Nigeria Produces 1.6 Million Barrels a Day. Dangote Still Imports Crude

The Nigerian state extracts approximately 1.6 million barrels of oil each day but the Dangote facility has the capacity to refine 650 000 barrels in that same period. Although this refinery exists within the nation that generates the most petroleum in Africa, the plant continues to bring in 30 % to 40 % of its raw oil from foreign suppliers. Chief Executive Officer David Bird stated that this situation exists because of the way the industry is organized. As a significant amount of the oil from Nigeria is already under contract to go to other buyers, the refinery cannot access all local supplies.

Nigeria’s Oil Is Not Fully Available to Nigerian Refiners

The NNPC produces unrefined petroleum through joint ventures but the company ties many of those barrels to loans and agreements that exist before exportation. The company commits the materials to other buyers before Aliko Dangote is able to purchase them. At a daily operating capacity of 650 000 barrels, the facility requires imported feedstock for 30 % to 40 % of its needs, which is equal to approximately:

The facility processes a large volume of oil from global sellers despite the fact that the plant operates within a nation that extracts a high quantity of petroleum.

Local Crude Does Not Guarantee a Cost Advantage

The availability of oil serves as a single concern - the cost of the resource is a separate factor. The Nigerian government and suppliers price crude oil for domestic sale against benchmarks that link to the Brent international market - those prices reflect costs for shipping plus logistics that the global market requires.

The location of the oil production near the refinery is not a reason for the Dangote refinery to get a lower price for the raw materials.

The refinery sometimes pays prices for crude oil from other countries that are equal to or lower than the prices for oil from Nigeria even when the company pays for the shipping - this situation reduces the benefit that the Dangote refinery expects to receive because the facility is located near local oil sources.

A Few Dollars per Barrel Matter

The Dangote refinery is able to process approximately 237 million barrels of crude oil every year if the facility operates at its maximum capacity of 650 000 barrels per day. Because of this high volume, even minor variations in the prices that the refinery pays to acquire raw petroleum are significant.

The following example uses a capacity of 650 000 barrels per day and operation at the highest possible level. It is a mathematical demonstration rather than a measurement of the specific extra expenses that the Dangote refinery incurs.

The costs to purchase raw materials for production exert a direct influence on the earnings before interest, taxes, depreciation and amortization - but those expenses also affect the movement of cash into and out of the company. It is common for the price of the materials to determine the financial value that shareholders choose to provide during the initial public offering.

The IPO Is Coming During an Exceptional Refining Market

The choice to list the company in October is advantageous - conflict in Iran causes a decrease in available petroleum products and an increase in the profit earned by refineries that function outside the Middle East. It is certain that the Dangote refinery gains value from those market conditions at the same time the business arranges to collect 5 billion dollars.

The danger is that the financiers calculate the worth of the refinery - using the profits that the facility produces during periods of high demand. If the price difference between refined products and crude oil returns to a standard level while the cost of unrefined petroleum stays high, the profit margins are likely to decrease. The income that the company earns under standard market conditions is therefore more significant than the immediate profit when the analysts evaluate the initial public offering.

Expansion Magnifies the Feedstock Issue

The owner of the Dangote refinery intends to expand the processing ability of the facility until it reaches 1.4 million barrels per day. It is a volume that represents 88 % of the 1.6 million barrels of oil that extraction teams in Nigeria currently produce each day. The industrial site does not use the entire output from Nigerian wells because existing contracts for international sale, the identities of stakeholders, the chemical properties of different oil types and the arrival of foreign goods determine the specific blend of resources - but this measurement illustrates that the facility requires a large amount of raw materials.

If the Dangote refinery continues to buy between 30 % and 40 % of its crude oil from foreign suppliers while processing 1.4 million barrels each day, the facility is going to require:

The quantity of unrefined oil which tankers transport into this location is between 420 000 and 560 000 barrels during each twenty four hour period.

The limited supply of unrefined petroleum is a primary factor that prevents the industry from growing.

What Investors Are Actually Pricing

The public offering of shares valued at 5 billion dollars is therefore partly a gamble on shifts that occur beyond the operations of Dangote.

The refinery achieves the total benefits of refining oil in Nigeria when the facility prioritizes three specific factors:

1. Higher Nigerian crude production.
2. More domestic barrels becoming available as existing financing commitments expire.
3. A pricing structure that allows domestic refining to capture some of the logistical advantage of local crude.

The refinery is able to use a high volume of materials and low priced raw supplies if those financial and operational circumstances become better - but it is possible that the largest facility in Africa continues to require crude oil from other nations if the conditions remain the same - this outcome is possible even though the facility functions within the borders of the nation that produces more oil than any other country on the continent.

That is the number investors should watch after the IPO: not just 650,000 barrels of refining capacity, but how much of those 650,000 barrels Nigeria can supply — and at what price.