Key Takeaways:
Nigeria’s NNPC will now exclusively source refined fuel domestically from the Dangote Refinery and other local refineries, ending fuel imports from the EU. This shift is intended to increase self-sufficiency but has led to immediate fuel shortages due to limited refinery capacity.
Persistent crude shortages and a weak Naira are driving up import costs, worsening inflation (above 25%) and economic stagnation. Fuel prices have spiked.
Once the refinery reaches full capacity, long-term reductions in local fuel costs and increased competition in Europe’s fuel market are expected.
The government’s failure to address refinery issues may trigger political unrest, including violent protests, as the removal of fuel subsidies exacerbates the crisis.
This image is sourced from BusinessDay. If there are any copyright concerns, please contact us to address them.
Shift in Nigerian Energy Policy
On November 12, Mele Kyari, Group CEO of the Nigerian National Petroleum Company (NNPC), announced that the NNPC would cease importing refined fuel, sourcing exclusively from the Dangote Petroleum Refinery and other domestic refineries. However, the Dangote Refinery, the world’s largest single-train refinery, has operated at half capacity since it began in 2023, initially slowed by crude oil supply shortages from the NNPC. Dangote has utilised US crude to offset shortages, with potential future imports from Libya, Angola, Saudi Arabia, or Brazil under consideration.
Since October 8, 2024, Nigeria has completely halted refined gas imports from the EU, creating a fuel deficit due to the failure of the NNPC to supply the Dangote Refinery with the necessary crude. When it will reach full capacity remains unclear, along with the requirements to do so. The single-train configuration makes the refinery more vulnerable to outages, and ongoing capacity issues contributed to Fitch’s recent downgrade of Dangote Industries Limited’s national rating from AA to B+. Amid these supply challenges, Nigeria’s inflation remains above 25% alongside low economic growth, compounding the nation’s stagflation crisis, as KSG assessed in August.
Forward Look
Domestic supply effects
KSG assesses that the Tinubu government’s inability to bring the refinery to full capacity will be a major political issue going forward. The risk of violent protests in urban areas such as those seen in the first two weeks of August 2024 are highly likely.
With Nigeria’s fuel subsidy removed, KSG anticipates sharp fuel price hikes in the short term as long as the refinery is not at full capacity. Given the near collapse of Nigeria’s power grid, many small businesses and manufacturers rely on gasoline for generators, thus likely reducing Nigeria’s overall production capacity. Business confidence in Nigeria is likely to decline, and investment risk will increase for businesses in transportation, logistics, and manufacturing.
Currency and foreign exchange effects
The longer the NNPC takes to supply the Dangote Refinery, allowing it to operate at full capacity, the more the Dangote Refinery is likely to run into financial trouble given its massive debt commitments to local banks.
KSG assesses that the NNPC will likely not supply the refinery with its needed capacity for at least the next four to six months and that the Dangote Refinery will not reach full operational capacity until at least Q2 2025.
The Dangote refinery will likely need to continue importing its crude shortfall, which will be increasingly expensive as the Naira continues to decline.
KSG assesses that the Nigerian government’s inability to meet domestic fuel demand will lead to an extended depreciation in the Naira relative to the US dollar and the Euro.
Nigeria will likely seek to increase interest rates in an attempt to reduce the depreciation, which will be profitable for asset managers and insurers holding Nigerian bonds, and hedge funds holding long-term short positions on the Naira.
However, consumer discretionary sectors, real-estate, construction firms and any businesses that are highly leveraged are likely to face higher financing costs in 2025.
KSG expects that Nigeria’s foreign exchange reserves, which have declined since 2008, will continue to face downward pressure in 2025.
Import-dependent businesses that rely on the availability of foreign exchange in Nigeria, including those that hold foreign debt, will likely face spiralling costs of imported goods in 2025.
The primary imports likely to be affected will be those not locally produced at scale: consumer goods, industrial machinery, chemical products, and construction materials.
International effects
Assuming full capacity is eventually reached at the Dangote Refinery, KSG assesses that there will be long-term reductions in local fuel costs and increased market competition in Europe as Nigeria becomes a new fuel exporter.
KSG assesses that Nigeria’s transition to reliance on domestic refined oil will likely allow European nations to further de-risk their oil supply chains from Russia, given the freed-up supply Nigerian refined oil demand will leave countries like Belgium, the Netherlands and Norway with an oversupply.
KSG’s Most Likely Scenario in the Next Six Months
The Dangote Refinery will still be operating below full capacity, as NNPC fails to provide adequate crude supply, forcing continued reliance on expensive foreign crude imports.
The Naira will significantly depreciate further against major currencies, prompting interest rate hikes by the Nigerian government that will benefit asset managers but strain leveraged businesses.
Urban areas will likely be experiencing violent protests similar to those seen in August 2024, driven by fuel shortages and price hikes following the removal of fuel subsidies.
Small businesses and manufacturers will be facing reduced production capacity due to expensive fuel for generators, leading to decreased business confidence and increased investment risk.
Import-dependent businesses will be struggling with spiralling costs, particularly affecting access to consumer goods, industrial machinery, chemical products, and construction materials, as foreign exchange becomes increasingly scarce.
European countries like Belgium, the Netherlands, and Norway, will likely be selling more of the oversupply to other EU countries, with further reduced dependence on Russian and Indian supplies.