FEATURE: Refiners brace for margin pain as Nigeria's Dangote refinery scales up

When Nigerian business mogul Aliko Dangote unveiled plans to build one of the world's largest refineries in Lagos, skeptics saw the $20 billion project as fanciful. Waves of state-built refineries have failed to make a dent in Nigeria's fuel import dependence, while a series of setbacks to the project only confirmed fears.

However, 10 years on, the giant 650,000 b/d refinery is now flexing its muscles on the global stage, with its ramp-up set to prove pivotal to the fortunes of competitors nervously eyeing a margin downcycle in higher-cost production hubs.

"This is one of the largest refineries that has ever been built, so the pace at which it ramps up is the difference between margins staying good for refiners or deteriorating," said Dan Evans, head of fuels and refining at S&P Global Commodity Insights.

Since starting operations in January, the refinery has reached around 50% of its capacity and is now producing its full suite of products, which it reports meet Euro 5 quality standards. Its petrochemicals complex is currently being commissioned and will be operational before 2025, officials say.

Growing production has already tipped Nigeria into becoming a net exporter of jet fuel, naphtha, and fuel oil. Next year, the country could ship almost 50,000 b/d more gasoil from Lagos than it imports, with volumes to almost triple again in 2026, according to Commodity Insights forecasts.

From January to October this year, the refinery has delivered the majority of its supply to the Lome transshipment hub off Togo, while South Korea has emerged as its single-largest export location, drawing 23,000 b/d of naphtha. Large volumes of gasoil have flowed to Ghana and other West African countries, while for the first time in history, Nigerian-made jet fuel has found its way to airports ranging from Iceland to Tenerife and London's Heathrow.

Gasoline exports

With a mission statement to redress Nigeria's fuel imports, Dangote was not expected to export substantial gasoline volumes. However, as Nigerians have struggled with fuel affordability, the company is already eyeing export routes.

The country's state oil firm, NNPC, had previously relied on imports to supply some 350,000 b/d of Nigerian gasoline demand, but in November it vowed to exclusively begin lifting supplies from domestic refineries.

Though Dangote is expected to be producing only around 50,000 b/d of gasoline while its residue fluid catalytic cracking unit ramps up, the refinery has already agreed to export 200,000 mt of its gasoline, threatening a political crisis at home and further downside to global margins.

Growing supplies from the refinery have coincided with a fivefold jump in gasoline retail prices over the last year, which the downstream regulator has warned could shrink domestic fuel demand by a quarter year on year.

As fuel quality from Dangote has improved, Nigeria's fuel regulator has shut off access to cheap but often poor quality supplies, while the government has stopped shielding consumers from rising prices as standards have been lifted.

According to the International Monetary Fund, the Nigerian government was still paying a form of gasoline subsidy at the beginning of 2024, but by September, NNPC was left with limited mileage to keep curbing import costs, revealing it had amassed $6 billion in debt. A previous hard stop to the subsidy scheme in May 2023 caused gasoline imports to drop over 40% year-on-year, partly driven by a slump in fuel smuggling, according to S&P Global Commodities at Sea data and experts.

As Dangote looks beyond the domestic market for gasoline buyers, a slide in global refining margins could accelerate. According to Commodity Insights forecasts, gasoline margins in Northwest Europe are already set to more than halve from levels of over $20/b in early 2024 to roughly $7/b in Q1 2025.

Wild cards

Financial and operational challenges remain as activities scale. Unlike most refineries of its size, the Dangote refining complex relies on a single crude distillation unit, leaving it exposed to outage risks, while operations will remain unstable over the next year as key units are stabilized.

Feeding surging crude demand has also posed a growing challenge, as the refinery has struggled to source the Nigerian crude it is designed to process.

NNPC was initially expected to supply half the refinery's crude requirements, but the state-owned company delivered only around a third of expected volumes in the first six months of the plant's operations. The refinery has struggled to secure additional volumes from international oil companies active in Nigeria, despite regulatory efforts compelling supplies to be delivered locally.

Divestments from ExxonMobil and Eni in Nigerian production assets completed earlier this year have left Chevron as one of the few IOCs still operating Nigeria's onshore wells. However, the company has stressed its freedom to seek higher export margins under the country's new "Domestic Crude Supply Obligation".

"I don't see it right now as an obligation where we have a certain amount that has to go [to Dangote] all the time," Jim Swartz, Chevron's chairman and managing director for Nigeria, told Commodity Insights earlier this month. "They call it a willing buyer, willing supplier negotiation," he added.

Supplementary US crude oil imports ground to a halt between July and November, while planned Brazilian and African imports have yet to materialize amid ongoing currency weakness. Nonetheless, the refinery hopes to improve the business climate by boosting tax revenues and GDP.

Meanwhile, market participants have placed their bets on when the refinery will begin to dominate. Absent disruptions, Commodity Insights analysts estimate that the refinery could reach utilization levels of around 70% by Q2 2025.