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Oil industry needs an open market strategy

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By Abiodun Okunloye

Dangote Refinery shows the importance of private partnerships in the sector.

One of the world’s largest oil refineries, the Dangote Refinery, was recently inaugurated just outside of Lagos, marking a significant milestone in Nigeria’s history. This massive undertaking, spearheaded by Africa’s richest man Aliko Dangote, will liberate Nigeria from its dependence on foreign Petroleum and create thousands of employment opportunities. Nigeria desperately needs to attract more private Investment in the oil sector, and the successful launch of this refinery highlights the potential benefits of open markets in the sector. Despite being Africa’s second-largest oil production, Nigeria does not have the Infrastructure to process its crude oil domestically. Four of the country refineries, which have a total capacity of 445,000 barrels per day, are Poorly maintained and rarely perform at their full potential.

Nigeria imports up to 90% of its refined petroleum needs despite having an estimated 37.1 billion barrels of proven crude oil reserves. Since 2013, the country’s four refineries have averaged a capacity utilisation (the ratio of production to installed capacity) of less than 20%, according to available data. Furthermore, Nigeria as one of the OPEC countries with the lowest per capita local refining capacity. Despite spending billions of dollars on regular maintenance and repairs, their operations have been plagued by decades of mismanagement alongside Corruption. Given the track record of failed attempts, even the most recent attempt in 2021 to renovate one of the refineries with a budget of $1 billion raises worries about its practicality and viability.

Country spends billions of dollars annually importing refined petroleum.

As a result of inadequate domestic refining capacity, Nigeria spends billions of dollars annually importing refined petroleum, significantly depleting its foreign exchange reserves. The cost of bringing in refined petroleum surpassed exports by $58.5 billion between 2015 and 2019, leaving the country exposed to local fuel supply disruptions induced by price changes and currency rate Volatility. When completed, the Dangote Refinery will double Nigeria’s refining capacity, meet domestic fuel consumption, and generate foreign cash through exports, making it a game-changer in the country’s efforts to overcome these obstacles. It is expected to process 650,000 barrels of oil per day, more than the current refineries in the country can handle, and to turn out 53 million litres of gasoline, 4 million litres of diesel and 2 million litres of aviation jet fuel every day.

With this surplus, Nigeria can cover its daily petrol demand of about 33 million litres and still have enough left over for Export. This $20 billion plant would solve refining problems. To add to its importance, the refinery will supply raw materials for the petrochemical, fertilizer, plastics, and textiles sectors. The Dangote Refinery’s performance is exceptional in an industry plagued by government intervention, corruption, and low private investment. Obtaining the necessary permits and authorisations from various government bodies is a significant burden for privately owned refineries.

Only 1 of the country 23 private refineries is currently functioning.

Private refineries can barely break even because the government has a Monopoly on the supply of crude oil to refineries and uses a subsidy structure to keep fuel prices artificially low. A list of private refineries in Nigeria from April 2021 shows that only one of the 23 private refineries on the list is currently functioning, despite its combined capacity being 1.09 million barrels per day. Others have been abandoned or put on hold because of a lack of capital, a lack of available crude oil, or regulatory hurdles. An additional issue is that private refineries have an unfair advantage due to a requirement that only one for-profit oil firm can participate in privately-owned refineries with a capacity of more than 50,000 barrels per day.

Moreover, Private investments can boost efficiency and creativity in Nigeria’s oil sector, as Aliko Dangote’s success shows. It shows the country’s huge potential to become a global leader in petroleum and other industries, but an individual can’t do it alone. Nigeria needs more private Investors like Dangote to participate in all industries. This is why the government needs to take swift action to eliminate restrictions on private investments. The government must simplify licencing and cut red tape to boost industry competition and benefit consumers. By ending its monopoly on crude oil supply and enabling private refineries to determine who owns stakes in their investments

More benefit awaits the government when market forces take over.

Lastly, Subsidies may help consumers in the short term, but they make it difficult for private refineries to stay in business by keeping petrol costs artificially low. Market-driven costs will level levels of competition and encourage more oil and gas investors in Nigeria. The Dangote Refinery is proof positive that private investment in Nigeria’s oil sector should be prioritised. It shows how much growth and Innovation can be achieved when the government lets market forces take over. Taking a free-market stance is the best way for Nigeria to solve its refining problems, as it will also promote Economic Diversification, increase jobs, and hasten the growth of supporting businesses.


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