BUSINESS DAY
In a surprising turn of events, Nigeria, long hailed as an oil-producing giant, has found itself importing crude oil from the United States. This shift in dynamics is particularly notable as it involves the Dangote Refinery Lekki, the largest single-train refinery globally, owned by Africa’s wealthiest individual, Alhaji Aliko Dangote, and the Nigerian National Petroleum Company Limited (NNPCL). The decision to import US crude, specifically West Texas Intermediate (WTI) Midland, unveils a strategic business move rooted in refinery economic pragmatism and market dynamics.
The Dangote Refinery’s choice to import crude oil from the US, particularly WTI Midland, came to light when it acquired 2 million barrels from Trafigura, one of the world’s largest oil traders. This decision raised eyebrows and sparked discussions regarding its financial implications and the underlying reasons driving such a move.
Refinery Economics
The price of crude oil is a crucial factor in determining the profitability of oil refineries. It directly affects feedstock costs, which constitute a significant portion of refinery expenses. Fluctuations in crude oil prices impact the overall economics of refining operations, influencing profitability alongside fuel costs, operational expenses, and compliance with emissions regulations.
Refineries must carefully analyse crude oil prices and their relationship with market prices for refined products to assess profitability accurately. The “crack spread,” representing the price difference between refined products and crude oil, is a simplified but useful measure for estimating refinery profitability. A higher crack spread indicates greater profitability and encourages refineries to maximise capacity utilisation. Conversely, lower crack spreads may prompt refineries to scale back capacity due to cost considerations.
Economic Considerations
Cost-effectiveness: The primary catalyst for importing US crude stems from its cost-effectiveness compared to Nigerian premium grades like Bonny Light, Agbami, Qua Iboe, and Brass River. While Nigerian grades are benchmarked against Europe’s North Sea’s Brent, WTI Midland provides a more economically viable option. During the procurement period, WTI Midland was notably more affordable, enabling the Dangote Refinery to realise substantial cost efficiencies.
Amidst various considerations, the significant price differential between Nigerian and US WTI Midland crude emerges as a key factor. Nigerian barrels of similar quality to WTI typically command a premium over Brent. For instance, on Wednesday, February 7, 2024, WTI closed at $73.86, whereas Brent crude closed at $79.29, indicating a $5.43 spread. In contrast, Nigeria’s premium grade, Qua Iboe, traded at $81.14, showcasing a $7.28 difference. It’s noteworthy that all Nigerian crude grades exceeded the $80 mark during this period.
Competitiveness of American Crude
The substantial increase in US crude oil production has led American companies to offer significant discounts on WTI Midland crude in the global market. This enhanced competitiveness further incentivized the Dangote Refinery to opt for US crude over Nigerian grades.
