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Dangote Refinery is game changer for downstream sector

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Dangote Refineries, which is expected to be completed in 2022, will bolster the profit margins of independent fuel marketer who are reeling from huge operating costs and foreign exchange volatility.

The refinery, which is owned by Africa’s richest man and businessman Aliko Dangote, has a capacity of 655,000 barrels a day, more than the 455,000 barrel a day capacity of the four largest moribund state-owned refineries.

Interestingly, the major impediment to petroleum marketers is the reliance on import sources for petroleum products, and foreign exchange scarcity which made the Nigerian National Petroleum Corporation (NNPC) the sole importer of the products.

That has undermined the industry, making the business a less lucrative venture.

However, the coming on stream of Dangote Refinery is a game changer for the downstream sector because there will be availability of product locally that means operators in the industry will no longer be susceptible to currency devaluation and foreign exchange scarcity.

That means they will soon be making profit from core operations and deliver higher returns to shareholders in the form of bumper dividends and share appreciation.

The oil marketers are also grappling with Inadequate pipeline infrastructure and inefficient storage facilities that continue to clobber profit. For instance, 40 percent of petroleum products are trucked, which is expensive.

The average earnings before interest and taxation (EBITDA) margin for the downstream oil and gas sector stood at 5.90 percent, according to data from Cordros Securities Limited.

That compares with consumer goods, (5.90 percent); upstream oil and gas (20.10 percent), Industrial goods, (37.30 percent), and Telecoms, (39.70 percent). It means other sectors are turning each Naira of sales into higher profit.

According to Cordros Securities’ estimates, at a capacity utilisation of 60.0 percent, Dangote Refinery should produce c. 62.01 million litres of petroleum products per day, which is enough to meet estimated demand of 56.40 million litres per day, and leaving enough for exports.

The refinery will salvage the government from huge money it is expending on subsidy and under-recovery and shrink the country’s balance of payment deficit.

Analysts at Cordros Capital said it is a game changer as local production of petroleum will save Nigeria an estimated $3 billion annually in foreign exchange.

Anthony Chiejina, Group Head Corporate Communications, Dangote Group, said the government was pursuing the same policy to encourage Nigerian oil refining that it had with cement. The backward integration policy that led to the ban of cement for two decades helped boost local product and the country is now a net importer of the product.

“It’s an economic policy that has been tried and tested and has worked,’’ said Cheijina.

The landing cost of Premium Motor Spirit (petrol) imported into Nigeria jumped to N216.31 per litre on the back of the recent increase in global oil prices and the depreciation of the naira against the dollar.
Group Managing Director, Nigerian National Petroleum Corporation, Mele Kyari said the federal government was subsidising petrol with about N100 billion to N120 billion monthly (N3.3 billion-N4 billion daily) as it was being sold for N162 per litre.

Nigeria’s current account (CA) position stayed in a deficit position for the tenth consecutive quarter, with the balance in the fourth quarter of 2020 was ($5.26 billion or -4.5 percent of GDP) representing the largest CA deficit since the fourth quarter of 2019.

The deficit in Q4-20 was primarily due to the goods imports ($14.69 billion) outstripping goods exports ($8.44 billion).

The passage of the long-awaited Petroleum Industry Bill (PIB) by the National Assembly is also expected to accelerate the liberalization of the downstream downstream industry, attract the desired foreign direct investment, and unlock potentials in the economy.

The outlook for supply is bleak however, as the existing foreign exchange illiquidity issues mean that oil and gas marketers would have to continue to rely on the NNPC for the majority of their products, at least until 2022 when the DIL refinery begins operations, according to analysts at Cordros Securities.

“Considering that NNPC operates a “cash and carry” model in its sale of products to the marketers, there is an added layer of pressure on the downstream companies, as they may have to incur debt (or more debt) to facilitate their transactions with the NNPC,” said the analysts.

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