Delay in crude supply to Dangote Refinery poses risk to Nigeria’s economy –EIU report

The Economist Intelligence Unit (EIU) has warned that delays in supplying crude oil feedstock to the Dangote Petroleum Refinery and Petrochemicals could undermine Nigeria’s economic recovery and add pressure to the naira.

The $20 billion refinery, which began production in January, has faced challenges in ramping up petrol production due to a shortage of crude oil feedstock. While it has successfully exported products such as fuel oil, naphtha, nitrogen fertilizers, gasoil, jet fuel, and diesel, the refinery’s ability to produce petrol has been hindered by difficulties in sourcing adequate crude oil.

These delays are anticipated to have serious economic repercussions for Nigeria. They may exacerbate the strain on public finances and the management of the naira. Despite the government scrapping the official petrol subsidy in June 2023, unofficial subsidies continue, impacting the national budget and contributing to a widening budget deficit. This could compel the Central Bank of Nigeria (CBN) to adopt stricter currency management measures.

The EIU report highlights that ongoing fuel imports might reduce the current-account surplus projected for 2025, potentially leading to lower foreign reserves and a less stable foreign-exchange system. It attributes the delay in securing a reliable crude oil supply to low production levels caused by oil theft and underinvestment. As of July, Nigeria’s crude production was 1.31 million barrels per day (b/d), below the OPEC+ target of 1.38 million b/d. Additionally, the Nigerian National Petroleum Company (NNPC) faces difficulties in delivering the promised 450,000 b/d of oil to the refinery, and a significant portion of production is used as loan collateral.

The situation is compounded by International Oil Companies (IOCs) demanding a premium for crude oil sold in Nigeria compared to other markets. Regulators are also hesitant to enforce the Domestic Crude Supply Obligation (DCSO), which requires IOCs to sell crude to local refineries, fearing potential divestment.

The report underscores the potential benefits of local fuel production for Nigeria’s fiscal health and currency stability. With a refining capacity of 650,000 b/d, the Dangote refinery could significantly reduce the need for fuel imports and mitigate the impact of exchange-rate fluctuations on local fuel prices. This transformative development could address the paradox of Nigeria being a major oil producer while still relying on fuel imports.