Except Dangote and other private refineries coming on board give preference to the Federal Government for patriotism sake, the NNPC may have to compete with other oil producers to supply crude to the entities in a move that will likely end crude swap deals with foreign firms. The Federal Government, through oil swap contracts, exchanges over 300,000 barrels of crude oil per day for fuel.
With energy transition ideals being reiterated globally, forcing oil majors to review their investment strategies, and slower oil demand in India, as well as United States’ preference for light sweet crude, Nigeria and other producers are exploring measures to find new buyers for their crude.
Already, the Nigerian National Petroleum Corporation (NNPC), on Monday, said there is no going back on acquisition of stakes in six private refineries, which are being developed in the country to ensure national energy security.
According to the state oil firm, the Federal Government policy directive stipulates the mandatory participation of the corporation in any privately-owned refinery that exceeds 50,000 barrels per day capacity in keeping with its statutory role of safeguarding national energy security.
Although Dangote had positioned his refinery around the Lekki Deep Seaports to enable it access feedstock supply from the spot markets, Reuters quoted the firm’s Group Executive Director, Devakumar Edwin, as saying the refinery was not looking for equity and the company wants to be able to secure crude from the market.
Like the Saudi Arabian Oil Company (“Saudi Aramco”) deal with Royal Dutch Shell plc (“Shell”) on the Motiva Enterprises LLC (“Motiva”) joint venture, which saw the oil producer becoming a major refiner in the United States and offtaker of its crude, the proposed deal between the NNPC and Dangote Refinery, may explore similar route as oil demand from Nigeria’s legacy crude buyers dwindle.
While the NNPC is not looking at taking over Dangote assets as it was in the case of Saudi Aramco and Motiva, the acquisition of some stake in the refinery is expected to assist the Federal Government in getting an offtaker for its crude, especially as it struggles to reduce petrol subsidy and rising importation costs due to devaluation of the Naira.
Presently, the Federal Government is literally buying time to weigh its best option to remove subsidy, with Dangote Refinery serving as the first option, in addition to the rehabilitation of the state’s moribund refineries.
Spokesman for the NNPC, Kennie Obateru, explained that “the Corporation has identified at least six refinery projects in which it intends to seek equity participation, five of them are at the development stage with the Dangote Refinery being the largest of them.”
Obateru explained that NNPC, being a National Oil Company, primarily, has a dual role of providing stewardship for the nation’s hydrocarbon resources and adding value to the resources for the benefit of all Nigerians and other stakeholders.
These roles, according to Obateru, enable it to achieve the twin objectives of providing energy security for the country and stimulating the nation’s economic development and growth.
The nation’s petrol consumption had reportedly skyrocketed to 93 million litres from a daily consumption of about 60 million litres per day, translating to some contentious 33 million litres difference at a time productivity across sectors is low.
The Aramco-Motiva 2017 deal gave Saudi Arabia sole control over the largest refinery in the U.S., a 600,000-barrels-a-day facility in Port Arthur, Texas, as it took full ownership of the Motiva Enterprises LLC name and legal entity, with Aramco equally getting 24 distribution terminals from the deal.
Edwin said the firms from Western and Middle East countries involved in trading and crude production were looking to secure crude supply agreements, a similar objective to that pursued by the NNPC.
“They are seeking to have a 20% minority stake in Dangote refinery as part of collaboration so that they can sell their crude,” said Edwin as quoted by Reuters.
REACTING to the development, the Peoples Democratic Party (PDP), yesterday, alleged that there was a plot to divert some N1.7 trillion ($3.9 billion) to private pockets, under the guise of acquiring 20% shares in the $19. 5 billion refinery being built by Dangote Group. The party said it was worried by what it called “the opaque and nebulous deal being pushed by officials of the NNPC.”
The PDP, in a statement by its national publicity secretary, Kola Ologbondiyan, noted that the deal would not only allow corrupt persons in government to divert the funds, but also entangles and smears the unsuspecting firm with corruption.
“While the PDP has nothing against any genuine and honest incentives for private refineries or any moves to divest our economic interest in the private sector, the party insists that such must not be used as a ruse to siphon funds from the national treasury,” the PDP added.
It expressed shock about the absurdity of a government, which cannot fix refineries, planning to spend such huge amount of money in such venture, and asked the Federal Government to immediately halt the process.
The PDP also urged the Dangote Group and other concerned investing firms to be wary of going into any kind of deals with officials of the APC administration. The PDP insisted that “any process involving the divesting of our nation’s economic interest by the government must be made open, transparent and not allowed to become a conduit pipe for treasury-looting officials in the APC administration.”
HOWEVER, the Director-General of the Lagos Chamber of Commerce and Industry (LCCI), Dr. Muda Yusuf, said the NNPC proposal is a move in the right direction, adding that the reality is that the Dangote refinery is a project of significant and strategic national importance, even though it is promoted by the private sector.
“Taking a stake in the project also makes a great deal of economic and business sense, especially in the light of our heavy dependence on importation of petroleum products and the associated fiscal leakages. It would also impact on our macroeconomic conditions from the perspective of the preservation of our foreign reserves as we currently spend billions of dollars yearly on importation of petroleum products.
“This is in addition to the several multiplier effects arising from related spin off industries like petrochemicals, fertilizers plants resonates well with our aspiration for self reliance and backward integration. The export prospects are also quite bright. The fact that the NNPC will be a minority shareholder offers a great deal of comfort. The undoing of our public enterprises has been the quality of management.
“As a country, we have paid huge price for this in the form of inefficiency, corruption, and wastages. The model being proposed with the Dangote Refinery is similar in a way to the NLNG model, which remains the best example of how government funds should be invested. It is a model that shields the investment from interference by politicians and bureaucrats. This proposition is much better than the decision to commit scarce public funds to the rehabilitation of decrepit government-owned refineries,” he added.
Professor of Petroleum Economics, Wumi Iledare, stated that the Federal Government’s move is the way forward, noting that the refineries do not necessarily have to pay international price for it as long as they pay the appropriate price within the context of the economic structure of Nigeria without subsidy.
“Nigeria needs to move away from exporting raw materials in exchange for imported final products for domestic consumption. The only caveat is the complexity of the refinery designs. What brand of Nigeria crude does it support?”
A stakeholder in the energy sector, Michael Faniran, said: “It is a good move and a win-win for both sides. The refineries need to be assured of feedstock supply for the business to be viable. This also provides secured offtaker for NNPC’s crude even if eventually global demand for crude declines.”
On his part, Head of Research and Policy Advisory, BudgIT, Abel Akeni, stated that Dangote Industries had previously made moves to secure crude oil supply for the refineries by purchasing significant stakes in some Oil Mining Leases (OML 83, 85, 71 and 72).
“However, given the refining capacity of its facility, any refiner would welcome additional strategic partnerships that could guarantee steady supply of raw materials, in this case crude oil. So, the proposed deal could come to fruition. The crude-supply deal in itself may not have any significant effect on energy transition for the country, it seems more like a win-win transaction for both NNPC and the refiners especially in the light of weakening demand due to a variety of factors,” he added.
EARLIER, in a desperate effort to offload and sell stranded barges of oil last year, the Federal Government had offered oil traders huge discounts on crude oil grades below the $10 mark, as glut and energy imbalance triggered by coronavirus hit the oil industry.
Latest prices for most of government’s crude oil grades for sale in May, showed prices as low as $1.51 while two of Nigeria’s banner grades – Qua Iboe, and Bonny Light sold at discounts of $3.92 and $3.95 respectively the following month.
Without refining capacity, Nigeria lacks the space to store unwanted supplies at a time the cost of hiring ships to take its supplies to importers has soared because many tankers are being used for floating storage.
With no refining capacity locally, a number of refineries in Africa have equally been offline, either as a result of scheduled maintenance or due to a lack of crude supply, forcing many African countries to depend on importation.
The NNPC uses the Direct Sale, Direct Purchase (DSDP) mechanism, otherwise known as crude swap, to secure Nigeria’s fuel requirements in exchange for crude, a practice that has gone on for years as all the country’s refineries have remained comatose.
In 2020, Europe was Nigeria’s main trade partner of crude oil. In the fourth quarter of 2020, the export value of crude oil to Europe amounted to about N853 billion, approximately two billion U.S. dollars. However, Asia was the first largest destination region of crude oil in the last quarter of 2020, whose exports from Nigeria reached over N880 billion, approximately $2.2 billion.
Overall, the exports of crude oil experienced a sharp fall in the second quarter of 2020. Exports of oil represent Nigeria’s main source of export value. The country’s economy was significantly impacted by the COVID-19 pandemic. The NNPC, earlier in May, picked 16 consortia for its new crude-for-fuel swap contracts for one year starting in August.