Dangote Petroleum Refinery has said it sometimes pays more for Nigerian crude oil than comparable imported supplies despite operating in Africa’s largest crude-producing country.
Edwin Devakumar, Group Vice President of Dangote Industries Limited, said certain Nigerian cargoes purchased by the refinery have cost more than comparable crude sourced from overseas, although he did not disclose the precise price difference.
The issue stems partly from the way Nigerian crude supplied to domestic refiners is priced.
Nigerian crude is generally priced against international benchmarks such as Brent, with pricing structures incorporating freight and logistics components associated with selling oil into international markets.
Dangote argues that domestic refineries can effectively bear some of these costs even when crude is being supplied locally and the corresponding international transportation expenses are not incurred.
This can make locally produced crude less competitive against certain foreign grades available to the 650,000-barrel-per-day refinery.
The pricing issue adds another dimension to Nigeria’s long-running debate over domestic crude supply.
While the country produces around 1.6 million barrels per day, Dangote Refinery currently imports between 30% and 40% of the crude required for its operations.
The facility has sourced feedstock from the United States, Guyana and other African producers as it seeks sufficient volumes at commercially competitive prices.
The refinery’s management has maintained that crude sourcing decisions are driven not only by physical availability but also by the economics of individual cargoes.
Nigeria’s domestic pricing structure has previously been identified as a significant cost for local refiners.
Industry estimates cited earlier this month suggested the existing system could add between $3 and $4 per barrel to refinery feedstock costs because purchases are routed through producers’ trading operations.
The Federal Government and the Nigerian Upstream Petroleum Regulatory Commission are considering reforms intended to reduce some of those costs and improve the flow of Nigerian crude to domestic refineries.
Among the options under consideration is a crude-swap arrangement that would directly match domestic producers with refiners.
Such a system could shorten delivery chains and reduce logistics expenses associated with obtaining locally produced crude.
Authorities are also examining whether domestic refiners lifting crude close to production locations should receive adjustments for freight and handling costs embedded in international benchmark pricing.
Pricing is particularly important for Dangote because crude represents the refinery’s principal input cost.
Even relatively small differences in the price paid per barrel can become significant when multiplied across hundreds of thousands of barrels processed every day.
The refinery reached its original 650,000-barrel-per-day maximum capacity in February and has since tested production at about 700,000 barrels per day.
Dangote plans to increase refining capacity to approximately 1.4 million barrels per day within three years, which would substantially increase its crude requirement.
Securing sufficient feedstock at competitive prices will therefore become increasingly important as the refinery expands.
Dangote’s coastal location in Lagos provides another advantage in sourcing crude internationally, allowing tankers carrying foreign grades to deliver directly to the facility.
Among the grades imported by the refinery is U.S. WTI Midland.
However, imported crude is typically priced in dollars and incurs international transportation costs, meaning foreign supplies are not automatically cheaper than Nigerian barrels.
Earlier this year, unusually tight international crude markets demonstrated the opposite effect.
Dangote was forced to pay premiums of as much as $18 per barrel above Brent to secure some international cargoes during severe supply disruption associated with the Middle East conflict.
The refinery therefore has an incentive to maintain a diversified crude slate rather than depend entirely on either Nigerian or foreign supplies.
For Nigeria, the fact that locally produced crude can sometimes be more expensive for a domestic refinery than comparable imported oil raises a broader question about whether the country’s crude pricing and distribution system is delivering the intended benefits of its domestic refining policy.
With Dangote already importing as much as 40% of its feedstock, reforms that make Nigerian crude more competitively priced could determine how much of the refinery’s future crude requirement is ultimately supplied by domestic producers.
