Nigeria’s Richest Man Confronts “Oil Mafia” With New $20B Refinery

By Alex Kimani of OilPrice.com

Two months ago, Nigeria’s beleaguered energy sector witnessed a very significant event: the Dangote Oil Refinery began producing gasoline and selling it domestically to Nigeria’s state oil firm, Nigerian National Petroleum Company (NNPC), marking the first time in decades Africa’s largest oil producer is refining its own crude. The state-of-the-art $20 billion refinery was launched in January 2024, but only began producing gasoline in September, expected to reach full operations in November. The giant refinery has a capacity to process 650,000 barrels of crude per day, more than enough for the country’s needs. To sweeten the deal further, the facility is buying crude and selling refined fuels in Nigeria in the local currency, saving the country’s much-needed foreign exchange, especially the US dollar.

Unfortunately for Aliko Dangote, Africa’s second richest man and owner of the refinery, his bold move has put him on a collision course with what he refers to as Nigeria’s ‘oil mafia’.

“I knew there would be a fight. But I didn’t know that the mafia in oil, they are stronger than the mafia in drugs,“ Mr Dangote told an investment conference in June.

“They don’t want the trade to stop. It’s a cartel. Dangote comes along and he’s going to disrupt them entirely. Their business is at risk,” says Mr Emmanuel, a Nigerian oil expert.

According to the BBC, since oil was discovered in the West African nation in 1956, the country’s downstream sector has largely been a cesspit of shady deals with little accountability by the NNPC. For decades, Nigeria has been producing and exporting its crude which is then refined abroad. NNPC swaps Nigeria’s crude oil for refined products, including petrol, which are shipped back home. Incredibly, it only started publishing its accounts five years ago, despite the fact that oil revenue accounts for nearly 90% of Nigeria’s export earnings. In other words, until recently, only the NNPC knew exactly how much money changed hands and who was involved in these “oil swaps”.

Dangote’s new refinery should definitely be a boon for the country. Unfortunately, its arrival has coincided with developments completely out of his control. Since the 1970s, the NNPC has been subsidizing fuel prices for local buyers. Every year, the state-owned firm has been gradually clawing this money back by depositing lower royalty payments with the Nigerian treasury. However, Nigeria’s new President Bola Tinubu was forced to scrap the subsidy in 2023 after it cost the government $10bn, more than 40% of the total money it collected in taxes. Further, he stopped the policy of artificially propping up the value of the naira, and let market forces determine its value. Nigerians are now paying ~$2.30 per gallon of gasoline, dirt-cheap by U.S. standards but triple what they were paying just a couple of years ago.

Only time will tell whether the Dangote Refinery is able to achieve its full potential. Nigeria is the home of the famous Bonny Light crude, a light-sweet crude oil grade produced at the Bonny oil hub and an important benchmark crude for all West African crude production. Bonny Light has particularly good gasoline yields, which has made it a popular crude for U.S. refiners, particularly on the U.S. East Coast. Two years ago, Nigerian National Petroleum Company Limited (NNPCGROUP) CEO Melee Kyari revealed that Nigeria is losing nearly all the oil output at oil hub Bonny,

“As you may be aware, because of the very unfortunate acts of vandals along our major pipelines from Atlas Cove all the way to Ibadan, and all others connecting all the 37 depots that we have across the country, none of them can take delivery of products today. The reason is very simple. For some of the lines, for instance, from Warri to Benin, we haven’t operated for 15 years. Every molecule of product that we put gets lost. Do you remember the sad fire incident close to Sapele that killed so many people? We had to shut it down, and as we speak, we have a high level of losses on our product pipeline,” he said.

Oil theft remains a major problem for the Nigerian energy sector, and could hinder the refinery from buying all of its crude locally.

“NNPC doesn’t have enough crude for Dangote. Despite all this instruction to give ample supply of crude to the refinery, NNPC can’t supply Dangote with more than 300,000 barrels per day,” says Mr Akinosho of the Africa Oil+Gas Report told BBC.

Meanwhile, the oil and gas multinational divestment from the Niger Delta that kicked off over a decade has hit a peak.  Numerous oil and gas majors have exited the Nigerian market over the past few years despite Africa’s largest economy opening its doors for wider exploration courtesy of the Petroleum Industry Act (PIA) 2021. Nigeria’s oil production has declined to 1.3 million barrels per day currently from around 2.1 million barrels per day in 2018.