Dangote Refinery, positioned as Africa’s largest oil refinery, has embarked on a strategic initiative to diversify its feedstock sources, marking a significant shift in its Nigeria-focused oil procurement tradition.
With one-third of its oil supply now sourced from the United States, according to Bloomberg, the refinery is spearheading an innovative approach to address domestic supply challenges and enhance operational efficiency.
Despite Nigeria’s status as a leading crude oil producer in Africa, the country has encountered persistent challenges in meeting domestic demand and fulfilling its OPEC quotas. In response, Dangote Refinery has opted to leverage more affordable oil sources, with a substantial portion of its feedstock now originating from grade WTI Midland in the US.
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This strategic decision, which took effect in February, underscores the refinery’s commitment to optimizing its operations while ensuring cost-effectiveness. The decision to tap into foreign oil markets is believed to be key for Dangote Refinery’s push to mitigate supply constraints in the local market, enabling steady production and increasing its competitive edge.
Ronan Hodgson, an energy analyst at FGE, highlights the enduring cost advantages associated with foreign oil procurement. He noted that the trend is likely going to last as long as oil prices remain cheaper in foreign markets.
However, Hodgson further stated, “The refinery is already having a sizable impact on product markets even running in its most stripped back form at minimum rates.”
Moreover, upcoming operational enhancements geared towards enhancing diesel quality are poised to further enhance the refinery’s market influence and product offerings.
Against this backdrop, the Nigeria Upstream Petroleum Regulatory Commission (NUPRC) has introduced a groundbreaking policy mandating oil companies to prioritize domestic refinery supply over exports. Under this directive, producers are required to fulfill their commitments to local refineries before exporting crude oil, a move aimed at bolstering domestic refining capacity and reducing dependency on imports.
While the specifics of supply allocations under the new policy remain uncertain, industry observers anticipate significant implications for Dangote Refinery’s operations. With the refinery poised to enter the petroleum products market, including Premium Motor Spirit (PMS) supply starting next month, its influence on regional fuel dynamics is expected to be profound.
Alan Gelder, Vice President of Refining, Chemicals, and Oil Markets at Wood Mackenzie, predicts that the refinery’s operation will disrupt the West African gasoline supply balance, particularly with the commissioning of its Residual Fluid Catalytic Cracking (RFCC) unit. This disruption is projected to reverberate throughout the Atlantic Basin gasoline markets, potentially reshaping trade dynamics and competition.
Moreover, as Dangote Refinery aims to curtail the $17 billion annual gasoline importation from Europe to Africa, smaller European refineries may face existential challenges due to intensified competitive pressures.
The refinery’s full 650,000 barrel per day operational capacity represents a formidable force in the global oil and gas markets, signaling a transformative shift in industry dynamics. A recent report by Reuters predicts that it will force the closure of small and medium-sized refineries in Europe.
On April 16, Dangote Refinery made headlines by announcing a reduction in the price of automotive gas oil (AGO), commonly known as diesel, to N1,000 per liter. But S&P Global noted that the decision to lower domestic prices by 37 percent was primarily influenced by the production of high-sulfur diesel at the Dangote refinery.
Low-sulphur diesel contains less than 500 parts per million (ppm) of sulfur and is considered environmentally friendly, and it’s cheaper than high-sulfur diesel, which is used primarily for off-road purposes due to its propensity to cause engine damage in machinery over time.