When Aliko Dangote announced the flag-off of the construction of his refinery, a lot of respites emerged in the minds of stakeholders in the oil and gas industry. This is because there are no functional refineries in Nigeria. As an oil-producing country, Nigeria has to import refined crude oil from abroad and this creates a higher price for cooking, automobile, and aeronautic fuel in Nigeria. It remains worrisome that a country that extracts crude oil from its environment does not have the refinery to process this crude oil.
Dangote refinery will help the Nigerian economy in several ways. First, Nigeria would not have to export its crude oil abroad for refining. This would save the government transportation cost, the cost of exchange rate instability, and subsidy payments, which is hypothesized as scrapped. These cost-savings is good for the Nigerian government, especially in a pandemic when fiscal revenues have plummeted significantly. Furthermore, the presence of a functioning local refinery like Dangote’s will improve the activity index in the upstream sector since the downstream (refining) is now functional.
Although there is euphoria about the Dangote refinery, there is some downside that should be considered as well. First, the level of incentives enjoyed by the business mogul, Aliko Dangote, will increase astronomically for two reasons. One, the Nigerian government does not joke with its crude oil since it is the mainstay of the economy. This means that they would go to any length to support the management of the refinery, even if it means giving all the possible incentives to keep the refinery running. This is the leverage that the Dangote refinery has. Two, because there are foreign markets for Dangote to sell its processed crude to, this could act as a bargaining chip to get any form of incentives to sell refined crude in the Nigerian market.
Following the previous discussion, the scene for the oil and gas downstream sector is bound to be a monopoly. Anywhere in the world where monopoly practices, the following issues are prevalent – artificial scarcity, higher prices than a perfectly competitive market, and reduction in consumer surplus and economic welfare. In Nigeria currently, there are momentary phases of fuel scarcity resulting in long queues and stampede in filling stations. Considering the potentials of artificial scarcity by Dangote refinery, the challenge may get worse.
Furthermore, the emergence of the Dangote refinery may fully cripple all the decrepit refineries in Nigeria. These refineries are notoriously cost centers, not generating enough revenue to cover their cost, let alone streaming any net profit to the government revenue coffers. There has been a lot of suggestions to the government to revamp these refineries. One of the popular suggestions is that the Nigerian government should eliminate fuel subsidies and invest the savings in revamping the refineries. Another suggestion is that the Nigerian government should enter into a private-public partnership in the ownership and management of refineries. However, with Dangote refinery coming on board, there is a major chance that local refineries will be abandoned.
From an environmental perspective, the Dangote refinery will worsen the level of heat within Lagos, where the refinery is located. Sadly, the government and environmental stakeholders are not paying attention to the environmental consequences of the refinery in Lagos. Already, the sea level is rising in Lagos, the frequency of rainfall is distorted, the temperature level is high and there are no active afforestation activities within Lagos. Since the government is unconcerned, it is no surprise that Aliko Dangote himself has not spoken on the environmental consequences of the refinery.
Concluding, the Dangote refinery portends great benefits for the Nigerian economy, but there are serious concerns for the Nigerian economy. Policymakers need to carry out a last-minute assessment of the consequences of establishing Dangote refinery to manage the risk effectively.
Written by Michael Ogunremi
Economist at PricewaterhouseCoopers, Nigeria