Dangote's Private Refinery: The Hopes and Fears

Billionaire business man, Aliko Dangote is proposing to build a $9 billion refinery at the Olokola Free Trade Zone, OK FTZ. If the project succeeds, that would be the first privately-owned refinery in Nigeria, with the potential to create jobs, eliminate subsidies and even spur other businesses in and around where the refinery is sited. 

For over 7 days, members of Spaces for Change-S4C's discussion forum on Facebook social networking site engaged in a very intense debate centered on the viability of the project, elucidating other social and economic concerns surrounding the initiative. Discussants comprised mainly of young Nigerian oil and gas professionals, business analysts, policy advocates, environmentalists, students, journalists and public commentators working in global and national energy-focused institutions and corporations. Concerns ranged from the massive drift towards privatization of public utilities, deregulation of the downstream sector, oil industry monopoly, ineffective regulation of private enterprises, poor maintenance of the existing four refineries, public sector inefficiency, including dearth of legal protection of the rights of the poor to access basic goods and services.  

Spaces for Youth Development and Social Change, (Spaces for Change) works to increase the participation of Nigerian youth, women and other marginalized constituencies in social and economic development and public decision-making. 

Here are excerpts from the conversation:  

Temitope Adeyinka Hitherto, the Nigerian government and many others have always insisted that the subsidy regime has prevented private investors from building refineries in Nigeria, but Dangote has effectively proved them wrong. In the words of Dangote:

"...making a new refinery run at a profit would work even if the government failed to scrap the subsidised fuel price that has deterred others from investing... We’ve done our numbers and the numbers are okay."

Chinedu Chiefsan With subsidies (easy money) out of the way, it creates a healthy environment for private refineries to come in as we are currently seeing with all the attendant benefits both on the side of the government and the society at large. No serious investor would like to sink money in a high cost, technology-driven business like crude refining for the government to dictate the price for which the products would be sold. That is why all the people that were given licences to build refineries in Nigeria have little incentives to act. That is also why the companies in the downstream segment of our oil and gas sector suffer from one common illness - low profit margins despite mind-blowing turnovers.

Philips Akpoviri. I'm sure you won't find too many Nigerians who would, broadly speaking, disagree with this initiative.  But when the issues are placed in perspective, one would appreciate the fears and rejections a few still hold on to, no thanks to the 'the more you look, the less you see' system of governance in the country. The most recent instance being the January 2012 pump price adjustments. What was the pump price of PMS or DPK before the January 2012 hike? What were the rationales behind the increase? What rate was officially agreed at the end of discussions? How much do you or I pay to per litre to fuel our cars and generators today?

Pick up your calculator, work out the difference between the #67 and the 100 and something naira we pay today - per litre. How has the supposedly huge windfall from all these been spent by the government? You see, it's more of a social challenge than an economic misunderstanding on the part of the rejecting mass, because the government has a lot to prove to earn some trust credit.

Chris Xrix Ero We seem not to understand the reason behind people's disdain for this government and by extension, this particular move. The whole subsidy payment became a national threat due to one constant variable: corruption. In light of all the stench that was unearthed regarding the subsidy payments, how many people in government took a fall for what was clearly their failure to do a job they are paid so much to do? What these guys are simply saying is that ''yes we know this government is corrupt and WE KNOW those who are corrupt, but because we are too scared to face them or 'we don't want to be attacked', so we'll just take the money elsewhere and the corrupt people can find less obvious avenues to loot''.

If you ask me, that is running away from the problem, tail in between legs. And again with all the heaven and earth that was promised we could attain with subsidy money, they got about half of it right? What have they been able to use that for?

Sunkanmi Adesina Well, if I'm a President, I will get the refineries working so I won't need to pay N10 trillion annually for subsidies. I think it's much more easier to get the refineries working than privatising the refineries. Is there any law that prevents the government from running its own sector (E.g NITEL) effectively and efficiently, while at the same time, providing conducive environment for private sectors?

Let FG give licence to Dangote and others, but let's revive government-owned refineries too to optimal standard. The common man will be better off with such healthy competition than when the control of commodity is entirely in the hands of business-minded private investors. Practical examples abound. Multichoice was forced to introduce GOTV for people that cannot afford DSTV, as a result of introduction of StarTimes by NTA.

Samuel Diminas: Do you also think it is easier making NEPA work rather than privatizing it? In the same way, do you  think it is easier to get NITEL provide better services as they did under a 50 year monopoly before liberalization of the sector and the entry of the private telcos?

Dangote's gamble is to create an arms-length relationship with the government, by selling at market rates to government contractors, whom in turn would deal with government. It would take a Nigerian with strong government contacts to successfully pull this off in an under-regulated market.

Temitope Adeyinka Dangote's strong government contact will mainly help him to fight the vested interests who are currently involved in petroleum products importation and not so much because it's a partially regulated environment. The best part Dangote got right is the scale of his refinery, 400,000 barrels per day (bpd). That gives him massive economies of scale and a high chance of the project being economically viable.

Dangote also putting up over 30% equity means he's minimised the risk of raising finance for the project. I'm not sure many of those who got refinery licenses were doing that. They were probably looking for pure debt financing. Truth is, setting up an economically viable refinery in a country like Nigeria is not for wannabes or jokers. If it's going to be done, it has to be massive possibly starting at 150,000 - 200,000 bpd capacity. Not all these jokers who are trying to set up 50,000 bpd refineries and who are still running around for financing. At the end of the day, whoever sets up a refinery in Nigeria will always sell at market rates to the oil marketers.

Samuel Diminas 1] If the industry is deregulated 30 bbls/day, refineries would be profitable.

2] Strong government contact is necessary to keep the trade in motion, a stalemate, probe or disagreement/late payments from government to contractors which is often, would see to massive losses to the refinery. This is the most important asset of Dangote on this project; the capacity to facility efficient business between all parties. In summary his end client is the government, with an artificial buffer/middle man for arms-length leeway.

3] Those who are involved with petroleum products have no fight against him; if the system remain regulated, nothing changes; apart from the sourcing refinery and BULK SELLER. This is in Dangote’s favour.

4] The economic viability, on time completion, long term sustainability still uncertain, it has less than a probability of success of 25% as at this time.

5] Raising entire "pure debt" finance for the project is impossible as it is in a regulated non-market economy for petroleum products. I commend him for taking the high risk of putting his cash. The issue here is not that “others do not want to do the same”. They don’t have the wherewithal.

I am yet to see any human being put in $3.5b on a single project of their own money. This is high risk and probably high payout, and Dangote would deserve whatever he gets out of this, morally and otherwise. But then if you are worth $16billion, you can play with $3b.

6] Selling at market rates to oil marketers whom would claim subsidy reimbursements is as complex as can be if you are within Nigeria operating in the country, it retains all other prevailing issues and the cycles of problematic bottlenecks. It’s obvious there would be issues, all those same factors faced under the regulated industry.

The 99% of investors prefer to deal in an open and free market devoid of issues related to government bureaucracy and its attendant apron strings, political interference etc

6] Dangotes cards may also be privileged information of a post-2015 deregulation. In fact, this is the most likely scenario, whether it is Tinubu, GEJ or David Mark that becomes president. Everyone in the know agrees on the need for deregulation, the issues against are mostly political.

Bologi Jimada We do not have to sell off public enterprises before private enterprise can flourish. There are real proponents of economic change, but equally you have mercenaries or predators who only want public enterprises sold to them at bargain basement prices. We are swarmed with all sorts of theories and as a result our economy has become a research laboratory for other economies to learn from. They deliberately create chaos and inflict pain on the citizens to prove to each other which theory or process works better. The more confusing the theory, the more erudite the proponent appears in the eyes of his colleagues. Just imagine if we had contracted more experienced and saner people to handle all our utilities? Rather, we were forced to sell them with no good results to show. Ajaokuta was stripped after workers were laid off; Bacita sugar is dead after workers were all thrown out and government took over the liabilities. We no longer produce much paper in this country. Because individuals wanted NITEL by hook or crook, it was permanently crippled so government will never be motivated to reactivate it. The rolling mills, smelter, sugar, airways, paper etc were all gotten rid of and what have we got years down the road. And some insist we accept it as the best way to go, haba!

Victoria Ibezim-Ohaeri  The deceit called privatisation is not sustainable. It is nothing but veiled robbery of public assets by a rich few. Privatisation is NOT the solution to all of Nigeria's economic woes. Nigeria hasn’t ever had a leader that has the interest of this country and its citizens at heart. Once we get that, all the cock-and-bull story about government's inability to run efficient institutions and refineries will die a natural death!

Kelechi Deca I am not an apostle of privatization because I know that there is no rule or evidence to show that businesses are profitable only in private hands. All the institutions that helped crash the world economy five years ago are all private sector-owned and run.There are outstanding evidence of private sector efficiency same as we also have public sector examples.

Today Japan Post is the biggest and most profitable postal service, yet its public owned why its US counterpart is dying. One of the most profitable airlines in the world today which has defied all known case studies in the industry, becoming a business case study itself in the last 3 years is Ethiopian and its 100% govt owned and run.

Some years ago a certain man with vision was made Post Master General of Nipost, within 2 years he turned the fortunes around, achieved 48 hours delivery and for the first time in half a century Nipost was self run.

Adesoji Adebisi:".... how is it difficult to get Nigeria refineries working at optimal level, while also granting licences to interested investors such as Dangote et al to build their own if they like?..." is a catch-22 to the ones that know. The moat has to be deeper or broadened just to keep the status quo in place. It is as clear as day and that is an assault on our collective intelligence. Amazing too that we are still flummoxed in 2013.

Chyke Nwokedi  I admire the Chinese economic model where public and private companies exist alongside each other but unfortunately it is not applicable in our environment and the reason is obvious to everyone. NITEL MTEL..whatever they called it had a level playing field with the new entrants (MTN, ECONET) in those days. After a few years, the results are evident to all. The same is applicable in the power sector. You have high level contacts within the Oil & Gas sector and I am sure that you must have realised that the greatest subtle opposition to the PIB is from within the establishment who wants the status quo maintained.

Sunkanmi Adesina The problem with privatisation, under the cover of government inefficiency to catch thieves, is that they forget that it is the common man on the streets that bear the cost. This is a society where prices will be touching the roof in the hands of private. No regulation, no control - whatsoever.

If oil sector is in private hands, if all of them decide to be selling a liter of pms at N1000, who will stop them? In the UK, about 3 years ago, TESCO increased the price of a loaf of bread by ordinary 60 pence, above government stipulated benchmark, they were fined heavily for cheating the citizens. That is a definition of control.

In Nigeria, if the MTN, AIRTEL and co decide to make call rate at 1000 per minute, who will stop them? After building the refinery, who will stop Dangote from selling at N1000 per liter, especially if government refineries are down or have been sold to the likes of Otedola?

Bologi Jimada There is nothing wrong with our institutions. It is us, the people severally or collectively. Those who destroyed the public sector entities became the undertakers of these same entities. So where is the difference you ask? The dysfunctional public entities which guaranteed employment (and a social safety net) vs the privatised and cartelised entities which shovelled droves out of jobs in the name of efficiency while rendering very substandard service and pocketing humongous profits on the backs of the pauperised citizenry. Given enough time, the free market capitalism, in its current mutation will kill itself because of its ferocious feudalistic structure which only sees the human being as figures in its quest for profit. After the assets of the land have been completely stripped, the people will eventually wise up and take back what rightly belongs to them. Let's just go on with all these fancy economic reforms!

To view the entire discussion, click here: DANGOTE'S REFINERY: RISING STAKEHOLDER CONCERNS