An investment analyst has faulted the decision of the Nigerian National Petroleum Corporation (NNPC) to invest the sum of $3.2 billion in Dangote Refinery, warning that the actual project completion cost has not been done in a transparent manner, amongst other reasons.
The analyst, who prefers to be anonymous, in a position paper obtained by The Lagos Times, put forward several arguments why the investment was not sound and needed to be stopped.
According to the analyst, borrowing the sum of $3.2 billion to invest in a refinery that is already three years behind schedule, suffers from poor project planning, poor contracting and was badly designed to be the largest single train refinery in the world, makes no investment sense.
The analyst explained that the implication of being a single train refinery is that if any package goes down, the investors, including NNPC, loses 650,000 barrels of refining capacity until the said package is restored to operation.
Said the analyst: “This is a major flaw with the project design and from the indication, this refinery has the highest Nelson Index of 10 making it the most complex refinery in the world and susceptible to shutdowns and failures as there is no precedence and engineers are basically working and praying that the engineering makes sense. This is better illustrated by the Escravos GTL project in which Chevron and NNPC got approval to invest $1.8 Billion but ended up spending over $10 Billion and the project is still not functional due to its complex nature.”
Managing Director of the Nigerian National Petroleum Corporation, NNPC, Mele Kyari, had on June 29 explained that the national oil company was purchasing a stake in Dangote oil refinery for both energy and fiscal security of the country.
According to him, there is no resource-dependent country that would have such a gigantic project without having a stake in it.
Speaking in an interview on Channels Television breakfast programme, Sunrise Daily, said: “For the Dangote refinery, we are not taking government money to buy it, which is the mistake that people are making. We are borrowing on the back of the cash-flow of this business.
“We know that this business is viable, it will work and it will return dividends. It has a cash-flow that is sustainable because refinery business, in the short term, will continue to be sustainable.
“That’s why banks have come forward to lend to us, so we can take equity in this.”
He further said: “Dangote refinery will come into production by 2022. And what that will do is to deliver over 50 million litres of gasoline , to be specific, into our markets. We are also working on our refineries, to ensure that we fix them.”
However, the analyst noted that: “The world is changing, and we have seen significant push for renewable energy with Electric Vehicles now stealing a large portion of the international market. Countries like Brazil are now 100% on flex-fuel cars which allows their people purchase cars that can drive on Ethanol.
“The desire for fossil fuel derivatives in the West is dwindling and the largest refineries are in the west with plans to constantly push cheap products into Africa. The largest West African economies also have their own refineries (Ghana, Ivory Coast, Senegal) and small countries such as Niger Republic, Liberia and very shortly Sierra Leone will make West Africa a difficult home for these products.”
Below is the full text of the position paper:
Why We MUST Protect Our Economy and Future By Stopping NNPC’s USD $3.2 Billion Investment in Dangote Refinery
Background
Early June 2021, the Nigerian National Petroleum Corporation (NNPC) announced that it had taken the decision to purchase 20% in the Dangote Refinery and subsequently make similar investments in other similar projects in a bid to support increased local refining capacity locally.
Whilst there is need to support import substitution and create value within the country, this summary paper seeks to ensure that this investment is stopped for the right reasons, as it is well documented that the Federal Government of Nigeria and NNPC do not have the requisite free cash to make this investment; hence they will have to go to borrow money from the international market to make this investment which will increase our National Debt without the commensurate cashflows to service this debt thereby plunging us further down the rabbit hole.
The Dangote Refinery
The proposed Dangote Refinery was conceived in 2013 and was expected to be the world’s largest single train refinery with 650,000 Barrel Per Day Crude Processing Capacity and a Nelson Index of 10 which is the highest level of complexity.
The refinery was scheduled to be delivered in 5 years which would have placed the commissioning in 2018, but due to various reasons the project is currently 3 years behind schedule and no indication that the project can be delivered within 2 years.
Why Nigeria MUST Avoid Investing
The Federal Government of Nigeria MUST stop NNPC from investing in this project for the following reasons:
- Basis for Valuation: The said project has been fraught with delays and variations, most of which was caused by poor project planning and poor contracting; hence proper technical valuation and a comprehensive analysis to value the cost of the actual project completion must be done in the most transparent form to determine the value of this investment. This has not been done and should be done and published for public consumption prior to an investment decision.
- Technical implication of Unrealistic Project Ambitions: The project has been badly designed to be the largest single train refinery in the world. The impact of this is that if any package goes down, the country loses 650,000 barrels of refining capacity until the said package is restored to operation. This is a major flaw with the project design and from the indication, this refinery has the highest Nelson Index of 10 making it the most complex refinery in the world and susceptible to shutdowns and failures as there is no precedence and engineers are basically working and praying that the engineering makes sense. This is better illustrated by the Escravos GTL project in which Chevron and NNPC got approval to invest $1.8 Billion but ended up spending over $10 Billion and the project is still not functional due to its complex nature.
- Market Dynamics and Changing Global Scene: It is widely said that this project will support the transition of the country from a product import country to a product export country. The issue with this assumption is that fossil fuel will not be the choice transport fuel in the world in the near future. The world is changing, and we have seen significant push for renewable energy with Electric Vehicles now stealing a large portion of the international market. Countries like Brazil are now 100% on flex-fuel cars which allows their people purchase cars that can drive on Ethanol. The desire for fossil fuel derivatives in the West is dwindling and the largest refineries are in the west with plans to constantly push cheap products into Africa. The largest West African economies also have their own refineries (Ghana, Ivory Coast, Senegal) and small countries such as Niger Republic, Liberia and very shortly Sierra Leone will make West Africa a difficult home for these products.
- Energy Security and local refining over-capacity: NNPC has recently commenced over $2.5 Billion worth of revamp on the Port Harcourt and Warri refineries and a recent study done by PriceWaterCoopers (PWC) on the local demand for PMS, AGO and Kerosene shows that the NNPC owned refineries and the current Modular Refineries in operation have the capacity to solve local demand. There is a no strategic reason for NNPC to support this project when the said funds should be used to complete the revamp of existing national assets.
- Badly Structured EPC Contract with no certainty and no warranties from International Contractor with repute: The standard is for projects of this nature, in which construction and technology risk is high to be wrapped under a general EPC contract with a solid international AAA rated balance sheet backing this exposure. This is not the case for this project as it is done with what is similar to direct labor. It could be wondered why banks will lend to a project of this magnitude under this contracting structure and the simple answer is that – the bank did not lend to this project alone, all banking structures were backed by the already established Cement and Sugar businesses which are being subsidized by the Nigerian population, and a protection that NNPC will not have as an investor.
Thank you.
