Listen: How is Dangote's crude supply diversification disrupting global trade flows?

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Joel Hanley:

Hello and welcome to the Oil Markets podcast from S&P Global Commodity Insights. I'm Joel Hanley, and with the Dangote Refinery now up and running in Nigeria, are things getting up to speed as we expected?

In January 2024, the oil world watched with weary relief as the much-delayed Dangote Refinery in Nigeria finally started production. Ramping up since then, this 650,000-barrel-a-day plant represents not only a huge technological and economic boost for West Africa, but as we've mentioned before on this podcast, it has the ability to upend trade flows in both crude and refined products. Many years ago, there was perhaps the expectation that this refinery would largely take Nigerian crude and provide the country with much of its transport fuel needs. However, this has not so far been the case. Now, as I say, the refinery is still getting up to speed, and so its regular intake and outputs have yet to be seen. But with political undercurrents and disrupted trade flows and new deals being made around the world, the phrase, 'complex refinery,' can rarely be better used.

Now, with me to discuss this on the podcast all the latest intrigue and the impact on the markets are Charlie Mitchell, one of our senior news reporters, Matthew Tracy-Cook and Tommy Petrou, who cover and assess gasoline and fuel oil markets respectively. Now, Charlie, as something of an Africa specialist, you've lived and breathed Dangote for years. What's the latest on the refinery? Is it taking as much local crude as it could?

Charlie Mitchell:

As you say, this is an absolutely massive turning point for Nigeria and for West Africa, the opening of the refinery in January. The idea really was that Nigeria would supply the crude for the Dangote Refinery with light, sweet, Nigerian crude, and they would be refined into gasoline, primarily used in the Nigeria market, and that would have ramifications for the whole region because neighboring countries like Togo, Benin essentially ran on imported, smuggled Nigerian fuel, which was subsidized by the Nigerian government. So this was going to affect the whole region and even beyond West Africa and to other parts of Africa too.

The NNPC, Nigerian National Petroleum Company, which is the national oil company of Nigeria, had agreed to supply around 300,000 barrels a day of crude to the refinery. That was in line with its 20% stake that it had in the refinery project, which is being built by Africa's richest man, Aliko Dangote, but that hasn't really materialized, as you said. Since December, our ship tracking shows that NNPC's shipped around 30 cargoes to Dangote, 33,000,000 barrels of crude, but that includes initial feedstock testing, et cetera. We're looking at 160,000 barrels a day. So we can see NNPC not being able to deliver on the agreement that it would supply around 300,000 barrels a day, and that has left the refinery forced to import crudes from other places, including from the United States.

Joel Hanley:

So energy security of course, is vital for everybody in the world. It's part of the energy trilemma, but energy security or indeed security of supply for Dangote has been an issue. So naturally, they've had to look further afield. Well, I think we'll come to that in a bit. Let's talk about the impact on the refined product markets because Nigeria has traditionally been quite a large importer of gasoline from Europe and other parts of the world, particularly Europe of course, but is it able yet, Matthew, to provide much gasoline to the market?

Matthew Tracey-Cook:

Thanks, Joel. Yeah, so for a very, very long time, Nigeria has been seriously dependent on international traders for its gasoline supply, seeing as its refinery production is slim to none, and there has always been a really significant emphasis on gasoline production with the Dangote project, seeing as it's by far the biggest product imported and because there's this incredibly costly subsidy for the Nigerian government that's applied to its gasoline imports. So this has been seen as this really beneficial project for fuel supply in the country.

Gasoline production has been pushed back many times over the lifespan of this project. So in January of this year, Dangote said they would begin gasoline production before April, but then in April, a person close to the refinery said that all the secondary units were, "99% complete." The RFCC was 99% complete. Around this time, the refinery started producing some straight-run products such as naphtha and fuel oil, which my colleague, Tommy, will talk about. Then in June, the CEO said they expected gasoline in mid-July and sales by the third week of July, and now we're approaching that time and the refinery has come out again and said that they now expect sales in August.

Just in terms of the timeline here, it's a little bit difficult to say when exactly gasoline will be sold from the refinery, but we've been seeing some interesting impacts on the markets, which we'll talk about further in this podcast. But in terms of physical flows from Europe, gasoline has really fallen off into West Africa already. So the schedule for July, many traders have said that only about 800,000 to 850,000 metric tons are scheduled to be imported into Nigeria over this month, which is actually a very, very small volume. And this has been corroborated by our ship tracking data, commodities at sea. It's showing that over the month of June, there was actually a total volume imported into Nigeria that was at a three-year low.

Joel Hanley:

So it sounds like someone's clearly believing the hype that if it's going to be able to produce enough gasoline, then gasoline imports into the country need to fall. So it better happen, otherwise Nigeria is going to find itself very short of gasoline in quite quick order. I suppose they need to get the catalytic cracking units up and running, but before they do, as you say, it's quite interesting. You mentioned the phrase, 'Straight run.' We see NAFTA, maybe straight-run gasoline, maybe low silver straight-run fuel. That is very much the products of a simple or not yet upgraded refinery, where the secondary units haven't quite come up to speed. So as a result, Tommy, you're covering fuel markets. Now, I imagine there might've been some low silver straight run and various other straight-run products coming out?

Tommy Petrou:

Yeah, exactly, Joel. So we've seen consistent low silver straight run exports from Dangote over the past few months and recently, these have really started to slow down. So S&P global commodities at sea data often groups general fuel oil and low silver straight-run fuel oil cargoes together, but it's our understanding that from the market, that LSSR make up the bulk of these volumes. So according to data from commodities at sea, the last cargo unloaded from Dangote was on July 6th, 2024 for just under 196,000 metric tons of fuel oil, and this represents the first exports in two weeks.

Now, this is a significant slowdown in exports when you consider that the refinery exported 277,000 metric tons in June, 323,000 in May and 465,000 in April. In terms of exports into Europe, we saw Dangote LSSR discharge into the UK and Rotterdam during the month of May, amounting to 195,000 tons, but we haven't seen any subsequent exports from Dangote into Europe since then.

Joel Hanley:

Right, interesting. So it does sound like their secondary units are coming up to speed you. And LSSR for straight-run post Russia has been an interesting market. Well, not almost as interesting as the vacuum gas oil market, a big market that came out of Russia that's no longer so active in Europe. But these refinery feedstocks are always popular and especially at times of low refining margins, straight run is particularly important. So it's interesting that there's a bit of a spike in Europe from West Africa, and maybe that's equalizing again with the secondary units come on stream.

So the international impact of Dangote really can't be understated. I know it's just one refinery in one part of the world, but I was in India a couple of weeks ago and the two main things a lot of Indian refiners and Indian oil companies were asking me was, "What is Dangote mean to us? How important is it? How much of a disruptor is it?" And the other one is just about as far from India as you can get, is Canada. It's the TMX, the Trans Mountain Pipeline Expansion project over in Vancouver in West Coast Canada, which again, is having a major knock-on effect that naturally impacts other people along the chain.

So speaking of that international question, if we come back to you, Charlie, Dangote is not getting so much oil from Nigeria. As you mentioned, they were providing more, and then there's been some political and financial intrigue about this that's that's made Dangote has to look elsewhere, right?

Charlie Mitchell:

Exactly. Yeah. They've been actually getting a lot of WTI Midland crude from the United States. We estimated about 130,000 barrels a day since February, and that's because it's a like-for-like crude, light and sweet, and it's become a really big component of its crude slate, which is interesting. Traders even have told us that WTI has presented a more competitively priced feedstock option for Dangote than domestic supplies even. And actually, on the 14th of July, Aliko Dangote said in a statement that they were going to broaden their feedstock sources to include other African producers like Senegal and Libya and Angola, as well as Brazilian crudes, but we're probably not going to see that until October.

I will say that Senegal has just brought its first crude project online, the Sangomar project, 100,000 barrels a day. The first two cargoes of that are currently on their way, the first one to Rotterdam. The second one's going to load and go to Trieste, no sight of any exports from Senegal to Nigeria yet, but that would be really interesting. But as ever with Dangote, there are challenges even with obtaining foreign crude. The reality is that the company has found it hard to obtain foreign exchange dollars. That was previously very simple under the previous government, but there did seem to be some kind of dispute or mild falling out between Dangote and Bola Tinubu, the new Nigerian President, perhaps related to Dangote being perceived to be a bit too friendly with Tinubu's opponents during the election last year, and Dangote found it hard to get foreign exchange.

That meant that it was, according to market sources, trying to swap crude for a finer products when suppliers of crude, WTI Midland in particular may have wanted cash instead, and that left two PetroChina vessels sitting just off the refinery for over a month, waiting to unload their cargoes at WTI Midland. So you can see that with this project, there's always one crisis just around the corner. I remember speaking to one of the people who was very important in bringing it all together, and who told me about a litany of issues that they'd faced over the decade they spent building it, including initially choosing a swamp as the site, then choosing a place that had to be reinforced and actually physically elevated with millions of tons of sand, which they had to import. None of the materials or equipment they needed was available in Nigeria. All of it had to be imported. So they're no strangers to challenges along the way in this refinery, and I'll just add the third component.

You've got NNPC crude, you've got foreign crude from the United States and elsewhere, and then you've got crude from IOCs operating in Nigeria. And there's actually been a quite public dispute, or at least Dangote's tried to have a public dispute in recent weeks with the IOCs operating in the country about their own supply to the Dangote, which we can get into as well.

Joel Hanley:

Well, a lot to unpick there. And it's interesting that now, crude oil vessels are sitting off the coast waiting to discharge. In the past, I've stood on the beach at Lagos myself and seen huge queues of refined product tankers, handy MR1s and so on, sitting there. You can see 25 of them all queuing up, and now crude oil cargoes have been added to that list of late, as you say, because of the financing issues.

And when you mentioned Angola, Brazil, if it's taking volumes from there, and again, that's the disruption, that's the knock-on effect because those are cargoes that China can't buy anymore. It depends, of course, who can give them the best price, but again, it is a disruptive force to Dangote Refinery and it has certainly well poised to shake things up even more. On the international front then, Matthew, when it comes to gasoline, what's it been meaning for the wider region?

Matthew Tracey-Cook:

Yeah, so just following on to what Charlie has talked about in terms of the NNPC's financing difficulties, this really does extend to the refined products front as well. So this has been widely reported on, but the NNPC is actually $6 billion in debt to its gasoline suppliers. This is resulting in some of the very large players who typically would supply the country with gasoline, they've started to step away, and some of the traders that I talked to have said that actually, some of the smaller traders or the smaller companies have been trying to step in to supply Nigeria with its much needed gasoline. But it's interesting. This all coincides with this real drop in flows and the traders that I've talked to, they've been a bit split on whether or not this is a result of this financing challenge that the NNPC is facing, or if it's just a typical seasonal effect, or if it's in the face of Dangote being about to start producing gasoline.

On the seasonal side, every summer, there is less gasoline that's exported from Europe into Nigeria. This is due partly because it's the rainy season in Nigeria, people drive less, but also, partly because there isn't a quality arbitrage between Europe and West Africa in the summer. In the summer, European gasoline gets more expensive and that in effect lowers this pricing arbitrage, as it were, between Europe and West Africa. But in the winter, that arbitrage is more workable. So typically, we see less volumes being exported to Nigeria in the summer months.

So it's really ambiguous whether or not this real drop in flows into Nigeria is because of Dangote or if it's just a seasonal effect, or if it's due to the NNPC. As Tommy has mentioned, with LSSR, exports really dropping off, that is a really good sign that something is about to happen with the FCC, that potentially they might even already have gasoline. As Aliko Dangote said, "We need to produce the gasoline, but then we need to let it sit and tank for a little bit and settle." He said that that was going to be happening in the back half of July, so that could have already happened. It's unclear, and I guess the next several weeks, it'll all play out.

Charlie Mitchell:

If I could just add to what Matthew just said about the NNPC's debts, another big talking point we've seen from the same statement actually on July the 14th, NNPC's 20% stake in the Dangote Refinery has been reduced to 7.2%, and that's directly related according to Aliko Dangote speaking to Nigerian press, to the NNPC's failure to meet its financial commitments to the refinery.

Joel Hanley:

I think that's right, Charlie. I think that's an excellent point on which to leave it. And knowing this refinery and the news and the intrigue that it generates, I'm sure that some of you will be coming back in a couple of months to discuss this again on the podcast as we look at those, the far-reaching consequences and impacts of the Dangote Refinery.

So thank you, Charlie. Thank you, Tommy and Matthew, of course, as well. I thank you, the listener, for joining us on this episode of the podcast. Now, this and plenty of other local issues will be discussed at our upcoming annual energy forums in both Abuja and Lagos. Now, these are going to be held on the 24th and the 26th of September, so keep an eye on the Commodity Insights events website. This episode of the Oil Markets Podcast was produced in London by Felix Fernandez.