Unpacking Nigeria’s oil paradox

This loan is significant beyond its monetary value. Giant industrial projects in Africa struggle to attract funding, with foreign investors historically shy of uncertain political climates and unconvinced by Africa’s potential for profit. That international banks are prepared to invest billions of dollars in a complex, long-term project is a positive change and a strong symbol of confidence in the continent’s future and Nigeria’s in particular.

Reinvesting in Nigeria

In addition, this confidence has the potential to be self-fulfilling. By eventually lowering fuel costs, Dangote’s new refinery will make it cheaper to do business in Nigeria and free up government funds for other development and infrastructure projects. It will also create 85,000 direct and indirect jobs for Nigerians, Dangote claimed in an interview last September.

Given Dangote’s track record, any profit the plant makes is likely to be reinvested in Nigeria. This should speed up Nigeria’s economic expansion, which continues to be impressive despite the army’s ongoing and violent confrontation with Islamist militant group Boko Haram in the north. As Africa’s second-largest economy (expected to become its largest this year when the National Bureau of Statistics releases rebased GDP figures), Nigeria’s economic growth will fuel the continent’s progress.

The refining process will yield further tangible and lucrative benefits useful for making other sellable goods. The industrial complex housing the refinery will include plants to produce agricultural fertilisers and polypropylene, used to make plastics. Fertiliser will be a major money maker for Dangote and Nigeria. His project is expected to produce 2.75m metric tons of urea and ammonia for the agriculture sector every year. “We’ll also see Nigeria for the first time exporting fertiliser rather than using hard-earned foreign exchange to import fertiliser,” Dangote said.


Despite these ringing expectations, a few notes of caution remain. First, refining oil is a notoriously difficult process. Crude oil has to be heated to extreme temperatures until it vaporises and loses its chemical structure, turning into various hydrocarbon gases. These gases are pumped through a special tower. As they rise to the top, they start cooling. As they cool, each condenses at a different temperature corresponding to a specific height. The liquid is then collected and siphoned off. Some of these liquids will be ready for public consumption. Others need to go through additional, even more complex procedures before they become useful.

Plenty of room for error resides in all this complexity. Dangote’s refinery will not be immune to the problems that have plagued Nigeria’s existing refineries. It will probably be many years before it is operating at full capacity.

The pricing issue is another potential problem. In the early stages of production, massive start-up costs will prevent the new refinery’s petrol from being significantly cheaper than imports. It may even be more expensive. Reports are emerging that Dangote is looking for government subsidies to make sure his final product is competitive initially.

Given his close ties to the ruling People’s Democratic Party (PDP), and President Jonathan in particular, Dangote will probably get whatever he needs. Some argue that his proximity to government is an essential ingredient of his business success. So far Jonathan’s administration has been effusive in its praise for the refinery project.

Voters, however, are expected to elect a new president in 2015. Thanks to a new opposition coalition, the PDP faces a genuine challenge to its rule for the first time since multiparty democracy resumed in 1999. Will a new administration, if there is one, be as supportive when it comes to financial incentives and in granting the all-important operating permits, without which the refinery would lie dormant?

Dangote has already made his bet and placed his money on the table. It is a gamble without much risk. Even Nigerian politicians, not always known for their foresight, would have a hard time arguing against this particular project for one simple reason: everyone – Dangote through immense profits, the Nigerian government through reduced subsidies, and the Nigerian people through eventually cheaper petrol and fertiliser – stands to benefit.

This article was first published by Good Governance Africa