Of government prioritisation of Dangote Refinery
Martin Ike-Muonso, a professor of economics with interest in subnational government IGR growth strategies, is managing director/CEO, ValueFronteira Ltd. He can be reached via email at email@example.com
May 18, 2020933 views0 comments
Although we have four petroleum refining facilities and issued licences for the construction of additional twenty-five, we import refined petroleum products like every other non-oil-producing country in the world. In 2018, the federal government spent N2.9 trillion on the importation of petrol only. It was a 50% increase over the 2017 petroleum import spending of about N1.97 trillion. In any case, notwithstanding the import spending moderations in 2019, the depressed crude oil export prices evidence the need for urgency in self-sufficiency in refined petroleum products. There is also additional possible foreign exchange earning opportunities by positioning the country as a net exporter of refined petroleum products. It is needless to restate that naturally curbing our appetite for that quantum of dollar expenditure in refined petroleum importation will enhance the value of our currency.
Refining crude oil also results in the production of up to forty-eight different byproducts and raw materials that are incredibly relevant for our manufacturing. That is also another area for foreign exchange conservation as it will minimise the billions of dollars doled out annually to Chinese firms in procuring raw material inputs. Put together; all these pluses will lead to the emergence of millions of new businesses and new job opportunities. They are the natural symbols and drivers of prosperity. Most importantly too, it will orchestrate the disbandment of the cartels sustaining government corruption in the sector and the liberation of the Nigerian economy. The capacity for domestic refining of our petroleum products cannot be more urgent than now. Thanks to the billionaire Alhaji Aliko Dangote who appears to be the most committed in delivering on that purpose.
Dangote refinery positions itself as the fulfilment of Nigeria’s aspiration for self-sufficiency in petroleum products refining. After several years of delay, work commenced on it in 2019 and has progressed with commendable speed and has gained lots of support from governments and the private sector alike. The refinery, when completed, will produce 650,000 barrels of refined petroleum products per day. It will also be producing fertiliser as well as other petrochemical products. It is this high hopes placed on the imminent Dangote refinery that also confounds the memory of our collective ownership of four refineries as a nation. There also appears to be some level of public dementia about twenty-five refinery licences recently granted to various categories of investors whose refineries are currently at different stages of implementation.
Some “questionable” analysts think that the federal government should broadly step in and prioritise the completion of the ongoing Dangote refinery to fast-track its completion by the end of this year. The speed of continuing work on the refinery viz-a-viz the urgent need of Nigeria to walk out of its current economic morass seems to give the argument its base. Consequently leveraging government support to hasten the completion of the project could aid the “reflation of the economy”. Ironically, as good as the suggestion sounds, it will end up creating a destructively thorny economic pathway that may never lead to freedom.
Thoughtless “short-term convenience” mindset such as the one currently suggested, has historically emboldened our governments to abandon our four refineries. The drums are sounding again to consign them to oblivion permanently by prioritising Dangote’s refining plant. It is much the same way that we left our natural endowments in agriculture and solid minerals as soon as crude oil earnings blossomed. We built four refineries that have a collective daily refining capacity of 445,000 barrels. Each of the refineries also possesses the capability for outputting several petrochemical products. Even though their cumulative size does not compare with Dangote refinery’s, the former should not go extinct because a bigger perhaps better one is coming on stream. Their complementary side-by-side existence with Dangote’s refinery should be encouraged as part of a national strategic plan to strengthen Nigeria’s overall advantage in the export of refined petroleum products.
Our four refineries have been victims of “poor operating records” which also resulted in their deficient capacity utilisation of between 15% and 25% for close to two decades. The same statecraft that presided over this terrible performance is the ones trying to crown Dangote refinery as Nigeria’s critical refining facility subtly. That kind of a government-backed prioritisation agenda will only smother the four nationally owned refineries. The government appears to be tired. It is increasingly challenging for them to turn those refineries around or even at worse sell them to right investors that will make them run efficiently. The refineries have suffered from lack of proper maintenance of its facilities. Of course, with a less than 25% utilisation capacity, one would be expecting too much if the facilities are adequately maintained. While the oil industry within the African continent has more than 70% of Nigerians as leading experts, the managers of our refineries never considered it expedient to take advantage of the experience and know-how of these experts to make the best out of these refineries. In any case, the media campaigns of clearly unrealisable targets meant to distract the attention of curious Nigerians continue unabated.
How would a practically abandoned bunch of refineries ever support the achievement of the so-called national target of three million barrels per day and 40 million barrels of reserve? Progressively the initially popped up excitement about the prospects of the restructuring and turnaround of Nigeria’s four refineries is waning at an alarming speed. On its deathbed is the latent crowning of the upcoming Dangote refinery and petrochemicals as the new deal. Dangote refinery is no doubt the most promising among the set of refinery plant prospects in the country. And given Dangote’s incredible wealth, there is no fear that it will be completed in record time all things being equal. It is, therefore, for this reason, that government ought not to prioritise it but should shift its attention to building a portfolio of refineries that should offer it a substantial comparative advantage in the export of refined petroleum products after satisfying its domestic demands.
One strategic success recorded by the government is the issuance of twenty-five (25) refining licenses to indigenous companies. That is perhaps the only way that it would have realised much of its ambitious aspirations. But, wrongly focusing on the prioritisation of the nearly completed Dangote refinery without consciously paying attention to the hurdles that have prevented these twenty-five refining licence owners from taking off will constitute a grave error. There are four constituencies in the prospective refining ecosystem of Nigeria that the government must equitably pay attention. The first is the four government-owned refineries. The second is the nearly completed Dangote refinery. The third is the twenty-five refinery licensees that deserve immediate assistance to take off, and the fourth is the illegally operating refineries that should be mainstreamed, licensed and accommodated in the refined petroleum market.
Micro-refining capacities are an integral part of the supply-side of refined petroleum products all over the world. The only difference is that they face the same quality regulation that equally governs the big players. It is, therefore, up to them to determine how to operate profitably given those constraints. There is absolutely no reason why many of the hounded illegal refinery operators cannot be legitimised and licensed to operate as mini/micro refineries. The more we exclude them from the market, the more they cut corners and hurt the system. Granting legal status as well as regulating these hitherto illegal oil refineries will create the right set of incentives for their owners to invest in them as appropriate. The summary is that it does not help the government to full bodily focus on the mainstreaming of the prospective Dangote refinery. It is only one out of four critical sets of potential players that will bring dynamism into that market. If therefore, the government is desirous of leveraging the natural advantages that we have in oil to create a formidable refined petroleum export market, then such posture has to be comprehensive to be meaningful. Anything short of that will amount to the creation of a potentially harmful monopoly.
That is why, the call for federal government’s prioritisation of the prospective Dangote refinery while downplaying the other three prospectively critical players is nothing short of monopolist crowning. That will constitute a dangerous ordination of the “unproductive entrepreneur” scenario where the entrepreneur rides on the rights given to him to unquestionably profit at the expense of the state and its citizens. As a country, we are already cursed with a retinue of such unproductive entrepreneurs who acquire their legitimacy through the government. Historical experiences globally have shown that recovering monopoly powers when given and already enjoyed can be painfully difficult. Reliance on a single refinery owned by a single legal entity or person can only result in the person acquiring the ability to single-handedly determine the prices at which Nigeria will sell its crude oil to his refinery as well as the price at which Nigerians will purchase refined petroleum products. It is easy to see how it effectively kills the market mechanism and completely hands over national economic life into the hands of one man. Such an agenda is, therefore, ill-advised.
It is also not equitable. However, supporting the successful emergence of the other three blocks of potential market operators in the refining business will create a robust and dynamically reinforcing market ecosystem. Geographically, the spread of refineries will be reasonably fairer than it was as one would be sited in Lagos (South West Nigeria), another in the northern part of Nigeria (Kaduna state) while many others will operate in the south south geopolitical region of Nigeria. Abandoning our refineries in ways characteristic of our lifestyle of project abandonment will only concentrate the associated opportunities that come with the refineries in the South-West geopolitical zone only.
Government corruption effectively robbed us of the comparative economic advantages that our four refineries would have massively conferred on us. While this is not a good time to bemoan the losses, it is equally not a good time to continue in the error of the past that brought us to where we are today. The implications of the depleting crude oil market mean that we must have to go back to optimising the advantages that refining capacities can give to us.