The revitalisation of the four government-owned refineries seems unlikely due to a creative destruction process unfolding in Nigeria’s petroleum industry. This transformation could spell the end of the road for stakeholders in Nigeria’s moribund refineries.
With an inability to produce even 10 percent of the fuel needed to meet Nigeria’s energy demand, the soon-to-be-operational Dangote Refinery is poised to process a whopping 650,000 barrels of crude oil daily. Recent reports suggest that the refinery’s construction has been completed, with test runs currently underway and operations slated to commence in Q4 2023. When it becomes operational, the Dangote Refinery is set to churn out over 100 million liters of PMS daily, surpassing Nigeria’s fuel demand by nearly 100 percent.
But that’s not all. The BUA Group, a prominent conglomerate in Africa with interests in food, mining, and infrastructure, has entered into an agreement with France’s Axens to supply process technologies for its ambitious 10 million tonnes per annum mega-refinery and petrochemicals facility, set to be located in Akwa-Ibom, Nigeria. This massive integrated 200,000 bpd refinery and petrochemical plant aims to produce Euro-V fuels and Polypropylene for both domestic and regional markets.
BUA group’s chairman and CEO, Abdul Samad Rabiu, stated, “This 10 million tonnes per annum refinery and petrochemicals project is in line with BUA’s vision to develop local capacity in key industries where we can add the most value and where raw materials can be sourced locally.” The project’s successful completion will lead to the production of high-quality gasoline, diesel, jet fuel meeting Euro-V specifications for Nigeria and the wider region, reducing Nigeria’s reliance on imported fuels and petrochemicals.
This ambitious project will vie for prominence with the Dangote Group’s large-scale refinery project, heralding the possibility of ‘creative destruction’ playing out in the industry.
Joseph Schumpeter, the renowned Austrian-American economist, postulated that during economic downturns, inefficient companies should go bankrupt, leading investors to allocate their resources to more promising sectors of the economy. This process, known as creative destruction, may cause short-term pain but ultimately fuels the economy’s long-term growth.
Over the years, Nigeria’s reliance on its four existing refineries has proven unprofitable. In line with Schumpeter’s theory of creative destruction, these refineries should not continue to consume a significant portion of the government’s limited budget.
The government’s expenditure has increasingly skewed toward recurrent spending, leaving minimal funds for critical capital projects like road construction and infrastructure development, essential for economic growth.
Once operational, the outflow of funds associated with fuel subsidies will be reversed. Nigeria will enjoy additional revenue from the export of fuel products to neighboring countries, taking advantage of ready markets. Furthermore, these refineries will create a domestic market for Nigeria’s crude oil, increasing daily crude oil production opportunities.
The progress of BUA and Dangote refineries may lead to the disbandment of government ownership of the four refineries in Port Harcourt, Warri, and Kaduna, viewed by industry observers as futile. This development could also discourage the establishment of numerous licensed modular refineries.
Nigeria currently refines less than 3 percent of its fuel demand and imports nearly 98 percent of the rest. Strengthening the downstream sector, where 40 percent of Nigeria’s import bill could potentially be saved, represents one of the most impactful applications of creative destruction to the Nigerian economy.
Nigeria’s existing four refineries and modular refineries are not the panacea. The federal government should incentivize players like BUA and Dangote Refineries for swift market entry, which promises to be one of the most expeditious and significant diversification efforts Nigeria seeks.
When these two mega-refineries commence operations, market competition will likely drive down petroleum product prices, placing the government in a position to subsidise production rather than consumption, heralding a new era for the country’s energy industry.
