Friday, 17 May 2024 04:34

Despite Nigeria being Africa’s largest crude oil producer, Dangote Refinery orders 24m barrels from US. Here’s why

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Nigeria’s new Dangote mega refinery near Lagos plans to purchase millions of barrels of US crude over the next year, highlighting the challenges Africa’s largest oil producer faces in boosting its own output. According to an analysis by Thisday, the refinery, built by Africa’s richest man Aliko Dangote, has issued a term tender for the purchase of 2 million barrels a month of West Texas Intermediate (WTI) Midland crude for 12 months starting in July, according to a document seen by Bloomberg. The tender closes on May 21.

The request for US oil underscores the refinery's growing influence in global crude and fuel markets and reflects Nigeria’s ongoing struggle to increase its crude production, which remains well below capacity. Dangote is opting for cheaper and more reliable foreign supplies due to insufficient and inconsistent local crude availability.

"Supply of Nigerian crude is insufficient or unavailable and sometimes unreliable," said Elitsa Georgieva, Executive Director at Citac, an energy consultancy specializing in the African downstream sector. She added that WTI is available, reliably supplied, and competitively priced, making it a sensible choice for the refinery.

Nigeria has been unable to meet its OPEC+ quota for at least a year, producing about 1.45 million barrels per day of crude and liquids in April, far below its estimated capacity of 2.6 million barrels per day. Factors such as crude theft, aging pipelines, low investment, and divestments from oil majors have contributed to declining production.

Despite assurances from the federal government and the Nigerian National Petroleum Company Limited (NNPC) about meeting the country’s OPEC quota, Nigeria recorded an estimated underproduction of 30 million barrels in the first four months of 2024. Data from the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) showed that Nigeria produced an average of 1.32 million barrels per day, below the revised target of 1.58 million barrels per day.

The data further revealed that Nigeria produced 44.2 million barrels in January, 38.3 million barrels in February, 38.1 million barrels in March, and 38.4 million barrels in April. Overall, Nigeria drilled 160 million barrels from January to April, instead of the expected 190 million barrels, reflecting a 17.1 percent deficit.

In November 2023, OPEC+ revised Nigeria’s oil output target to 1.58 million barrels per day for 2024, lower than the 1.74 million barrels per day target due to consistent underperformance. Despite significant spending to address insecurity in the Niger Delta, issues such as oil theft, vandalism, and sabotage persist.

Nigeria’s projected oil production in its budget for this year is about 1.78 million barrels per day, with a benchmark price of $77.96 per barrel. However, the government has not clarified how it plans to bridge the gap between projected and actual production. To ensure sufficient local supply for the 650,000 barrels per day Dangote refinery, Nigeria’s upstream regulators recently introduced new draft rules requiring oil producers to sell crude to domestic refineries.

The Dangote refinery, currently operating at about half capacity, is leveraging cheaper US oil imports for up to a third of its feedstock. Since the start of the year, it has received at least one supertanker carrying about 2 million barrels of WTI Midland each month. An official at Dangote declined to comment, Bloomberg reported.

In a significant development, the Dangote refinery has started exporting finished products to Europe. For the first time, a cargo of Low-Sulphur Straight Run Fuel Oil (LSSR) produced at the Lekki Free Trade Zone facility reached the European market, expanding the company’s revenue opportunities. The 90,000-ton cargo was loaded in Lekki on April 25 and discharged in Rotterdam on May 13, according to trade analytics firm Kpler. The cargo is likely to be used as a blendstock to produce very-low sulphur fuel oil (VLSFO).

Approximately 72 percent of the fuel oil exported from Dangote has been delivered to the US since the refinery's first LSSR export tender in mid-February. A total of nearly 620,000 tons has been delivered so far. Another LSSR shipment of 83,400 tons left the refinery on May 7 and is expected to arrive in France on May 22, although market participants believe this may not be the cargo’s final destination.

LSSR price assessments on an FOB Amsterdam-Rotterdam-Antwerp (ARA) basis have remained at a $5 per barrel premium to front-month ICE Brent crude futures this week, narrowing from an 18-month high of $7.50 per barrel in mid-April. Maintenance work on fluid catalytic cracking (FCC) units at some refineries, which process LSSR and low-sulphur vacuum gasoil to increase gasoline yields, affected these price dynamics.

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