How Nigeria’s $20B Refinery Disrupts European Markets

Two months ago, Nigeria’s struggling energy sector marked a pivotal milestone: the Dangote Oil Refinery commenced gasoline production and began selling domestically to Nigeria’s state oil firm, Nigerian National Petroleum Company (NNPC). This historic development signifies the first time in decades that Africa’s largest oil producer is refining its own crude.

The $20.5 billion state-of-the-art refinery, launched in January 2024, began gasoline production in September and is projected to reach full operational capacity by November. With a processing capability of 650,000 barrels of crude per day—far surpassing any European refinery—the Dangote Refinery is more than equipped to meet Nigeria’s domestic fuel demands. Moreover, the facility purchases crude and sells refined products within Nigeria using the local currency, thereby conserving critical foreign exchange reserves, including U.S. dollars.

The Dangote Industries oil refinery and fertilizer plant site in Lagos. Photographer: Benson Ibeabuchi/Bloomberg.

However, Africa’s largest refinery’s impact extends far beyond Nigeria. It is disrupting Europe’s Premium Motor Spirit (PMS) markets. According to OPEC, the Dangote Refinery has significantly reduced Nigeria’s reliance on petroleum imports from Europe. Experts predict it could end the decades-long gasoline trade route from Europe to Africa, a market valued at $17 billion annually.

“The ongoing operational ramp-up efforts at Nigeria’s new Dangote refinery and its gasoline (petrol) exports to the international market will likely weigh further on the European gasoline market,” the report states. “Continued gasoline production in Nigeria, a country that has relied heavily on imports to meet its domestic fuel needs in the past, will most likely continue to free up gasoline volumes in international markets which will call for new destinations and flow adjustments for the extra volumes going forward.”

The Oil Mafia

While the refinery’s success is a game-changer for Nigeria, it has also placed Aliko Dangote, Africa’s second-richest man and the owner of the refinery, in conflict with Nigeria’s feared “oil mafia.”

A view of the newly commissioned Dangote oil refinery is pictured in Ibeju-Lekki, Lagos, Nigeria, May 22, 2023.

“I knew there would be a fight. But I didn’t know that the mafia in oil, they are stronger than the mafia in drugs,” Mr. Dangote told an investment conference in June.

The journey ahead for the Dangote Refinery remains both transformative and fraught with challenges as it reshapes the dynamics of Africa’s energy landscape.

“They don’t want the trade to stop. It’s a cartel. Dangote comes along and he’s going to disrupt them entirely. Their business is at risk,” says Mr. Emmanuel, a Nigerian oil expert.

According to the BBC, since oil was discovered in Nigeria in 1956, the country’s downstream sector has been mired in corruption and a lack of transparency, with the Nigerian National Petroleum Company (NNPC) at its center. For decades, Nigeria has exported its crude oil, which is then refined abroad and returned as imported petroleum products, including gasoline. NNPC managed these “oil swaps,” but astonishingly, it only began publishing its accounts five years ago, even though oil revenue constitutes nearly 90% of Nigeria’s export earnings. Until recently, only NNPC insiders knew the specifics of these transactions, including the sums involved and the beneficiaries.

The Dangote Industries Ltd. oil refinery near Lagos, Nigeria.

Dangote’s new refinery should definitely be a boon for the country. Unfortunately, its arrival has coincided with developments completely out of his control.

Since the 1970s, NNPC has subsidized fuel prices for local consumers, covering the cost by reducing royalty payments to the Nigerian treasury. In 2023, Nigeria’s President Bola Tinubu abolished this costly subsidy, which had ballooned to $10 billion annually—over 40% of the government’s total tax revenue. Additionally, the president ended policies artificially stabilizing the naira, allowing market forces to dictate its value. These changes have caused gasoline prices to soar to approximately $2.30 per gallon—still low by U.S. standards but triple what Nigerians paid just a few years ago.

Only time will tell whether the Dangote Refinery can achieve its full potential. Nigeria is home to the famous Bonny Light crude, a light-sweet crude oil grade produced at the Bonny oil hub, which serves as an important benchmark for all West African crude production. Bonny Light has particularly good gasoline yields, which has made it a popular choice for U.S. refiners, particularly on the U.S. East Coast. Two years ago, Nigerian National Petroleum Company Limited (NNPC) CEO Melee Kyari revealed that Nigeria is losing nearly all the oil output from the Bonny oil hub: ‘

“As you may be aware, because of the very unfortunate acts of vandals along our major pipelines from Atlas Cove all the way to Ibadan, and all others connecting all the 37 depots that we have across the country, none of them can take delivery of products today. The reason is very simple. For some of the lines, for instance, from Warri to Benin, we haven’t operated for 15 years. Every molecule of product that we put in gets lost. Do you remember the sad fire incident near Sapele that killed so many people? We had to shut it down, and as we speak, we have a high level of losses on our product pipeline,” he said. Oil theft remains a major issue for the Nigerian energy sector and could hinder the refinery from sourcing all of its crude locally.

Former Nigerian President Muhammadu Buhari, Aliko Dangote, and West African presidents at the commissioning of the Dangote Refinery in Lagos, Nigeria, on May 22, 2023.

“NNPC doesn’t have enough crude for Dangote. Despite all this instruction to give ample supply of crude to the refinery, NNPC can’t supply Dangote with more than 300,000 barrels per day,” Mr Akinosho of the Africa Oil+Gas Report told BBC.

Meanwhile, multinational oil companies have accelerated their divestment from the Niger Delta, a trend that began over a decade ago. Despite the enactment of the Petroleum Industry Act (PIA) in 2021 to encourage exploration, Nigeria’s oil production has plummeted from 2.1 million barrels per day in 2018 to just 1.3 million barrels per day currently.

As Nigeria grapples with these structural challenges, the success of the Dangote Refinery remains uncertain. While it has the potential to revolutionize the nation’s energy sector and disrupt entrenched interests, systemic issues like crude supply shortages, oil theft, and declining production pose significant threats to its long-term viability.