A New Era for Oil Refining

“Ambitious” is a word not only used to describe my low-fat diet, but also Aliko Dangote, the Nigerian business mogul worth over $13 billion USD, making him the wealthiest African — for ten consecutive years. That is if we leave out Elon Musk, who was born in South Africa and later became a U.S. citizen in 2002. Dangote started his entrepreneurial journey in an upper middle-class family selling cartons of sweets as a kid, later graduating from university in Egypt when his uncle agreed to lend him money to start a business importing Thai rice and Brazilian sugar. He bought these at wholesale prices from international suppliers, then sold them in small quantities in his local area with lucrative markups. He eventually vertically integrated, building a plant to produce what he had been importing. It was around this time that he was also awarded a state-owned cement company, with which he constructed a cement manufacturing plant with his own money plus a loan from an affiliate of The World Bank. Now, for the first time in his career, he is taking a large position in oil by building the continent’s largest oil refinery, humbly named: Dangote. With this he also hopes that the financial returns are sizeable enough to help him buy Arsenal, the English football club, an acquisition he has been yearning for for years.

A mural depicting Dangote, who also moonlights as a Philanthropist.

The Dangote mega refinery’s construction has not been smooth sailing. It has faced years of delays with debt restructuring, inefficiencies with contractors, issues accessing foreign exchange, potential tweaks in the refinery’s design to adapt to recently changing refining economics and a strong-arming by the state to sell a stake to NNPC, Nigeria’s national oil company. A realistic start date with all the information we currently have is Q1, 2024 despite the publicly advertised H2, 2023.

In theory the refinery will be able to supply 100% of Nigeria’s domestic (oil) fuel demand, but with the country suffering from acute foreign currency shortages it may be forced to export a significant proportion of refined products in return for USD. The wider economic implications of this project are vast with 57,000+ people being employed by the refinery and its affiliates, with dozens of companies and additional infrastructure being set up around Dangote in the Lekki Free Trade Zone highlighted below in anticipation of the refinery’s grand (eventual) opening.

Zooming out, the world is building refineries at a startlingly rapid pace. Oil refining capacity is growing at a speed not seen for nearly two generations, with the 2023–2024 increase likely to be the largest two-year increase in net refining capacity globally in 45 years, according to RBC Capital Markets.

Source: Bloomberg

Large new refinery projects and their capacities include:

• Dangote (Lagos, Nigeria): 650,00 b/d
• Al-Zour (Kuwait): 615,000 b/d — commenced operations in November, yet to reach full capacity.
• Jazan (Saudi Arabia): 400,000 b/d — has been gradually coming online since 2021.
• Jieyang (Guangdong, China): 400,000 b/d — now operational.
• Beaumont (Texas, USA): 250,000 b/d — the largest single addition in the U.S. in 10+ years. This expansion project is part of the refinery owned by ExxonMobil and is now in full operation as of end of March.
• Duqm (Oman): 230,000 b/d — this will be the third refinery in Oman, which is well positioned on the Arabian Sea to take crude coming from the Arab Gulf and the rest of Asia.
• Karbala (Iraq): 140,000 b/d — more on this below.
• Sentuo (Ghana): 120,000 b/d — this will be Ghana’s largest refining complex. Construction began in June, 2021 with no solid deadline for completion.

During the Covid pandemic refining was a primary chokepoint with high costs and razor thin (or negative) margins which caused several refineries to shut down, those left standing that relied on natural gas as an input later had margins further hit by expensive gas resulting from the Russia-Ukraine conflict. Now, this new ramp up in refining capacity stems from many drivers, including a fluke: the simultaneous appearance of projects which were delayed over the pandemic. A general consensus that oil will still be needed for decades to come, especially when considering petrochemicals, despite ESG pressures and favourable refining economics in the past year have also refreshed investor sentiments. The increase in global refining capacity will put downward pressures on oil products, especially gasoline and diesel over the next few years.

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