Dangote Refinery Resumes U.S. Crude Imports As Domestic Supply Challenges Persists

The Dangote Refinery, Africa’s largest single-train petrochemical plant, has resumed importing crude oil from the United States after a three-month hiatus. This marks a fresh move to maintain production levels amid ongoing challenges in securing adequate domestic crude supply.

The Lagos-based refinery recently purchased approximately two million barrels of WTI Midland crude from Chevron Corp., with the shipment expected to arrive at its 650,000 barrels-per-day (bpd) facility in December.

The decision to resume U.S. imports comes despite a prior agreement with the Nigerian National Petroleum Corporation (NNPC) Limited for local crude supply.

Background: Earlier Reliance on Imported Crude

Earlier this year, Dangote Refinery regularly imported one or two shipments of crude oil monthly from the U.S. and Brazil to sustain operations. This practice became necessary as the NNPC struggled to meet its commitments for local crude oil delivery.

In a bid to resolve this, the NNPC and Dangote Refinery entered into an agreement around mid-2024 to supply up to 400,000 barrels of Nigerian crude per day, with payments made in naira instead of dollars. This arrangement was designed to ease foreign exchange (FX) pressures and support the refinery’s operations using domestic resources.

However, NNPC’s ability to fulfill its obligations was hampered by existing forward sales agreements and crude swap deals with international traders. These contractual obligations limited the availability of crude for local refineries, forcing Dangote to resume sourcing from international markets.

Implications of Sourcing Crude from the U.S. for the Naira

The refinery’s return to importing U.S. crude raises concerns about its potential to ease FX pressures on the naira. Importation of petroleum products gulps more than 40 percent of Nigeria’s foreign exchange. When the refinery was first announced, it was touted as a game-changer for Nigeria’s economy, expected to reduce the country’s dependence on imported fuel and, by extension, its FX needs for petroleum products.

However, sourcing crude oil from the U.S. and other foreign suppliers undermines this hope. Instead of alleviating FX demand, the need to pay for imported crude may contribute to the country’s already significant dollar outflows.

While the refinery has begun addressing Nigeria’s heavy dependence on imported refined products, its own reliance on imported crude raises concerns about the broader benefits it can deliver to the domestic economy.

According to Sparta Commodities, recent reductions in shipping costs may have made U.S. crude more competitive in Europe and West Africa, prompting Dangote Refinery to choose this option.

Dangote Refinery’s management has frequently highlighted issues with sourcing crude oil from Nigeria. Edwin Devakumar, the refinery’s vice president, once accused international oil companies (IOCs) of artificially inflating crude prices.

Despite the naira-based supply agreement with NNPC, the refinery has continued to face supply gaps. NNPC’s longstanding crude-for-cash and swap agreements have left little room for flexibility in meeting the demands of new local refineries like Dangote’s.

In response to these challenges, the refinery has diversified its sourcing options, importing crude from Brazil, and the U.S., and even considering Libya as a future supplier.

However, it is believed that paying for U.S. crude in dollars may offset the potential benefits of the refinery, keeping FX pressures on the naira high.

Although the $20 billion investment boasts of 650,000 barrels per day production capacity, capable of serving Nigeria, West Africa, and beyond, the crude oil supply deficiency has become a threat to its potential to position Nigeria as a regional energy hub.

Energy experts have noted that addressing the limitations in local crude supply and ensuring that agreements like the one between NNPC and Dangote Refinery are fully implemented will be crucial for the facility to achieve its full potential. They note that without significant improvements in the local oil production and distribution framework, the refinery’s impact on the naira and the broader economy may remain limited.

In the meantime, the refinery has already achieved milestones, including exporting refined products to neighboring African countries like Togo and Ghana. These developments demonstrate its potential to transform the regional fuel market, even as it continues to grapple with sourcing and operational challenges.