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President Obama was not among the heads of state at the inauguration of incoming President Muhammadu Buhari on May 29, 2015. However, in his private conversations with Nigeria's new president, he might offer Mr. Buhari some encouragement that beyond the friendship between their nations, they share something else in common.
They both inherited an economic mess when they took office. For Obama it was the great recession precipitated by the collapse in real estate. For Buhari, it is the recently patched-over fuel crisis precipitated by the plunge in oil prices and the long simmering tension over fuel subsidies.
In the weeks before inauguration, Nigeria was slowly grinding to economic gridlock as petroleum marketers and the outgoing government of President Goodluck Jonathan argued over nearly $1 billion in outstanding payments. Banks shortened their opening hours. Mobile phone companies warned they would cease service. Planes were grounded and citizens queued for hours at the gas station. The root of this economic paralysis? A combination of the fuel subsidy and the exchange rate the outgoing Jonathan government used to calculate what it owed crude traders.
As president, Buhari signaled that he would remove the fuel subsidy (estimated at $7 billion annually) that many Nigerians see as a source of corruption. While international financial organizations such as the World Bank and IMF might cheer this move, it spooked Nigeria's petroleum traders, who demanded that the Jonathan government pay up its arrears.
President Jonathan's administration calculated the subsidy payment owed using an exchange rate of N168 to $1, while the marketers claimed they incurred their costs at N198 to $1 in the market. Three days before inauguration, the outgoing government and the traders announced they had reached an agreement that would allow fuel supplies to resume. President-elect Buhari also promised a thorough investigation.
Nigeria's three domestic refineries have a total capacity of 445,000 barrels/day. The Nigerian National Petroleum Corp. (NNPC) estimates that the country needs at least 500,000 to 560,000 additional barrels per day of refining capacity by 2016. The shortfall in refining capacity, if left unaddressed, would grow at a rate of 3% to 5% per year. The country must import 70% of the refined fuels it consumes.
Recognizing this opportunity, Nigerian industrialist and Africa's richest man Aliko Dangote is investing $11 billion to build a 500,000 barrel-per-day refinery, scheduled to come online by mid 2018.
The economics of refineries is tough due to high start-up costs and tight margins. But for Nigeria, refineries make sense. New refining capacity would cut fuel imports and eliminate rackets associated with the fuel subsidies.
It would also provide valuable exports. Across West Africa there is insufficient capacity. Ghana's only refinery, a 45,000 barrel-per-day plant, which does not meet the country's needs, was idled for at least a month earlier this year because of mechanical problems. Sierra Leone mothballed its refinery decades ago. Senegal has 20,030 barrels per day in refining capacity; Côte d'Ivoire 73,990 barrels per day and Cameroon 47,110 barrels per day; all way below these countries' needs.
Nigeria has been hit hard by the rise in U.S. shale and the slump in crude oil prices. Its light sweet crude, once in great demand and commanding premium prices, is now struggling to find buyers. U.S. shale oil has displaced most of Nigerian imports, eliminating a once reliable market.
Reuters quotes OPEC as saying "This supply glut, primarily of light sweet crudes, needs to ease sizably before the oil market steadies. Low oil prices are expected to force some of the costly light sweet crude oil to idle, but the displaced African light sweet crude is also forced to find an alternative market."
Making matters worse, pricing order has been flipped. According to OPEC, sanctions and geopolitics have caused "...the value of regional sour crudes to be oddly higher or at small discounts in relation to the sweet crudes." If sanctions and geopolitics can be sorted out, there is still pressure from the heavy crude refineries, built before the shale revolution, when light crudes were expected to remain scarce.
"It is also difficult to justify altering the configuration of deep conversion refineries after the huge investments that were put into their upgrading prior to the tight oil boom, when the sweet/sour spread was wide enough to justify building such heavy conversion units."
None of this is good news for Nigerian crude exports, which generate 90% of the country's foreign exchange earnings. Importing refined fuel products as crude prices slump also puts pressure on its reserves.
Dangote Group's planned refinery will meet Nigeria's existing demand. Expanding refinery capacity to also export refined fuels could help Nigeria replace some revenue from lost crude sales. Its neighbors in West Africa will provide a receptive market.
The U.S., the world's second-largest economy, made banking reform (the merits of which are still hotly debated) an important component of its economic recovery. Nigeria, Africa's largest economy, would encounter less debate if it makes refining sector reforms the cornerstone of its own economic recovery.
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