The Dangote Oil Refinery, Africa’s largest oil refinery, may soon face a deep financial crisis as a result of a $7 billion debt burden, indicating that the project could be taken over by the Assets Management Corporation of Nigeria (AMCON).
The Dangote Refinery is an oil refinery under construction in Lekki, Nigeria, owned by the Dangote Group.
The Dangote Group, founded by Aliko Dangote, Africa’s richest man, is a Nigerian multinational industrial conglomerate with interests in a variety of sectors in Nigeria and across Africa.
According to a Money Management Series analysis, the Dangote Oil Refinery, a 650,000-barrel-per-day (BPD) integrated refinery project under construction in the Lekki Free Zone of Lagos, Nigeria, was set to start production in 2016 with $3.3 billion in financing secured in 2013.
Dangote Group’s debt to financial institutions is expected to reach $8.4 billion by 2025, with the refinery expected to start operations in 2025.
This debt burden has now risen to $7 billion, with debt servicing costing nearly $700 million per year.
The refinery’s completion date has been pushed back eight times.
While some may argue that this is out of character for Dangote Industries and their numerous projects in various industries, the problem is systemic.
Poor planning, underpayment of contractors, and a lack of proper project management with over 40 contractors on site, according to a contractor at the delayed refinery project who spoke on the condition of anonymity, have caused the majority of the delays. He also stated that none of the 40 are willing to be commissioned because there is no clear delegation of duties and over-decentralization, resulting in complete chaos.
With the constant delays, some financing banks have already called in their loans, fearing a liquidity crisis, while others are ecstatic at the prospect of huge interest payments once the refinery is operational.
Dangote has been able to restructure the facilities from various local and international banks twice so far, but most banks have flatly refused to do so a third time, with principal repayment and annual interest payments due.
The Nigerian National Petroleum Corporation (NNPC) has contributed $3.8 billion to the project as part of the federal government’s 20% equity stake, with $1 billion in cash and the remaining $2.8 billion in crude supply.
Analysts have pointed out, however, that the Dangote refinery is overvalued at $19 billion due to NNPC’s 20% equity of $3.8 billion.
When Aliko Dangote unveiled early refinery plans in September 2013 and announced that he had secured $3.3 billion in financing for the project, the refinery was expected to cost $9 billion, with $3 billion coming from the Dangote Group and the rest coming from commercial loans, with production starting in 2016.
However, due to the refinery’s relocation to Lekki, excavation and infrastructure preparation did not begin until 2016, and the planned completion date was pushed back to late 2018.
The refinery is expected to be mechanically complete in late 2019 and commissioned in early 2020, according to Dangote, who started major structural work in July 2017. Experts, on the other hand, believe that the project will take at least twice as long as Dangote has stated, with refining capability not expected until 2025.
Meanwhile, Timipre Sylva, Minister of State for Petroleum Resources, reiterated last week that the Federal Executive Council (FEC) had approved the NNPC’s purchase of a 20% minority stake in the Dangote Petroleum and Petro-Chemical Refinery.
While briefing State House correspondents after the virtual FEC meeting presided over by Vice President Yemi Osinbajo at the Presidential Villa last Wednesday, Sylva stated that the acquisition cost $2.76 billion.
“The Executive Council also approved the NNPC’s $2.76 billion acquisition of a 20% minority stake in the Dangote Petroleum and Petro-Chemical Refineries,” he said.
Industry observers have described this development as unusual because $2.76 billion is less than 20% of the Dangote project, which is valued at $16 billion by the sponsor. Analysts have expressed dissatisfaction with the disparity between the project’s value and the NNPC’s funding, based on the $16 billion value.
Mr. Johnson Chukwu, the Managing Director of Cowry Assets Management, told MMS Plus that the banks would not face any challenges in funding the Dangote refinery because Dangote would be responsible for the interest payments.
“I don’t believe the banks will be unable to meet their liquidity needs as a result of the Dangote refinery funds. Finally, if the investment is financially viable, it should be able to pay off the debt when it begins operations. I believe the banks involved in this project were aware of some of these constraints and did not use their balance sheets to fund the Dangote refinery. I don’t think any bank will face liquidity issues as a result of their investment in the Dangote refinery. If there is a problem, it will be caused by Dangote, but it should be resolved once the project gets off the ground,” he said.
Chukwu speculated that NNPC may be looking at an enterprise valuation while the other value could be the net value when it comes to the possibility that it over-valued or under-valued the project in its 20 percent equity.
“The enterprise value of the project could be higher than Dangote’s investment. However, because I was not involved in the decision-making process, anything I say will be entirely speculative,” he explained.
Despite the Nigerian government’s strong support for the refinery project, the billionaire’s finances have deteriorated to the point where even income from his other businesses may not be enough to cover the interest rates, let alone the principal.
The $8.4 billion debt represents 75% of Dangote’s $11.1 billion net worth, and Africa’s richest man now needs to find creative ways to keep his business afloat as the refinery project continues to be delayed.
