The commencement of crude oil refining at the Dangote Refinery Complex in Lagos promises to significantly improve the financial performance of Nigerian manufacturers and Small and Medium Enterprises (SMEs). The largest refinery in Africa, with a processing capacity of 650,000 barrels per day, officially began operations last week. This milestone follows the receipt of the sixth and final batch of one million barrels of crude oil from the Nigerian National Petroleum Corporation (NNPC), signaling the activation of the refinery’s production processes.
The $18.5 billion Dangote Refinery is now producing diesel and aviation fuel, with plans to release these refined products into the Nigerian market as soon as regulatory approvals are granted, which is expected to happen within the month of January. Aliko Dangote, President of Dangote Group, confirmed that the refinery would play a crucial role in reducing Nigeria’s dependency on imported refined products. He emphasized that these efforts would help stabilize the local market and boost economic growth.
The introduction of the Dangote Refinery comes at a critical time when Nigerian firms are grappling with rising energy costs. A recent analysis shows that the energy costs for companies listed on the Nigerian Exchange Group (NGX) saw an alarming 29% increase in the third quarter of 2023. This surge in costs has been largely attributed to the removal of fuel subsidies, which caused a spike in fuel prices across the country. Firms like Dangote Cement, BUA Cement, Zenith Bank, and Transcorp saw their energy expenses grow by over 30%, significantly impacting their operational margins.
Despite the challenges, the Dangote Refinery is expected to mitigate some of these pressures by ensuring a more stable and cost-effective supply of refined products. PwC, in its Africa Energy Review for 2023, pointed out that the refinery would substantially reduce Nigeria’s reliance on imported refined products from 80% to less than 20%. It also highlighted that the refinery could potentially decrease petroleum imports across Africa by as much as 36%, leading to significant savings and improved energy security for the continent.
Moreover, financial analysts at Financial Derivatives Company (FDC) have identified the Dangote Refinery’s production start as one of the key factors likely to drive economic transformation in 2024. The increased supply of refined fuels is expected to enhance energy security and improve productivity in sectors such as manufacturing, transport, and logistics. The refinery’s output will also help cushion the effects of rising fuel prices, which have been a significant challenge for Nigerian manufacturers, especially those relying on diesel-powered generators due to the unreliable national grid.
The sharp increase in diesel prices, which rose by 30.5% year-on-year in November 2023, further underscores the need for local refining capacity. In particular, the price of diesel soared to N1,055.57 per liter, with variations across Nigeria’s geopolitical zones. The Manufacturers Association of Nigeria (MAN) has consistently highlighted that energy costs, particularly power, can account for up to 50% of the total production costs for many Nigerian manufacturers—much higher than the 10% average in other countries. This makes Nigerian businesses, especially SMEs, less competitive in both local and international markets.
The Dangote Refinery’s ability to produce refined fuels domestically is a crucial step toward addressing these energy challenges and driving down operational costs for businesses. The positive effects of this development are expected to reverberate across the economy, improving business margins and supporting sustainable growth in the industrial sector.
