Nigeria’s Oil Paradox: The Dangote Refinery and the Struggle for Economic Transformation

Although Nigeria has consistently been the largest crude oil producer in Africa, it possesses an incredibly impoverished population and has suffered from enormous levels of corruption. Unlike countries such as Saudi Arabia, the Nigerian state has been largely unable to utilise its black gold in empowering and enriching the nation - around a third of its population lives in extreme poverty. Along with that, due to numerous financial issues, Nigeria refines little of its own oil and has instead had to import the vast majority of its fuel. Financial reforms and the recently-commissioned Dangote Oil Refinery have sparked some hope in transforming Nigeria’s society and oil industry, but there are still significant hurdles ahead.

The seemingly absurd situation regarding Nigeria’s fuel importation has long been publicised. In order to refine most of its crude oil, Nigeria has had to export it abroad (mainly to Europe and Asia) and then import the finished fuel products. One major cause of this has been the inability of Nigeria to consistently sell oil and buy fuel in its own currency: the Nigerian Naira. Refineries in Europe and Asia have been reluctant to trade in Naira, as it is considered a weak and unstable currency. Nigeria does not have a large and experienced industrial base, and corruption, poor state finances and black market activity have only hindered its growth. The few domestic refineries Nigeria possessed before 2024 were often underfunded, ill-maintained and run well below full capacity.

Fuel subsidies have also negatively impacted the country’s economy, state finances and oil industry. Sometimes viewed as the only good thing to have come out of Nigeria’s oil industry, the subsidies have kept fuel prices in Nigeria artificially low, making it more affordable for the general population. However, there have been numerous and significant downsides. In times of rising oil prices, the Nigerian government had to resort to increased borrowing in order to keep fuel subsidies in pace with oil price fluctuations. In times of global economic downturn and rising oil prices, it severely strained the country’s finances and oil industry - so much was spent on subsidies that there was little left for improving the oil industry’s infrastructure. Funds set aside for subsidies were often misappropriated or siphoned off by corrupt officials and middlemen. All this has resulted in near-constant fuel shortages besetting the Nigerian populace. In the early 2000s, the British oil and gas multinational, Shell, refused an offer to run Nigeria's oil refineries, citing their poor maintenance, and corruption surrounding the country’s oil industry. Most of the official fuel subsidies were removed in 2023, but the Nigerian government has since continued to pursue expensive measures in attempting to artificially depress fuel prices.

A major source of hope in remedying all this has been the Dangote Oil Refinery. Spearheaded by Nigeria’s wealthiest man and foremost industrialist, Aliko Dangote, it has seen $20 Billion worth of investment in the hopes of producing an enormous 650,000 barrels of fuel per day. Due to Nigeria’s aforementioned lack of a strong and established industrial base, most of the refinery’s construction equipment had to be imported. Although the Dangote Refinery has drawn the spotlight, there are other events that should warrant close attention. Earlier this month, it was announced that from October 1st 2024, the Nigerian state would be selling crude oil to (the privately-owned) Dangote Refinery in Naira.

Despite the hopes in recent years however, there are still significant hurdles ahead for nearly everyone involved with oil refining in Nigeria. Aliko Dangote announced in July of this year that his eponymous refinery should reach 85% capacity by the end of 2024. This has been seen as a highly optimistic number, thanks in no part to the issues Dangote has encountered with the Nigerian National Petroleum Company (NNPC), the government-owned company that controls most of Nigeria’s oil industry. Although the Dangote refinery started operations in January this year, Dangote himself has complained about the quantity of crude oil deliveries to the refinery having been lower than promised. In order to make the difference up and continue filling the refinery’s capacity, Dangote has had to resort to buying crude oil from abroad. NNPC authorities have claimed that the refinery is actually only half complete, and have noted inspections showing that fuel produced by the refinery has been of substandard quality compared to foreign fuel.

Nigeria’s position as a highly corrupt country has no doubt exacerbated this. As the wealth of some government and NNPC officials has relied on the pre-Dangote refinery system, they have vested interests in seeing Dangote fail. Foreign firms that have dominated Nigeria’s fuel supply by refining and exporting the country’s oil will also not want to see the refinery succeed. As Aliko Dangote himself lamented in the 2024 Afreximbank Annual Meeting in Nassau: “The mafia in oil; they are stronger than [the] mafia in drugs”.

As Nigeria pursues oil self-sufficiency through the Dangote Refinery, the path towards transforming its economy still has plenty of obstacles remaining. Time, money, publicity and resources have been poured into it, but corruption, vested interests and systemic inefficiencies will not disappear overnight. While Nigeria has been expanding its service industries in an attempt to lessen the economy’s reliance on oil, the country’s corruption and poverty make its reforms far more challenging to implement. The developed world investing more into renewable energy forms could also pose a long-term challenge to not only Nigeria, but developing oil-rich nations around the world. Can Nigeria capitalise on rising oil prices, or will they be left behind in an increasingly anti-oil world? The next few years will be critical for the future of its people and economy.

Augustus Redman is a Lead Analyst at Autran Group, specialising in defence and military policy. Redman is currently reading History at Trinity College, Oxford.

Email: aredman@autrangroup.com