Dangote impact felt in global oil markets six months after launch

Nigeria's $20 billion Dangote refinery is set to shake up international crude flows when it reaches full capacity, having already made an impact since coming online in January, trading sources and ship tracking data show.

Nigeria is sub-Saharan Africa's largest oil producer, pumping 1.5 million b/d in June, according to the Platts OPEC Survey from S&P Global Commodity Insights. Until this year, all of its oil was exported due to the lack of refining capacity, with gasoline, diesel and jet fuel imported for domestic use.

An expensive gasoline subsidy fueled an illicit market in neighboring countries for smuggled Nigerian motor fuel. But the 600,000 b/d Dangote refinery, built by Africa's richest man, was conceived to make Nigeria self-sufficient in fuel.

In its first six months, the plant has scaled to 400,000 b/d and delivered diesel, jet fuel, naphtha and fuel oil to both domestic and export markets, according to company sources and ship tracking data. Gasoline, Nigeria's primary fuel type, should be produced from mid-August.

Nevertheless, the refinery has already affected crude flows, with dozens of Nigerian cargoes remaining in-country and US WTI Midland, a comparable light, sweet grade, being imported.

The mega-refinery could therefore tighten the light, sweet crude market. "Its diet is WTI and the lighter Nigerian [crudes] so if you were chasing those barrels you'd probably feel it quite keenly," a West African crude trader told Commodity Insights. "Once they get to 600,000 b/d without any WTI Midland, 'severely disrupted' [will be] the headline."

Teething issues

The Dangote refinery near Lagos was built to run on Nigerian crude, with the ability to process other light and medium crudes as a backup.

Nigerian National Petroleum Company, originally a 20% stakeholder in the project, had agreed to supply some 300,000 b/d, but it has failed to do so, fueling a public spat between the state oil firm, Nigeria's energy regulators, the refinery and international oil companies.

To date, Dangote has received 47 cargoes -- roughly 170,000 b/d -- of Nigerian crude, 20 of them from NNPC.

WTI Midland crude initially emerged as the favored feedstock to supplement Nigerian supply, with the refinery signing long-term supply contracts for the US grade and noting its competitive pricing. Platyts, part of Commodity Insights, last assessed WTI Midland into Rotterdam at $82.36/b on July 31, while Nigeria's Bonny Light was assessed at $82.80/b on the same day.

The US grade has accounted for 30% of crude delivered to Dangote, through 18 cargoes.

While traders hinted that the US grade could rival domestic supply on pricing in the long term, its status as a staple of the Dangote diet now looks increasingly uncertain. Difficulties in accessing foreign exchange have left PetroChina vessels loaded with WTI Midland sitting off the refinery for weeks, with the Chinese firm reportedly reluctant to swap crude for products.

On July 30, Commodity Insights confirmed that the refinery was looking to sell surplus WTI Midland, fueling uncertainty around the permanence of the newly established trade flow.

Domestically, Dangote has alleged that IOCs had been charging it a $6/b premium for crude in June, leading Nigeria's government to seek to mandate local supply at "market price" and facilitate crude payments in naira.

On July 14, owner Aliko Dangote said the facility would broaden its feedstock sources with Senegalese, Libyan, Angolan and Brazilian crude.

"The refinery was built to use Nigerian crude and add value to it within Nigeria. Why should we deviate from that focus?" said a Dangote executive, adding that the crude supply issues were "getting resolved", but that the refinery remained open to all opportunities "to supplement it".

"Dangote refinery is designed to process a range of light and medium grades of crude oil, including Nigerian grades," said Rasool Barouni, associate director and head of refining at S&P Global Commodity Insights. "Other similar grades including other WAF grades could be an option."

Market impact

Teething issues aside, crude flows in and out of the Dangote refinery have been felt in other markets, especially in Europe, the largest consumer of light, sweet Nigerian crude.

S&P Global Commodities at Sea data shows European imports of Nigerian crude have slumped since January, with only imports of US oil falling by more. Meanwhile, Brazil, Egypt, Libya and Guyana have boosted supply to Europe. Analysts caution that refinery maintenance and other factors could have played a role.

Nigeria -- which previously did not import crude -- has seen the largest increase in WTI Midland imports globally since the refinery's inauguration.

A growing call on WTI Midland could affect Asia and Europe, the main export markets for the US crude which has emerged as a "swing" grade in recent years. For two consecutive years, Europe has ramped up WTI Midland imports by 20% to plug gaps left by sanctioned Russian oil.

On a macro basis, Nigerian exports have fallen in successive quarters since last year. CAS data shows Nigeria exported 1.4 million b/d in Q1 2024 and 1.24 million b/d in Q2 2024, down from 1.5 million b/d in Q4 2023.

Analysts are waiting for the plant to hit 600,000 b/d and start producing gasoline before assessing its impact, but note it is already leaving a mark on the light, sweet complex.

"The refinery's opening has certainly had an impact on trade flows, especially for Nigerian crudes and WTI," said Payam Hashempour, research associate director at Commodity Insights. "But, we should see the full impact on global trade flows once the refinery's operation really ramps up."