The Way Forward For Dangote Refinery:Risk Assessment, Analysis, and Mitigation Strategies By Mahmud Shuaibu Ringim

Since its coming on stream Dangote Refinery has been confronted with series of challenges that could have serious consequences on its operations

As a new player in the oil and gas industry Dangote Industries is expected to encounter obstacles and many hurdle to cross in its market penetration strategies, because market leaders in the industry will employ everything in their arsenal to protect their market dominance.

It is therefore, advisable for Dangote Refinery to develop a risk assessment, analysis and mitigation strategies, in order confront such challenges.

1) Risk Assessment

a) Supply of Crude Oil from Locally Sourced Facilities:

•   Risk: The availability of crude oil from local sources may be limited due to existing joint venture agreements between the Nigerian National Petroleum Corporation (NNPC) and major international oil companies (IOCs). These agreements often prioritize exports over domestic supply.
•   Potential Impact: This could force Dangote Refinery to rely on imported crude oil, increasing operational costs and affecting profitability.

b) Joint Venture Sharing Agreement Between NNPC and Major Oil Companies:

•   Risk: The joint venture agreements could restrict the supply of crude oil to Dangote Refinery, as these agreements may prioritize commitments to export crude oil over supplying it locally.
•   Potential Impact: Violating these agreements could lead to legal disputes, international arbitration, and significant financial penalties for the Nigerian government, which could also impact the refinery’s operations.

c) Existing Monopoly of the Global Oil and Gas Sector by the Seven Sisters:

•   Risk: The global oil and gas market is dominated by the “Seven Sisters,” seven major oil companies that control a significant portion of the industry. Dangote Refinery could face resistance from these established players.
•   Potential Impact: The refinery’s entry into the market could disrupt this monopoly, leading to potential retaliatory measures, including price wars or lobbying against Dangote Refinery.

d) Entrenched Interests of Powerful Entities in Nigeria’s Oil and Gas Sector:

•   Risk: Powerful political and economic entities within Nigeria have entrenched interests in the oil and gas sector. Dangote Refinery could be perceived as a threat to their established revenue streams.
•   Potential Impact: These groups might use their influence to create regulatory hurdles, legal challenges, or even direct actions to disrupt the refinery’s operations.

e) Potential Competition from an Upcoming Refinery in Akwa Ibom:

•   Risk: A new refinery in Akwa Ibom, backed by strong foreign and domestic power brokers, could emerge as a significant competitor to Dangote Refinery.
•   Potential Impact: This competition could erode Dangote Refinery’s market share, especially if the new refinery is able to offer competitive pricing or better terms.

f) Protecting Politically Powerful Interests in the Industry:

•   Risk: The refinery could threaten the interests of powerful groups that benefit from the importation of refined petroleum products. These groups have historically opposed efforts to repair or upgrade NNPC refineries.
•   Potential Impact: These groups may attempt to undermine Dangote Refinery’s operations through lobbying, regulatory challenges, or other means to protect their interests.

g) Threat to the Importation of Refined Petroleum Products:

•   Risk: Dangote Refinery’s operation could significantly reduce Nigeria’s reliance on imported refined petroleum products, threatening the business of importers.
•   Potential Impact: This could lead to resistance from stakeholders in the importation sector, potentially resulting in lobbying efforts or regulatory challenges designed to protect their business interests.

2) Risk Analysis

a) Supply of Crude Oil:

•   Analysis: The joint venture agreements between NNPC and major oil companies could limit the availability of locally sourced crude oil for Dangote Refinery, as these agreements often prioritize exports. This could lead to higher operational costs due to the need to import crude oil, which involves additional expenses such as transportation, insurance, and other hidden costs associated with international shipments.

b) Joint Venture Contract Implementation:

•   Analysis: If NNPC fails to meet its obligations under the joint venture agreements, it could face significant financial penalties and damage its international reputation. This could also affect Dangote Refinery’s ability to secure local crude supplies, potentially leading to legal battles and arbitration in international courts.

c) Monopolistic Competition:

•   Analysis: The entry of Dangote Refinery, with its modern and efficient technology, could disrupt the existing monopoly held by the Seven Sisters. However, this disruption could provoke a competitive response from these global players, including aggressive pricing strategies or lobbying efforts to undermine Dangote Refinery’s market position.

d) Entrenched Interests:

•   Analysis: The powerful political and economic interests in Nigeria’s oil and gas sector pose a significant risk to Dangote Refinery’s operations. These entities may use their influence to create regulatory or operational challenges, potentially disrupting the refinery’s supply chain or market access.

e) Competition from Akwa Ibom Refinery:

•   Analysis: The upcoming refinery in Akwa Ibom, supported by strong foreign and domestic interests, could pose serious competition to Dangote Refinery. This competition could lead to market share erosion, particularly if the new refinery can offer more competitive pricing or better terms to customers.

f) Politically Powerful Interests:

•   Analysis: The success of Dangote Refinery could threaten the interests of powerful groups that have benefited from the importation of refined products. These groups may seek to undermine the refinery through regulatory, legal, or operational means.

g) Threat to Importation Business:

•   Analysis: The refinery’s potential to reduce Nigeria’s reliance on imported refined products could lead to resistance from stakeholders in the importation sector. This resistance could manifest in lobbying efforts or regulatory challenges aimed at protecting the importation business.

3) Risk Mitigation Strategies

a) Listing on the Nigerian Stock Exchange:

•   Strategy: Dangote Refinery should consider listing on the Nigerian Stock Exchange to allow for wider public participation, particularly by dominant players in the industry. By allowing these stakeholders to acquire a stake in the company, the refinery could reduce potential hostility and align the interests of key industry players with its own.
•   Ownership Structure: Dangote Industries could retain a maximum of 40% of the shares, ensuring it remains the majority shareholder while allowing other stakeholders to benefit from capital gains.

b) Establishing a Downstream Subsidiary:

•   Strategy: Register a subsidiary focused on downstream operations, which can also be opened for public participation. This subsidiary would handle distribution and marketing, allowing the main refinery to concentrate on production. This approach could help mitigate hostilities by involving more stakeholders in the downstream business.

c) Diversification into Crude Oil Exploration:

•   Strategy: Dangote Industries should consider diversifying its investment portfolio by venturing into crude oil exploration. Acquiring assets such as OPL 809 and 810 from NNDC and leveraging the Kolmani oil findings could help the refinery secure its own crude oil supply, reducing dependency on third-party suppliers and mitigating supply risks.

d) Strategic Partnerships:

•   Strategy: Form strategic partnerships with both local and international stakeholders, including government agencies, industry regulators, and other oil and gas companies. These partnerships could provide additional support, reduce regulatory risks, and enhance the refinery’s market position.

e) Engagement with Stakeholders:

•   Strategy: Engage with key stakeholders, including government officials, industry regulators, and local communities, to build a broad base of support for the refinery. This engagement should include transparent communication about the refinery’s benefits to the Nigerian economy, such as job creation, reduced import dependency, and increased energy security.

f) Legal and Regulatory Preparedness:

•   Strategy: Prepare for potential legal and regulatory challenges by retaining top legal counsel and engaging with industry regulators to ensure compliance with all relevant laws and regulations. Proactive engagement with policymakers could also help shape a favorable regulatory environment for the refinery.

Mahmud Shuaibu Ringim
HALIM Consulting Ltd
mahmudshuaibu44@gmail.com