiri in 1957, it was already tearing the young country apart in civil war.
Production has never exceeded the 2.5 million barrels a day hit in 1979 and won’t in the foreseeable future. Nigeria’s oil output was insufficient to spark a Middle Eastern-style economic miracle back then; now, with a population three times larger, it’s woefully inadequate.
What are the problems with Oil in Nigeria?
While oil and gas sales typically account for about 90% of Nigeria’s export earnings, the state receives a relatively modest sum from the trade – less than $8 billion in 2020, according to the country’s Budget Office.
The government’s potential benefits from the industry are further eroded by rampant crude theft – as much as 150,000 barrels per day, according to the government, which is about $5.5 billion a year at current prices.
Despite being a longtime crude oil exporter, Nigeria’s government has four under-performing and frequently broken down refineries with a combined capacity of 445,000 barrels daily.
Those refineries, two in the oil hub of Port Harcourt, one in Warri in the Niger Delta, and the other in the northern city of Kaduna, are all operating at less than 50 per cent of capacity.
This means that even though Nigeria is Africa’s largest oil producer, petroleum for everyday use must be imported. This has spawned fuel importers and diesel traders who have grown extremely wealthy.
Nigeria’s government subsidises fuel imports to keep pump prices low, contributing to Nigeria’s well-documented culture of corruption in the petroleum industry.
Nigeria’s lack of refining capacity presents many challenges, such as spending billions of dollars on imports yearly and being exposed to disruptions in its domestic fuel supply.
Between 2015 and 2019, the cost of importing refined petroleum products exceeded the exports by $58.5 billion, according to OPEC, a group of major oil producers.
All that sounds grim, but there are reasons for hope for the oil sector— the Dangote Refinery.
The Dangote Refinery
Owned by Nigerian industrialist and Africa’s richest man, Aliko Dangote, the refinery promises to transform Nigeria’s economic fortunes. It is in a free-trade zone between the Atlantic Ocean and the Lekki Lagoon, an hour outside the city centre.
The Dangote refinery is Africa’s biggest. It will produce 650,000 barrels a day, enough oil to supply gasoline and kerosene to all 190 million Nigerians, and still enough to export.
The refinery is expected to boost domestic refining capacity, eliminating the current consumption shortfall. It will also reduce import dependency and stimulate economic growth.
It is the first privately owned crude oil refinery in Nigeria.
Nigeria’s existing refineries, plagued by operational inefficiencies under government control, have failed to meet the growing demand for petroleum products, making substantial imports necessary.
According to the Central Bank of Nigeria, the cost (including freight) of petroleum products imports into Nigeria doubled over a five-year period from about US$8.4 billion in 2017 to US$16.2 billion (indicating an annual average of US$11.1 billion), rising further to US$23.3 billion by the end of 2022.
How will the Refinery transform Nigeria’s economic fortunes?
Reduced oil import dependence
The most notable impact of Dangote refinery will be the increase in local refinery capacity, which will reduce imports.
Dangote refinery is expected to help Nigeria meet 100% of it’s refined petroleum product needs (gasoline, 72 million litres per day; diesel, 34 million litres per day; kerosene, 10 million litres per day and aviation jet, 2 million litres per day), with surplus products for the export market.
The refinery’s refined petroleum output, in combination with other refineries in Nigeria, is expected to meet the shortfall in the estimated daily consumption of 72 million litres of petrol.
The country has faced several fuel shortages in the past, which have caused prices to surge for transport and basic commodities.
Recent fuel shortages have been blamed on the Russia-Ukraine war, and the price of imported fuel rose more than 100%. Importers operated at a loss due to price ceilings set by the government.
Besides eliminating import dependency, the Dangote refinery can potentially reduce Nigeria’s crude oil export dependency as more crude oil will be refined domestically.
Refining crude oil locally will enable the country pay for the refined product in naira, which will save scarce foreign exchange and generate revenue in exported refined petroleum products.
The Central Bank of Nigeria says Dangote refinery could engender foreign exchange savings of between US$25 billion and US$30 billion annually for Nigeria.
Support for allied industries
Fuel is not the only output of oil refining; petrochemical industry too will build on it, like the fertiliser and plastic industry. A lot of other companies such as logistics, transport and trade industries will build on it too.
If the refinery is efficiently run, the forward linkage sector that relies on the output of the manufacturing sector will improve.
“That means the performance of the overall industrial sector which includes construction, and manufacturing in Nigeria will improve and their output will increase.”
The establishment of the refinery is also likely to help reduce the cost of production for industries that rely on petroleum products such as diesel to power their operations.
In turn, this should increase their competitiveness in the global market while promoting local industry capabilities.
The refinery could also create an environment for allied industries to emerge in and around it.
For instance, businesses in transport, housing and telecommunications will benefit from the construction and operations of the refinery. And the refinery should create jobs and entrepreneurship opportunities. While under construction, the refinery employed about 40,000 workers – 29,000 Nigerians and 11,000 foreigners. The jobs were in engineering, construction, manufacturing and operations, among other areas.
Mr. Dangote’s refinery hopes to help diversify Nigeria’s economy while reducing its dependence on imported oil. “We have other opportunities,” he said at the plant’s unveiling.
“Agriculture is there. Petrochemicals are there, Nigeria has more arable land than China. If we finish our gas pipeline, it can generate 12,000 megahertz of power. That’s huge. That’s more than what we are looking for in Nigeria and we can supply the rest of West Africa.”
In conclusion, the narrative of oil in Nigeria has long been one of missed opportunities, economic struggles, and dependency on imports despite being a major oil producer.
The country’s refining capacity has been severely lacking, resulting in significant financial losses due to importing refined petroleum products. This situation has perpetuated corruption, hindered economic growth, and left Nigeria vulnerable to global market fluctuations.
However, the impending completion of the Dangote Refinery presents a beacon of hope for Nigeria’s oil sector and overall economy. As Africa’s largest refinery, it is poised to revolutionize Nigeria’s economic landscape by significantly reducing oil import dependency, meeting domestic demand, and even creating surplus for export.
Moreover, the refinery’s impact extends beyond the oil sector, with potential benefits for allied industries, job creation, and entrepreneurship opportunities.
In essence, Nigeria’s oil industry has faced numerous challenges in the past, but the Dangote Refinery represents a transformative opportunity to reshape the country’s economic landscape, driving sustainable growth and prosperity for years to come.