Analysis – Nigerian oil refinery Dangote could accelerate European sector decline

Authors: Ahmad Ghaddar and Robert Harvey

LONDON (Reuters) – Analysts and traders say Nigeria’s giant Dangote oil refinery could end the decades-long, $17 billion-a-year gasoline trade from Europe to Africa, putting pressure on European refineries already facing closure due to intensified competition.

The refinery started production in January at a cost of $20 billion to build. It can refine up to 650,000 barrels per day (bpd) and will be the largest in Africa and Europe when it reaches full capacity later this year or next.

This has long been seen as a turning point in Nigeria’s quest for energy independence. Nigeria is Africa’s most populous country and largest oil producer, but it imports almost all of its fuel because of a lack of refining capacity.

Kpler data shows that about a third of the 1.33 million barrels a day of average gasoline exports from Europe in 2023 went to West Africa – a larger share than any other region – with the bulk of these exports going to Nigeria.

“Losing the West African market will be problematic for a small group of refiners who do not have the tools to upgrade their gasoline to European and U.S. standards,” said Eugene Lindell, head of refined products at consulting firm FGE, referring to the more stringent environmental standards in other markets.

Kpler analyst Andon Pavlov believes Europe is at risk of closing as much as 300,000-400,000 barrels per day of refining capacity due to rising global gasoline production.

A European refinery executive, who asked not to be named, said coastal refineries geared towards exports would be more exposed, while inland refineries were less exposed because they depend on local demand.

“These changes will not happen overnight, but could ultimately lead to the closure of refineries and their conversion into storage terminals,” he added, referring to the difficult market situation.

Pavlov said the Grangemouth refineries in the UK and Wesseling in Germany could close ahead of schedule due to a looming gasoline supply glut later in the year and the associated pressure on refining margins.

Petroineos Chief Executive Franck Dema cited the energy transition, which is causing falling demand for fossil fuels, as one reason for his company’s decision to close Grangemouth next year. Shell said the decision to close Wesseling next year was part of efforts to reduce carbon emissions.

Petroineos did not respond to a request for comment, while Shell declined to comment on whether the plant could be closed ahead of schedule.

A DUST-BURNING SECTOR

Some 30 European refineries have closed since 2009, while some 90 plants of varying size and complexity remain in operation, according to refining industry organisation Concawe.

The plant closures have been driven by competition from newer and more complex plants in the Middle East and Asia and, more recently, the impact of the coronavirus pandemic.

According to data from consulting firm IIR, Europe has lost 1.52 million barrels of oil per day since 2016, which now amounts to 13.93 million barrels per day.

The largest declines occurred in 2021 and 2022, when falling demand due to the COVID-19 pandemic forced closures.

European refineries do not produce enough diesel to meet the region’s demand, while they produce too much gasoline and are dependent on exports to make up for the excess supply.

West Africa has long been a major buyer of gasoline that does not meet Europe’s stricter environmental limits on sulfur and metals.

According to Argus Media pricing data and Reuters calculations, the value of this trade was $17 billion in 2023.

The Dangote refinery, funded by Africa’s richest man, Aliko Dangote, was configured to produce as much as 53 million liters of gasoline a day, about 300,000 barrels a day.

The drop in imports from West Africa will coincide with new environmental regulations in northwestern Europe that will force plants to reconfigure, seek new markets for lower-quality gasoline or close plants.

Plants with the funds to restructure could redirect gasoline exports to the United States or South America, said Yaping Wang, senior refining analyst at Kpler.

But modernizing refineries is also difficult because banks are reluctant to lend money to fossil fuel projects.

“Even if you find a bank that will finance a European refinery modernization project, interest rates will be too high to make the project successful,” said an executive at a large U.S. bank that lends to oil companies.

(Additional reporting by Dmitry Zhdannikov and Ron Bousso in London and Isaac Anyaogu in Lagos; Editing by Dmitry Zhdannikov and Elaine Hardcastle)