NNPC 20% Acquisition: Why Dangote Refinery May Drag Nigeria Into Further Debt

Is Nigeria ready to pile up more debts on a shaky, consistently postponed project whilst the economy is struggling? Africa’s largest state oil and gas company, Nigerian National Petroleum Company (NNPC) has recently hinted on its plan to acquire a 20 percent equity share (estimated at about $3bn) of the 650,000 barrels per day capacity refinery project of Africa’s richest Aliko Dangote.

This was disclosed by the corporation’s Chief Operating Officer, Refining and Petrochemicals, Mustapha Yakubu, who spoke at a conference recently.

“I can tell you today that we are seeking to have a 20 per cent minority stake in Dangote Refinery as part of our collaboration…”, Yakubu said.

Yakubu’s statement has sparked controversy amongst oil marketers and industry experts who opined that the NNPC proposal is too early and counter-productive to the revival of the moribund refineries owned by the country and may be detrimental to efforts to jumpstart the Nigerian economy reeling from high inflation, a recession and the global pandemic of 2020. They also opine that for a project whose valuation may be overinflated by about $9billion when compared to refineries of the same size across the world, it was unconscionable that the Government will have to borrow about $3billion to be 20% part owners of a refinery that has consistently missed delivery deadlines and which by the estimation of independent experts, may not be ready in the next three years.

What this effectively means is that by the time the project is up and running in Three years’ time, the government treasury will have incurred debts of almost the same amount it would take to build another refinery of a similar size using global cost estimates.

Dangote, who made his fortune from Cement production, first unveiled his plans for the refinery in September 2013, promising to complete it before 2016. He, however, did not start the construction of the facility until 2016, when he changed the location of the project to Lekki Free Zone, Lekki, Lagos State. More than three times, the businessman has changed the deadline for completion as many look forward to 2022, though it is widely acknowledged that the refinery may not be completed till about 3 years time.

Meanwhile, this paper examines the possible implications of the equity stake if finalised. Undoubtedly, new refineries will be a major breakthrough for Nigeria, one of the major exporters of crude oil and importers of Premium Motor Spirit (PMS) also known as petrol.

A partnership between NNPC and Dangote at this point is very questionable despite the fact that it may guarantee adequate supply of crude oil to the refinery and reduction in importation of petrol for NNPC. Our analyst recommendation would be for the project to be completed before such huge sums are dedicated to it by the NNPC as any investment at this point will be counterproductive.

Most importantly, there is the argument that industries in which Dangote operates have always received huge government subsidies, tax holidays and incentives without commensurate reduction in the prices of the commodities he sells. The question remains that with the refinery already benefiting from massive incentives, will it make further sense for the government to dip its hands into the already lean national purse or is this a bailout in disguise?

Industry experts are adamant that the move by the NNPC is too hasty, considering the fact that Mr Dangote has failed to meet up with the deadlines set on different occasions. This implies that a prolonged execution of the project might thwart the aim of the partnership and draw Nigeria into huge debt and debt servicing in the long run.

In an Interview with Punch Newspapers, the Chairman, Major Oil Marketers Association of Nigeria, Mr Adetunji Oyebanji, was of the opinion that the NNPC needed to clearly state the reasons for the proposed purchase of a 20 per cent stake in the privately-owned refinery. He said, “Dangote Group, owners of the Dangote refinery, should be allowed to operate the refinery efficiently as a private entity. Our experience is that government regulations and policies make decisions around investments like this political. Preferably, the equity should be sold directly to the Nigerian public.”

Some are also of the opinion that since the company financed the project through commercial loans and concessions from the Central Bank and FG, it would be preposterous to arrive at a sum as investment capital until the refinery begins operation.

It also needless to say that Nigeria has spent billions to revive its moribund refineries with little or no results to show for the humongous amount expended on them.

The Dangote-NNPC partnership however means that the country might have to jeopardize its revival of the government-owned refineries for which it has recently sought a loan to revamp one, whilst diverting its meagre resources to the private one.

Nigerians to bear the brunt

Havard Review Author and Tech Revolutionary, Ndubuise Ekekwe also criticized the move. He stated;

“This is the big revelation. Yes, the Nigerian government through NNPC, the national oil corporation, is planning to acquire 20% of equity in Dangote Refinery: “I can tell you today that we are seeking to have a 20% minority stake in Dangote Refinery .” So, magically, the Nigerian people have essentially solved any risk within Dangote Refinery as the world begins to move post-hydrocarbons. Depending on valuation, who knows, the company can even make “profit” before the first day of refining crude.”

“What do I mean? If Dangote Refinery invested $10 billion in that refinery, and now values the business at $50 billion and Nigeria takes 20% stake, it simply means that Dangote Refinery has recovered the $10 billion. Magic!”

“But how would Nigeria get the money to pay the refiner? We have a new revenue source called Recovered Loot: “The Minister of Finance and National Planning, Zainab Ahmed has revealed that the government has been borrowing from recovered loots to fund the budget. The minister also revealed that the government has not been able to repay back the loans taken so far.”

Monopoly

Mr Dangote’s businesses, from his investment in the maritime sector to manufacturing, sugar production and other areas, have over the years thrived on monopoly.

Major players in the oil and gas sector have feared that the equity share might result in another monopoly, wherein Mr Dangote will be the determinant of how much the end product will be sold in the market with prices likely to remain same or higher. Also, having enjoyed several concessions from the federal government in the past, he might hoodwink the government into accepting some obnoxious terms.
Recall that during the heat of the COVID-19 pandemic, only Dangote’s trucks were allowed free movement in and outside of the country, putting him ahead of competitors and other manufacturers in various industries.

The Africa’s richest has also been granted several waivers in different forms, which many feared to be detrimental to the economy of the country as it encourages monopoly and growth strangulation in those industries.

Verdict

Why the rush for NNPC to purchase 20% of a refinery that has consistently missed completion deadlines and is estimated to be overinflated by $9bn?

Nigeria via NNPC seeks to take a loan of about $3bn for 20% equity in Dangote refinery which in actual fact is almost half the real cost of the project going by global estimated cost of building similar sized refineries which puts the actual cost at about $8billion. What this portends for Nigerians is that by the time this project is completed in 2023 or 2024, the loan would have cost Nigerians over 4 to 5billion dollars (at current rates of 10 to 15%) including associated costs which could have built a refinery of a similar size. We are of the opinion that the NNPC has no business investing further funds into this project as the refinery already enjoys billions of Naira in Forex concessions by the CBN and other tax holidays for its special status.

The Federal Government should channel the funds to developing other nascent industries, and infrastructure to give much needed life to the economy.

From all indications, it may also be that Mr. Dangote’s project has run into cashflow trouble and this is an attempt at securing a bailout as costs overruns and project completion looks slower by the day. It is also important to note that Dangote’s recently announced projects in Nigeria within the last five years have mostly failed to materialize including his tomato processing plant in Northern Nigeria.