Fitch Ratings’ decision to downgrade parent company, Dangote Industries Limited, is the latest blow to hit Dangote Refinery, which has been mired in controversy since it started production at the beginning of the year. 

In Fitch’s 7 August report it downgraded Dangote Industries because of a decline in the group’s liquidity position amid operational and financial difficulties. In line with these concerns, it lowered its rating to B+ (negative) from a previous rating of AA (negative) and placed it on a negative rating watch. 

Specifically, Fitch noted that the Dangote Group has been impacted by the devaluation of the Naira as well as the absence of ‘contracted backup funding to repay its significant debt facilities maturing on 31 August 2024.’ It disclosed that Dangote was in the market trying to sell a 12.5% stake in the Dangote Refinery to interested investors. This stake was meant to be taken up by the Nigerian National Petroleum Company Limited (NNPCL) in exchange for supplying crude to the refinery but which the state-owned company could not pay for. The NNPCL’s inability or refusal to take up that stake, in return for the supply of 300,000 b/d of crude to the refinery over three years, appears to have significantly disrupted the plans of Aliko Dangote, Africa’s richest individual. 

If NNPCL had honoured its agreement the refinery would have obtained enough feedstock to meet nearly half of its 650,000 b/d capacity until it stabilised. Because it was also a crude-for-equity deal, it meant that Dangote would have been able to conserve cash at the early start-up stage of the refinery. 

The lack of crude from the NNPCL also meant that Dangote has had to dig into his pockets to keep the refinery running. He has been forced to import crude from the US and Brazil to maintain operations. The refinery is estimated to need as much as 15 cargoes of crude every month, but it is only getting about four from the NNPCL and its partners. The government estimates that Dangote would need an average US$600 million a month to continue importing crude, a heavy burden on Nigeria’s foreign exchange reserves. 

This is why President Bola Tinubu approved a plan on 29 July for Dangote to start paying for crude in Naira in the hope that this will reduce pressure on forex reserves and stabilise the Naira. Zacch Adedeji, Federal Inland Revenue Service (FIRS) executive chairman, who announced the plan, said that this will be based on a pre-determined exchange rate that will be in place for at least six months once agreed. 

The plan is yet to take off. Dangote is not keen on Naira crude sales and insists that all he wants is to be able to buy crude locally and does not care which currency he pays in. Dangote was not informed about the plan to sell crude to him in Naira. It was an idea that the presidency put together in the hope that it would settle what appears to be a growing dispute with Dangote about crude supplies to the refinery. 

In a 7 August statement, Dangote disclosed that, of the 15 cargoes that the refinery needs in September, it had only been able to secure six locally from the NNPCL. When he approached IOCs for the remaining nine, he was directed to their international trading arms, which are marketing the crude at a premium of US$3-4 a barrel, an extra cost of US$3 million-4 million per cargo. Unsurprisingly he views this as unfair pricing. The Petroleum Industry Act (PIA) specifically makes the domestic allocation of crude a priority. 

Dangote’s position is that, under the PIA’s provisions, he should be able to get crude directly from the IOCs and the NNPCL without going through their trading arms. This argument does not sit well with many in the industry. Even the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) said on 8 August that Dangote’s demand for it to enforce the supply of crude from local producers is constrained because some producers already have contractual obligations that cannot be broken to please Dangote. 

Many in the industry and the presidency believe that Dangote is trying to bully his way to getting crude below the market price locally after failing to do his homework before completing the refinery. It appears that he did not have a back-up plan for the arrangement with the NNPCL. Now that the agreement has largely fallen apart, he is scrambling to get the government to bail him out. Before the refinery came on stream, the expectation was that Dangote would have had feedstock contracts in place to avoid the current situation. 

As he has previously done in most of his businesses, Dangote is expecting the government to support him or risk failing. But the stakes are now much higher for him and the country. Dangote reportedly has a US$2.1 billion loan that matures on 31 August which he must find a way to pay or restructure. He cannot afford to default because this could risk bringing down some of the country’s largest banks, which lent the funds to build the refinery. He also needs to get the refinery running to have any chance of servicing and repaying the loan. The struggle over crude feedstock already means that he is set to miss the target of producing Premium Motor Spirit (PMS) this month, which will be the main revenue earner for the refinery when it is fully operational. 

Nigeria cannot allow the Dangote Refinery to fail. It is its best chance of becoming self-sufficient in refined products and guaranteeing a steady domestic supply. The refinery also has the potential to boost export revenues because it can still export about half of its products after meeting local demand. 

It seems that Dangote did not do a proper business evaluation before sinking US$20 billion into his giant refinery. Now he needs Nigeria to bend over backwards to save him from bankruptcy. 

Dangote has become too big to fail but the cost will not come easily. One solution would be to increase oil production and dedicate the extra barrels to the Dangote Refinery. Some have also suggested that Dangote should be allocated an oil well that he can exploit and supply the output exclusively to his refinery. The challenge with this is that it will involve additional investment that Dangote does not currently have. 

The Dangote Refinery, the country’s largest ever private sector project, now appears to be an albatross around the founder’s neck. It threatens to sink him and leave Nigeria with a financial mess.

The August 2024 issue of Nigeria Focus also includes the following:

Spotlight

• Hunger protests may end Tinubu’s hopes for a second term
• Implications

Politics & Society

• Is there a Niger connection to the Russian flag infiltration?
• Profile: Kayode Egbetokun –Tinubu’s favourite IGP gets a longer tenure
• Cabinet reshuffle now firmly on the cards
• IPOB takes advantage of Lagos bigotry

Economy & Finance

• Tinubu’s future rests on getting food prices down
• Outlook for the Naira is not looking good
• Numbers

Energy Sector

• Is the Dangote Refinery an investment too far for Africa’s richest person?
• National Assembly reinvestigates NNPCL’s moribund refineries
• NNPCL’s new crude grade and politically tainted data

Security

• IPOB provokes with Biafra independence declaration