A Second Refinery in the Works: What Does this Mean for the Nigerian Economy?

By Chinedu Okoye 

Summary:

• Nigeria’s quickest route to economic expansion lies in deepening its oil and gas base, leveraging crude revenues to catalyze downstream private investments and industrial value chains.

• The proposed 500,000 bpd Ondo Refinery, backed by a $50 billion international consortium, signals renewed investor confidence and sets Nigeria on course to becoming Africa’s energy hub.

• Competition between Dangote and the new consortium refinery could force efficiency, improve domestic pricing, and stabilize supply, benefiting consumers and industries alike.

• A broader refining base improves FX inflows, strengthens the Naira, helps finance eckoic diversification, enhancing surplus trade balance, while establishing Nigeria as a dominant fuel supplier under AfCFTA. 

• The oil sector’s deepening indirectly powers industrialization, logistics, agriculture, and manufacturing, reflecting how refined energy products are the lifeblood of economic activity.

1.0 Background:

As said on Nairametrics Spaces, the quickest way to grow the economy is to leverage resource revenue by first deeppeing the oil amad gas sector, and then investing gradually or encouraging private investments in the industry (downstream).

In our previous paper on the 15% petroleum imports tax, we stated how Nigeria is poised to become a significant energy provider/exporter to the continent.

The plans for an international consortium to develop Africa's second-largest oil refinery in Ondo State, Nigeria, puts the economy on this track.

Whilst Dangote Refinery was powered by a $20 billion debt, and an additional ~$3 billion, for a total cost o $23 billion, the consortium is said to have secured double that to invest in a new 500,000 barrels per day capacity refinery.

Effects:

• Efficient pricing: The presence of more than one refiner, forcing price competition to the benefit of the consumer. A glios.of this has already been witnessed with Dangote reducing prices of his PMS and Diesel relative to imported prices, another refinery would force cost efficient competition and improve price stability.
• Strengthen Nigeria'ss trade dominance in West - and the entire - African downstream market.
• Industrial Development: The project is spearheaded by Backbone Infrastructure Nigeria Limited and NEFEX Holdings Limited, representing yet another huge private sector oil and gas energy investment in the West African Nation.

 

A Second Refinery, in a world of free trade and foreign market [rules based] access, the competition between the current and would-be local refinery(s) would be mostly on efficiency not pricing; it also complements Nigeria's existing Dangote Refinery and significantly improves the nation's refining capacity, and by extension, earnings ccapacity, as, operating at full capacity, the country would be able to produce 1.15mbpd..

Several krhe factors affect price movements and could exain anomalies 

• Naira Exchange Rate: The more refined petroleum products the country can produce, the more quantity it has to export after satisfying local demand. This would bring in more FX receipts from exports and could furthr strenghten Nigeria's Trade balance and it's local currency by extension.
• Oil Prices: Should BRENT crude stay below $65/pb longer than desired by policymakers, usoteam oil companies, mand bullish traders, it could affect or negate any production increases with refiners not obiligated to reduce prices with costs reduction, a viable competition to the country and continent largest singletaind refinery – Dangote– becomes necessary for market determined pricing from the entrepreneurial knack to employ competitive advantage.
• Global Economic Momentum and Growth: With sanctions back in play for Russia's two largest oil producers, and a truce between the world's top two economies Crude has seen more strength, as would be a theoretical or classic expectation, maintaining a strong support at the $57 and $63 level. A sign of slowing demand from the world's largest manufacturing hub and the largest consumer market m, for this subdued price comes on the back of two 25 basis points cuts {0.25%}.

2.0 Synergic Alliances:

Fhe project’s partner (NEFEX Petroline, brings extensive expertise from operations spanning the Middle East, Europe, and North America, with a combination of the advantages of a global network with deep local understanding,

NEFEX Petroline is referred to as the backbone of My Iberian infrastructure simply because of its expertise in; Engineering/construction services for ports, terminals and logistics including pipeline., these infrastructure helps with distribution in the Oil and gas industry.

They are also involved in Petrochemical trading and supply, whilst engaging in  investment and  project management in large-scale energy/infrastructure projects, apparently with global financial linkages (multi-currency credit lines, which is immensely necessary in today's oil and gas and a n edge they have over Dangote Refinery.

3.0 Energy Security and Sufficiency:

For longer than I can remember,the oi rich nation hS exported crude and imported refined crude products, focusing more on extraction than processing. This applies to food and beverages too, for as rich as Nigeria is in Cocoa it still relies on importation of finished Cocoa goods like chocolate.

More so, the importation has drained foreign reserves, which was excerbayby the peg - in the Nigerian case - and the economy susceptible to global price shocks which affects the fiscal and monetary balance alike.

 

4.0 A Move to Economic Stability Through Self sufficiency:

By encouraging local refinery (fixed) investments, in order to improve Nigeria's scale, the economy is slowly headed to energy self-sufficiency, aiming to supply its own markets and export refined products across the continent.

From our paper: ‘ZE Commentary on the 15% Fuel Tarrifs: Strategic Outlook and Complementary Policy Proposals, eight days again(November, 1, 2925) we stated that:

“Nigeria stands at a crossroads between being a crude exporter and an integrated energy power. The goal should be to leverage refining capacity not only for self-sufficiency but as a platform for industrial expansion across West and Central Africa.”

We stated further that:

“Encouraging additional private refineries (ideally 3 to 4 medium-sized plants of at least 250,000 barrels per day) would ensure competition, enhance domestic value addition, and reposition Nigeria as a continental fuel supplier under the AfCFTA framework.”

The consortium plans to develope the site for the refinery in a 1,471-hectare free trade zone in Ondo State. The project if successful, would unsit Algeria's Skikda Refinery, with the continents [Africa], which boasts of a 365k barrels per day..

This is a combination of FDI and sufficient production capacity.

 

5.0 ZE Remarks, Takes, Commentary and Appraisal:

ZE is still of the idea that the government should sell off it's refineries and all downstream businesses to make financial accomodations for necessary financial investments needed to ramp up produce capacity.

This would be the easiest way to get to the 3 to 4 [working] refineries   and runnings. The 500k barrels per day is also a big boost and represents two of the - ZE stated - minimum  Refineries needed to create, enhance and could make NigeriaTHE African energy supplier.

With just these two rwfineeries operating at current full capacity (i.e.650k for DR, and 500k for the consortium). This puts Nigeria at the helm of its own and the wider continent energy supply. Realistically, the West African Nation's would be the priority, then a possible diffusion to the rest of the continent.

6.0 The impact of Adequate Supply of Petroleum products on the Broader Economy:

The impacts of efinee leisure ec me beyond the monetary gains of obtaining more FX receoten Putting the significance of deepening the oil and gas sector into perspective, bekwinare six petroleum products, their use and indirect impartial on the economy;

1. Refined petroleum products play a central role in powering industries, transportation, households, and even agriculture, by this it serves as both an energy source and industrial feedstock.

2. Gasoline power combustible engines, supporting transportation m delivery and inner/intra city commerceand back up power generation for factories in various industries.

3. Liquified natural gas (LNG) is used in hearing, and feedstock for petrochemicals, it played a key role in the promotion of clean energy transition, and could expand small-scale manufacturing through affordable heat and energy sources.

4. Fuel Oil, is used t fuel lager ships, power plants and industrial boilers, in doing so it supports marine transportation, and enhances and enables trade through seaports.

5. Lubricants and Greaseeare essential for the maintenance and efficiency of transportation, manufacturing and power generation plats and equipments. It could extend the lifesoaan of machines losing operating costs overtime

6. Aviation fuel powers planes, and ensures efficiency in air operations. So a stable, steady and increased local supply supports growth in aviation, logistics and tourism.

 

7.0 ZE Crucial Commentary and Policy Appraisal:

All the above six contribute significantly to national and global economic development and integration

An oil rich nation should be employing it's resource revenue to do more and the policies that seemed too protectionist on imported petroleum seems, like ZE asserted, would seem to have begun attracting new investments already.

For what it's worth, a $50 billion commitment to a refinery project is a sign of a perceived viability (which has no small part to do with government policy communication on support for local refiner), and ample opportunity in a country with just one functional (large-scale) refiner, and with access to a 53 strong country continental market (AfCFTA).

The federal and state government's though have their work cut out for them, for efficiency in public spending and cooetency making decisions has never been more imperative. Whatever positive impacts expected would be stunted or even muted by an inability to improve public sector efficiency, and ensure steady and - to a large extent - sufficient curde supply.

Also, a  failure to adequately develop and deping other sectors with direct (spending) or indirect,nails negate any positive impacts or economic gains from hm doubling the amount ifnkarge-caoactiybredineriesn

It is worth noting that extension of these sort of support policies to other industries in appropriate forms, is if utmost importance. The above is a move that could (and frankly should) be a game changer in Nigeria fortunes, from a deepeneing if the oil and gas sectors. 

But theory isn't always actualized in practice., and there are hurdles ranging from political will - enacting government policies that have adverse effects – insecurity, fiscal indiscipline, to outright clueless and/or ill-thought, and ill timed policies.

So far what the government has achieved is fiscàl breathing space (through waste cutting or mold and necessary austerity measures,m (subsidy), and a ‘managed-FX float, and policies that have combined tinunify the FX market and stabilize the Naira.

Beyond these, there has only been plans without execution. This is as the petrol subsidy removal and electricity subsidy reduction leads and the 400%+ depreciation in the value of the Naira ked to a steep inflationary spiral as real wages lagged behind.

Author's Remarks:

• The establishment of the Ondo consortium refineries, in addition to the Dangite Refinery, would edge Nigeria closer to controlling its own supply chain.

• The $50 billion commitment screams confidence in profitability, policy credibility and market confidence, but effective governance and crude supply stability remain the make-or-break factors..

• The Federal Government's next move in the lush for economic growth, through industrial development, should be a full divestment from dilapidated and funds wasting state refineries - amongst other assets - to further free fiscal space, support and incentivize competitive private-sector-led expansion.

• Nigerian policymakers must ensure this momentum translates into broader industrial linkages, not just oil revenue else gains.a

• This refinery push, if coupled with macro stability and discipline, could transform Nigeria from a crude exporter to a continental energy power, this ZE posits, woulda mark the next phase of national growth.

• Too much emphasis cannot be laid on the importance of the above, a, deepening oil refining capacity isn’t just about petroleum, itt is primarily about building structural foundations for sustained economic resilience and independence.