By Chibuzor Alli
The Dangote Petroleum Refinery has said a potential decline in crude oil prices after the end of the ongoing US-Iran war would not directly reduce its profitability, as returns are driven primarily by refining margins rather than the absolute price of crude.
Vice President of Dangote Industries Limited, Devakumar Edwin, gave the assurance on Friday as the refinery seeks to attract investors through its ongoing initial public offering.
Edwin spoke during a media tour and briefing at the refinery, where he addressed concerns that a fall in crude prices could affect the value of investments in the facility.
“The crude price will not directly have an impact on profitability. Because, let us say, you are a trader. You are importing stationery and selling. You want to have a 20 per cent profit margin. Whatever your import price is, you will add the 20 per cent and keep your profit margin.
“So, your import price is not going to affect your profit margin because you are focused on your margins. So, the same way, when the crude price goes up, our product’s price will go up. When the crude price comes down, the product’s price will come down,” he stated.
Edwin was responding to questions about how a possible end to the US-Iran conflict could affect crude prices, the refinery’s earnings and returns to shareholders.
War-related supply disruptions lift refinery margins
The Dangote executive said the ongoing geopolitical crisis could temporarily increase the refinery’s profitability, but attributed this to disruptions in refined petroleum product supplies rather than higher crude prices.
He said some refineries were unable to operate at full capacity because of difficulties obtaining crude, while refineries in the Middle East were also unable to maintain their usual supply of refined products to the market.
“But, during the war, there could be a little bit of extra profitability now. It is not because of crude, but because product movement is affected. So, irrespective of the crude price, the product price still goes higher because of a shortage in the market.
“Some of the refineries in the Middle East are not able to operate fully because they are not able to get enough crude. Also, all the products that used to come out from the Middle East are not getting into the market. So, there will be an extra profitability for this period,” Edwin stated.
He said the additional gains from the disruption would eventually ease but maintained that the original $20bn investment in the refinery had been based on projected returns.
“The extra profitability will go down. But when we made the investment of $20bn, we made our own calculation. How much is going to be our profit? How much will our returns be? So, we are on target as far as that is concerned,” he said.
Dangote promises dollar dividends
Edwin also told prospective investors that Aliko Dangote had committed to paying dividends from the refinery in foreign exchange.
Addressing concerns that the current N525 share value could decline after the company is listed, he said the business expected investors to benefit from value appreciation and dividend returns.
“As a company, we believe that there is going to be a very good value appreciation. There will be very good returns in terms of dividends. And my president has even declared that the dividends will be in foreign exchange, in dollars,” Edwin said.
He said the refinery’s export earnings would generate the foreign exchange needed to support the proposed dividend payments.
“As I said, 50 per cent is going into exports. Now, the new refinery will let 100 per cent go for export because we are already exporting half of our production. As for the new refinery, practically everything will have to be exported. So foreign exchange generation is going to be huge. That is why he was able to give the assurance that we will be paying in dollars,” Edwin added.
Refinery IPO targets wider Nigerian ownership
The assurances came as Dangote seeks to bring millions of Nigerians into the refinery as shareholders through its IPO.
Edwin said Dangote Industries deliberately chose to offer shares after the refinery had been completed, commissioned and operated for a period, rather than seeking equity while the project was still under construction.
According to him, this means prospective investors are buying into an operating business with an established financial and operational record.
“So what we are achieving is that none of the shareholders is taking any risk,” he said.
Edwin said the company had released its first six months’ operational results, giving prospective investors information they could assess before committing funds.
He added that the Dangote Group had historically followed a model of completing major projects, commencing operations and generating profits before taking them to the public market.
He also advised individuals considering the IPO to carry out their own assessments before investing.
“But you, as an individual, when you are putting your money, you can always do your own evaluation,” he stated.
Refinery expansion targeted for completion in three years
Edwin disclosed that the ongoing expansion of the refinery was expected to be completed within three years, although the company could finish the work sooner.
He said the expansion would cost slightly less than the original refinery project because several major infrastructure facilities were already available.
These include the granite quarry, welding gases plant and port facilities, which would not need to be developed from scratch.
The company is also seeking to lower engineering and design costs because much of the expansion will replicate infrastructure already used at the existing refinery.
“But at the same time, we are also adding petrochemical sites, we are adding linear alkyl benzene, and we are adding up a propane dehydrogenation plant. So that will be the additional cost. But overall, there will be a slight reduction in cost compared to the first strike,” he stated.
Edwin said all necessary licences had been secured, while basic engineering had been completed and almost all detailed engineering work had been concluded.
He added that most equipment had already been ordered, with contracts signed and advances paid.
“We are at that stage where we have practically gone very far. So we are targeting three years. And probably we may be even doing faster than that,” he said.
Refinery weighs economics of fuel blending
On fuel blending, Edwin said the refinery could blend intermediate products when it had spare processing capacity, but would favour direct crude processing where that generated better returns.
He cited naphtha as an example, explaining that the refinery could use spare capacity in some units to convert it into gasoline.
“If I have an extra capacity sitting idle. I can bring naphtha and then convert it to gasoline. So, I am adding value by filling that gap,” he said.
However, he said importing products specifically for blending would not be commercially viable if the refinery could produce the same products directly from crude.
“If I am going to bring products only exclusively for blending, by cutting down my operation, it will be foolishness, because I will be losing money. I would rather produce my products from crude, because my production margins will be more profitable,” Edwin stated.
He said blending would therefore be used when spare processing capacity made it commercially attractive.
“But where I have some extra capacity, I will take advantage by blending. But those refineries that are more closely focused on blending, they have no other alternative,” he said.
Dangote targets 10 million refinery shareholders
Edwin said the decision to list the refinery was also motivated by Dangote’s objective of widening ownership of the business among Nigerians.
The group has set a target of attracting at least 10 million shareholders, which he described as an unprecedented level of participation in the stock market.
“That is why we went a little bit faster, and our focus was to bring in at least 10 million shareholders, which has never been done in the history of the stock market in the world,” Edwin said.
He said the minimum subscription was deliberately set at N5,250 to enable people across different income levels to participate.
Dangote refinery employees were also given an opportunity to buy shares during the private placement, he said.
“Almost all the people in the refinery who know what it is, they all become shareholders, including me,” he said.
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