Why Africa’s biggest oil refinery may soon run into deep financial crisis

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Despite Nigeria being the second biggest oil-rich country in Africa after Libya with an estimated 37 billion barrels of proven oil reserves, the West African country has been depending on imported refined fuel products due to lack of domestic refining capacity.

Dangote Oil Refinery

However, the situation is set to be changed by the coming of Dangote Oil Refinery, a company owned by the Nigeria-based Dangote Group.

The Dangote refinery, a 650,000 barrels per day (bpd) integrated refinery and petrochemical project under construction in the Lekki Free Zone near Lagos, Nigeria, is expected to be the Africa’s biggest oil refinery and the world’s biggest single-train facility, upon completion.

Light and medium grades of crude

The project which is being developed with an estimated investment of $12bn will process a variety of light and medium grades of crude to produce Euro-V quality clean fuels including gasoline and diesel as well as jet fuel and polypropylene.

The Dangote refinery has been projected to increase Nigeria’s refining capacity two-fold and help meet the increasing domestic fuel demand, while generating foreign exchange through exports.

Debt burden

However, Aliko Dangote, Africa’s richest man may soon forfeit the project. This is as a result of a $7 billion debt burden that is currently staring at the project.

Analysts say that the project may now be taken over by the Assets Management Corporation of Nigeria (AMCON).

Dangote Oil Refinery was expected to commence production in 2016 with $3.3 billion financing secured in 2013.

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The refinery is now projected to commence operations in 2025, with  Dangote Group’s indebtedness to financial institutions estimated to hit $8.4 billion by 2025.

According to reports, the Group’s debt burden has now risen to $7 billion with debt servicing of almost $700 million per annum.

Delays

Since its inception, the project has suffered numerous delays. The completion date of the refinery has been moved eight times.

Reports now indicate that poor planning, underpayment of contractors, and a lack of proper project management with over 40 contractors on site have led to most of the delays.

A contractor who spoke to one of the leading dailies on condition of anonymity said that of the 40 contractors, none is willing to commission as there is no clear delegation of duty and over-decentralisation leading to absolute chaos.

In September 2013, Aliko Dangote unveiled early plans for the refinery and announced that he had secured about $3.3 billion in financing for the project, with the refinery estimated to cost about $9 billion, of which $3 billion would be invested by the Dangote Group and the remainder via commercial loans, and begin production in 2016.

Aliko Dangote. Photo/Courtesy

However, after a change in location to Lekki, construction of the refinery did not begin until 2016 with excavation and infrastructure preparation, and the planned completion was pushed back to late 2018.

In July 2017, major structural construction began, and Dangote estimated that the refinery would be mechanically complete in late 2019 and commissioned in early 2020.

Experts, however, posit that the construction would likely take at least twice as long as Dangote publicly stated, with refining capability not likely to be achieved until 2025.

Dongote oil refinery Contractors

Engineers India is the engineering, procurement, and construction (EPC) contractor for the project.

Honeywell UOP was contracted for the supply of catalyst regeneration and dryer regeneration control systems, column trays, heat exchanger tubes, a modular CCR unit, and catalyst coolers among other equipment.

C&I Leasing was contracted for providing transportation and installation services for mooring systems and subsea pipelines of the refinery.

Hang Xiao Steel Structure Company received a $112m contract to provide steel structure for the refinery.

Jan De Nul Group was engaged for carrying out land reclamation works.

MAN Diesel & Turbo was contracted for supplying two compressor trains, while Air Liquide Engineering & Construction was contracted for supplying the SMR units.

Fabtech (18 columns), Schneider Electric (process automation systems), SOFEC (Catenary Anchor Leg Mooring buoys), and WABAG (raw water treatment plant) are the other suppliers involved in the Dangote refinery project.

Financing Banks

Some financing banks are already calling in their loans amid fears of liquidity crisis due to the delays on the project, with details showing that others are elated by the guarantee of huge interests to be recouped as soon as the refinery comes on stream.

Dangote has been able to restructure the facilities from various local and international banks twice so far, but most banks have totally refused to restructure for the third time with principal repayment also falling due as well as the annual interest payments.

The Nigerian National Petroleum Corporation (NNPC) has made available $3.8 billion as part of federal government’s 20% equity in the project, providing $1 billion cash, while the remaining $2.8 billion will be in crude supply.

However, analysts have pointed out that NNPC’s 20% equity at $3.8 billion makes the Dangote refinery overvalued at $19 billion.

Last week the Minister of State for Petroleum Resources, Timipre Sylva, reiterated that Federal Executive Council (FEC) approved the acquisition of 20 per cent minority stakes by the NNPC in the Dangote Petroleum and Petro-Chemical Refinery.

Sylva, while briefing State House correspondents after the virtual FEC meeting presided by Vice President Yemi Osinbajo last Wednesday at the Presidential Villa, said the acquisition was in the sum of $2.76 billion.

This development has been described by industry observers as strange because $2.76 billion falls short of 20 percent of the Dangote project valued by the sponsor at $16 billion.

Using the $16 billion value, 20 percent should be $3.2 billion and analysts have expressed dissatisfaction at the disparity in the project’s value and NNPC’s funding.

According to the Managing Director of Cowry Assets Management, Mr. Johnson Chukwu, the banks wouldn’t have any challenge from the financing because Dangote would have to pay the interests.

Commenting on the possibility that NNPC over-valued or under-valued the project in its 20% equity, Chukwu opined that NNPC may be looking at an enterprise valuation while the other value could be the net value.

Despite the massive support of the Nigerian government on the refinery project, things have got so bad for the billionaire that even income from his other businesses may not be enough to cover the interest rates, let alone the principal.

The $8.4 billion debt represents 75% of Dangote’s net worth at $11.1 billion and Africa’s richest man has to seek innovative ways to prop up his business now as the refinery project continues to be consistently delayed.

Dangote Oil Refinery Design

The refinery include a crude distillation unit (CDU) and associated facilities, a mild hydrocracking (MHC) unit, a residual fluid catalytic cracking (RFCC) unit, a naphtha hydrotreater, and a gasoline hydrodesulfurisation (HDS) unit as well as alkylation units.

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The refinery complex will also house sulphur recovery and hydrogen generation facilities and a polypropylene unit. Comprising two steam methane reformer (SMR) units, the hydrogen generation facility will generate 200,000Nm³/h of hydrogen and steam to produce sulphur-free fuels.

The other processing units at the refinery include the STRATCO® alkylation unit, the MECS® sulphuric acid regeneration (SAR) unit, the MECS® DynaWave® sulphur recovery unit, and the BELCO® EDV® fluid catalytic cracking unit.

The refinery is designed to produce up to 50 million liters of gasoline and 15 million liters of diesel a day.

 

Talented and immensely creative journalist with a commitment to high-quality research and writing with over 5 years of professional experience. Dedication to sound investigative research methods and a strong desire to know the truth of the matter. Excellent reporting and interviewing skills and award-winning writing techniques. Experience writing and reporting across a variety of platforms, including Opera News Kenya, DailyActive.info, LitKenya.com and Scooper News

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