Notes on Dangote's Refinery Project
Has Aliko Dangote bitten off more than he can chew with his refinery project? While he has hired an Indian company to do the engineering for the project, the problem is that he (Aliko Dangote) is performing the construction and procurement himself. There are not many companies in the world who will take on this kind of risk themselves. He's hired expats to do a lot of the work for him but industry observers say the expats were on the market for a reason. This is akin to deciding to build a plane for yourself rather than buy from Boeing for whatever reason.
This approach - where Dangote himself is calling the shots on procurement - has led to some questionable decisions. One important one has been around how power will be generated for the refinery. The refinery will have six refining and product lines. Industry best practice would say each line should have its own power unit to minimise the risk of having to shut down production completely if there was a problem with one unit. Instead Dangote made the decision to build one large power unit for all the six lines. It is surely cheaper to do it this way but it raises the risk of lost production significantly if something happens to that one power plant.
Now, this is not enough to bet against Dangote. For one, he's taken big bets in the past and they have managed to pay off. His refinery will also have a captive market given how political it has now become with the government betting everything on it to put an end to fuel importation. Whatever it takes, the government will surely do it - whether it be selling him crude oil at a discount or a tight ban on imports of any kind of refined products.
But it is unlikely that the refinery will be able to beat or even match world prices or efficiency. This is the lesson from the cement business where he has been able to get away with inefficiencies like using Low Pour Fuel Oil (LPFO) in his Obajana plant. These simply get passed on to consumers and Dangote has never had to deal with anything remotely like a restructuring of the company to make it more efficient. In the case of the refinery, he only needs to be more efficient than the moribund local refineries to have achieved something significant.
Nigeria's cement was once seven times more expensive than Vietnam's. But given that this is Nigeria, the counter argument is that at least it wasn't seventeen times more expensive.