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New law requires Nigerian crude-oil producers to provide 483,000 bpd to Dangote Refinery

The Nigerian government has been decisive in attempting to reduce its dependence on oil imports. Indeed, Nigeria is known to be Africa’s largest crude oil producer but it does not refine its oil, which makes it more expensive for Nigerian consumers to consume petroleum products. Thus, this has created an important trade deficit for Nigeria.

The Nigerian oil and gas sector is undergoing a significant shift with the recent implementation of regulations mandating the allocation of 483,000 barrels per day (bpd) of crude oil to Dangote Refinery in the first half of 2024. This policy, aimed at boosting domestic refining capacity and reducing reliance on imported fuel, has sparked various reactions and raised important questions about its potential impact. This policy presents a double-edged sword situation for the Nigerian oil and gas sector.

On the one hand, this policy presents an enormous opportunity for the Nigerian oil market to become as competitive as the advanced economies that refine oil. The mandatory allocation of 483,000 bpd to local refineries provides them with a reliable source of crude oil, crucial for their smooth operation and increased output. This should hopefully lead to a decrease in fuel imports and potentially lower fuel prices for Nigerian consumers.

Furthermore, the 650,000-barrel-per-day Dangote refinery, expected to come online in 2024, will be the biggest recipient of this allocated crude, taking in 325,000 bpd. Its operation, along with other refineries expected to be operational by then, could significantly boost Nigeria's refining capacity and potentially transform the country into a net exporter of refined petroleum products.

On the other hand, this policy also paves the way for Dangote Refinery to monopolize the oil-refinery market. Once fully operational, Dangote Refinery will have a capacity of 650,000 barrels per day (bpd), significantly exceeding the combined capacity of all other existing refineries in Nigeria (around 445,000 bpd). This gives them a clear edge in terms of production and market share.

This will clearly limit competition. The four existing government-owned refineries in Nigeria have been plagued by inefficiency and underperformance for years. They are currently operating far below their capacity, leaving Dangote Refinery as the primary source of refined petroleum products in the country. The Nigerian government has been a strong supporter of the Dangote Refinery project, providing various incentives and concessions. This raises concerns about potential favoritism and an uneven playing field for other potential entrants into the market.

While this policy would enable the Nigerian oil market to become more competitive on the global stage by refining its own oil, thus reducing its dependence on oil imports as well as its trade deficit, It will also further cronyism and rent-seeking in that market because if the Dangote Refinery has all the power and favors to control the oil-refining market, it will be incredibly difficult for other local oil-refining companies to healthily compete as the barrier to entry will be set higher than it already is.

Time will tell eventually how the Nigerian oil-refining market will evolve. But based on what has been established, it seems that the Dangote Refinery is on the path to have absolute control over that market.


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