Muda Yusuf is the Director General of Lagos Chamber of Commerce and Industry (LCCI). He holds degrees in economics from the University of Ilorin and the University of Lagos. Passionate about private sector development and a strong private sector advocate, he has played active roles in public private partnerships on all levels of government. In this interview, Yusuf, says the completion of the Dangote Refinery is a game changer for the Nigerian oil and gas sector. He believes that the refinery will reduce pressure on the country’s foreign reserves and foreign exchange earnings.
What impact would the coming on stream of the Dangote Refinery have on the Nigeria economy?
Dangote Refinery will on completion be a game changer for the Nigerian oil & gas industry as well as the Nigerian Economy. The Impact will be profound and multi-dimensional. Currently, the biggest pressure on our foreign reserves and foreign exchange earnings is the importation of petroleum products. With a refinery capacity of 650,000 barrels per day, petrochemical plant that would produce 780KTPA of polypropylene, 500 KTPA of polyethylene, and a fertiliser plant with a capacity to produce 3 million tonnes of Urea per annum, the import substitution effect would be significant.
An estimated $10 billion is spent by the country annually on the importation of Petroleum products. Therefore, the coming on board of Dangote Refinery will conserve foreign exchange through the sales of Petroleum products directly to the domestic market, thus drastically reducing importation of petroleum products. Additionally, the impact of this on the macro-economic dynamics will be quite significant. Refineries come with many other related industries, particularly Petrochemicals and fertilizer plant. This implies that many of the raw materials currently being imported, especially in the plastics and chemical industries will be sourced from the Petro-chemical plants.“Similarly, the fertilizer plant which is highly dependent on gas will eliminate the need for importation of fertilizer from our scarce foreign exchange.
The refinery is expected to produce petroleum products for local consumption as well as for exports. Do you think the will help improve the strength of Nigeria’s naira to a dollar?
Given the capacity of the Dangote Refinery on completion, the story of the Nigerian economy will change from the export of crude oil to the export of refined products. The export earnings will boost foreign exchange earnings for the economy, this will help to stabilise the macroeconomic environment. Additionally, the refinery will come with a lot of spine off Industries, which will provide raw materials for many other industries.
It is expected that the refinery will provide 4,000 direct jobs and over 150,000 indirect jobs. This employment impact is considerable and the multiplier effect on the economy will also be enormous.
Clearly, the Dangote Refinery on completion will impact the supply side of the Forex market and consequently moderate exchange rate. A positive exchange rate impact is expected to happen through conservation of Forex through import substitution and generation of Forex through export. It reduces demand and boost supply of Forex. This is the positive trajectory that the refinery offers for the exchange rate.
Nigeria depended on European refiners for several years for petroleum products. Now that the Dangote Refinery is coming on stream, do you see the refinery becoming a threat to international refiners?
The global market for refined Petroleum Products is large, estimated at over $2 trillion in 2017, and projected to reach $7 trillion by 2024. The effect of the Dangote Refinery on the global market may not be that material. I do not think it would pose a major threat to foreign refineries. What would happen is that current suppliers to Nigeria will seek new markets and customers.
I also do not see any basis for anybody or organisation to seek to sabotage the Dangote Refinery. The market is big enough to accommodate all players.
What policies would you prescribed for government to assist the development of private refineries in Nigeria?
Refineries are capital intensive and long gestation projects. Unfortunately, there is no long-term funds in the Nigeria economy. Besides, the cost of fund in the economy is too high, well above 22 per cent. It will be suicidal for an investor to fund refineries project with funds from the commercial banks at such outrageous interest rates.
Funding options appropriate for such projects should be on concessionary terms, perhaps from bilateral sources, multilateral sources and other concessionary financing. Perhaps even more critical challenges for private refineries is the policy environment. The current policy regime in downstream is a major disincentive to investment in the sector.
It is an inappropriate policy to fix prices when costs are not static. No investor can thrive in such a policy environment. Currently, the pump price of Premium Motor Spirit (PMS) is N145 per litre, while landing cost is about N200/litre. Domestic production cost may also be higher than the fixed price. But the important point to stress is that we cannot attract investors if they cannot reflect their cost in the pricing of their products. That of course cannot be a sustainable business model.
“It is also difficult to raise funds to support downstream oil and gas projects under the current policy regime. Therefore, policy reforms are urgent and imperative to attract investment. What will however make the difference with Dangote Refinery is the fact that it is in export free zone. It has the option of selling to domestic market or exporting. Current importers of petroleum products may buy from the refinery and save cost of freight. This is the business model I believe the Dangote Refinery has adopted.
What do you think the Federal Government should do to assist private investors in petroleum refining?
The Federal Government should urgently fix the numerous governance, institutional and policy shortcomings in the oil and gas sector. The sector should be completely liberalized and deregulated. Safety net could be provided to protect the vulnerable groups. There should be accelerated development of mass transit programmes to reduce dependence on road transportation. Provision of concessionary financing to support investors in refineries.
Some people believe that there are cabals who are determined not to allow Nigeria become self-sufficient in petroleum product refining, what do you think government should do to break their strongholds?
I do not believe in the cabal theory. What is important is for the leadership of the country to demonstrate the will to reform the sector. The government should be completely disconnected from the sector operations. It should be completely private sector driven. Regrettably, the government is yet to demonstrate the craved urgency of reforms in the sector. The PIB is not driven with the desired speed that it deserves. The current situation with the oil and gas sector is one of the major shortcomings of the present government. Unless, the reform takes place it will be difficult to unlock the huge investment potentials in the sector. We need the political will to make this happen.