Dangote Refinery Plans to Substitute Nigerian Crude with WTI Midland
Additional information has surfaced regarding the decision-making behind the choice of the Dangote Refinery Lekki, the largest single-train refinery globally, owned by Africa’s wealthiest individual, Alhaji Aliko Dangote, to import crude oil from the United States. Insights from credible sources familiar with the agreement suggest that the decision was primarily driven by economic factors, marking it as a business transaction influenced by strategic considerations.
It may be recalled that the Dangote Refinery had acquired 2 million barrels of West Texas Intermediate (WTI) Midland from Trafigura, the world’s second-largest oil trader, with delivery scheduled for the end of February.
Upon the revelation of this purchase last week, many raised questions about its financial prudence, with some attributing it to the Nigerian National Petroleum Company Limited (NNPCL) falling short in meeting the refinery’s crude oil requirements after pledging over 30% of its future crude for cash.
Nevertheless, reliable sources indicate that the astute entrepreneur from Kano, apart from other factors, opted for the more economical American crude, which has gained significant competitiveness in the global market.
In comparison to Nigerian premium grades like Bonny Light, Agbami, Qua Iboe, and Brass River, which are indexed against Europe’s North Sea’s Brent, the WTI Midland light crude from the United States is notably more cost-effective.
According to information gathered, the Dangote Refinery reportedly earned a profit of at least $8 per barrel on the 2 million barrels of crude oil acquired from the U.S., resulting in an estimated total gain of around $16 million.
Independent investigations revealed that during the period when Dangote Refinery purportedly made the purchase from Trafigura, Brent crude oil prices averaged $82.03, while WTI Midland oil stood at $76.78, and the OPEC basket at $84.19.
An oil and gas consultant familiar with the transaction informed Business Hallmark that due to the substantial increase in U.S. crude oil production, American oil companies have been offering significant discounts on their WTI Midland crude stocks in the global oil market. Consequently, American crude has become more competitive than Nigerian premium grades.
“I know many Nigerians were confounded by the recent announcement that Dangote Refinery purchased crude oil from the U.S.
“They should know that Dangote is not stupid. A discerning observer would have known that there is a catch in him going as far as the U.S to get feed stocks for his refinery.
“The major reason, apart from the other valid ones being bandied about in the media, is the wide difference in the prices of Nigerian crude grades and the U.S WTI Midland.
“Nigerian barrels that are of comparable quality to WTI trade at a premium to Brent. For instance, while WTI closed at $72.28 at the end of trading on Friday, February 3, 2024), Brent crude closed $77.33, a difference of $5.05, while Nigeria premium grade, Qua Iboe, traded at $81.63 (8 hours delay), a difference of $9.35. All Nigerian crude grades traded above the $80 mark within the same period.
“So, if you are a businessman, which one will you go for if you have the option?”, the source demanded.
When queried about the associated expenses involved in transporting the crude oil to Nigeria, the source dismissed them as negligible in comparison to the substantial profits generated from the transaction.
“Yes, you are right. Costs will be incurred in the process of bringing the product from abroad. But you should also know that almost the same costs will apply to products shipped from inside Nigeria because we don’t have the type of super tankers needed to transport crude oil in the region of 1 million barrels in the country. Apart from this, shipping costs are universal.
“If you like, bring in your products from Escravos in the Niger Delta or Abdijan in Ivory Coast, the difference won’t be much because shipping costs are benchmarked and relatively the same all over the world.
“Also, we don’t have the kind of vessels that can carry millions of barrels at one. They will need to come from Europe, Morocco, Angola or South Africa to lift crude from the Niger Delta before going back to their bases abroad. At the end of the day, it (transport cost) will all boil down to almost the same thing”, the source added.
Investigations revealed that shipping costs are typically calculated per barrel, ranging from $10 to $15, depending on factors such as distance and vessel capacity.
It was discovered that large supertankers capable of carrying 950,000 liters or more offer significant discounts to customers, which they offset through the transportation of massive volumes of crude. Conversely, smaller vessels tend to charge higher rates to cover expenses such as fuel, port fees, wages, and other overheads while still turning a profit.
Multiple sources informed our correspondent that, based on the lowest figure in the price range ($10 per barrel), Dangote Refinery would require approximately $20 million to transport the 2 million barrels of crude oil to Lagos.
“Don’t be surprised that it must have cost him (Dangote) more to bring in the first six million barrels he got from Nigeria to his refinery in Lagos.
“This is so because all the six vessels used in the massive operations did not originate from Nigeria. Infact, only one came from Africa. The transportation cost will crash only when his undersea pipeline is put to use”, a stakeholder in the shipping industry explained.
Addressing the situation, Mallam Aminu Umar, the President of the Nigerian Chamber of Shipping (NCS), affirmed that not a single Nigerian shipping company was involved in transporting the six-ship crude oil delivery to the Dangote Refinery from December 2023 to January this year. This absence of Nigerian participation was attributed to the necessity of very large vessels required for the task.
“There were two deliveries at the Dangote Refinery; the first was the test-running stage, where gas oil was brought in to flush and power the system; while the second stage was the crude oil delivery stage, where crude oil products were brought in.
“My shipping company was one of the two companies that delivered the gas oil that was used to flush and power the system at the Dangote Refinery.
“The gas oil that we supplied was used in test-running and flushing the system at the Dangote Refinery. Our company was the only local shipping firm that participated in this process while the second company was an internationally owned shipping company.
“After the system was flushed, the refinery took delivery of six crude oil ship, but no Nigerian company participated in that stage. This is because currently, Nigeria does not have the kind of ships that were used to bring in crude oil products to the Dangote Refinery.
“Six shipping companies brought in crude oil products to the Dangote Refinery, and only one of them was from an African country; Angola to be precise.
“The other five were foreign shipping companies from outside Africa. No Nigerian currently has the size of vessels that were used to move crude oil products to the Dangote Refinery. I am talking of vessels called Suez Max.
“A Suez Max is a type of vessel that can load a million barrel of crude oil products, which is equivalent to 150,000 dead-weight vessels. As at today, there is no Nigerian that has a 150,000-dead-weight vessel trading in crude oil.
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“We were the only indigenous shipping company that participated in the first stage while there was no Nigerian company that participated in the second stage”, the NCS chief lamented.
It’s worth noting that the Dangote Refinery, boasting a daily processing capacity of 650,000 barrels, initiated its operations in January, starting with an initial processing rate of 350,000 barrels per day.
