Dangote Refinery needs $3bn working capital amid difficulty procuring Letters of Credit

Dangote Refinery, owned by Africa’s richest man Aliko Dangote, is cash strapped and needs at least $3 billion for working capital to procure adequate crude feedstock supply.

This financial situation could significantly impact the refinery’s liquidity and profitability, three trading sources familiar with the matter have disclosed.

“The amount invested in working capital is typically substantial in proportion to total assets, highlighting the importance of having these funds and utilizing them efficiently,” an industry source told MoneyCentral.

BP, Trafigura and Vitol met Dangote in Lagos and London, earlier in the year, to work out an agreement on loans for some $3 billion in working capital the refinery needs to buy large amounts of crude, Reuters reported.

The oil traders had asked the refinery to repay any extended loans with fuel exports but so far no deals have been signed. Dangote has also met state-backed firms in his search for cash to no avail.

Refineries have large working capital requirements which constitutes a significant use of liquidity and intra-month changes in working capital needs can be large because payments for crude and customer payments for products are not perfectly aligned.

Changing crude prices can further exacerbate the swings in working capital, trading sources told MoneyCentral.

●Difficulty with LC’s amid dollar shortage

In general, an oil refinery needs to buy crude oil one or two months before the start of the production process, while final product sales are carried out after the discharge and processing of the crude oil.

This time difference can lead to differences between the cost of crude feedstock and the income from the sale of products called crack spreads. These differences are due to fluctuations in the prices of crude oil and products during this time gap.

Sources have pointed to currency weakness and limited access to US dollars as challenges for Dangote Refinery amid difficulties with procuring Letters of credit (LCs) to fund crude purchases.

A letter of credit is essentially a financial contract between a bank, a bank’s customer and a beneficiary. Generally issued by an importer’s bank, the letter of credit guarantees the beneficiary will be paid once the conditions of the letter of credit have been met.

This has led the Dangote Refinery to attempt to barter refined products for crude which was rejected by some suppliers, leading to delayed deliveries of crude to the refinery as a result of alleged payment disputes.

Two tankers carrying WTI Midland experienced over month-long wait times before discharging at the refinery in May, with Chinese supplier Petrochina reported to have refused payment for its crude cargo with refined products, according to a report by S&P Global.

An apparent reluctance to supply the refinery was confirmed by a trader who said a ‘Domestic Crude Oil Supply Obligation’, included no “absolute requirement” to deliver crude to the domestic market if it was not commercially prudent.

● Fitch downgrade, low margins highlight liquidity problems for refinery

According to S&P Global Ratings, an oil refining and marketing company with a “strong” scale, is typically characterized by a combination of: Large refining capacity (usually at least 500,000 bpd)l; having at least three different refineries, and the company is not overly reliant on any one asset to generate cash flow; a geographically diversified asset base; a high degree of complexity and value-added product mix; and downstream integration from an established midstream or retail network.

By this measure the Dangote Refinery passes just one major criteria which is scale, a second oil trader told MoneyCentral.

Fitch Ratings last week downgraded Dangote Industries Limited (DIL) due to significant deterioration in the group’s liquidity position, financial underperformance compared to its prior expectations, local currency devaluation, and lack of contracted backup funding to refinance maturing debt related to the syndicated loan raised to finance construction of Dangote Oil Refining Company (DORC).

“The EBITDA contribution from DORC has been far below our previous projection,” Fitch said.

The downgrade makes it more expensive for the Dangote Refinery to borrow to augment its precarious working capital position.

The Dangote group’s consolidated EBITDA margin is projected to dilute from 33% in 2023 to 9.1% in 2024 due to the low-margin refinery business, which began operations in February 2024, according to Fitch.

The 650,000 barrels a day Dangote oil refinery will also be ramping up just as global refining margins fall from historic highs adding to another layer of uncertainty for the $20 billion project.

Refinery margins are shrinking amid new capacity additions at the same time as electric vehicles and heavy trucks fueled by LNG are growing in popularity in China, the world’s top oil importer.

The refining industry’s problems have shown in most recent company earnings. Chevron Corp. missed estimates largely on weaker refining. France’s TotalEnergies also fell short of estimates as a result of weakness in its refining business.

Phillips 66 revised down its estimates for utilization rates and will bring forward planned maintenance. The biggest US fuel maker by market value, cited softer margins as the rationale for its reduced output projections.

●NUPRC says cannot cancel IOCs licensees, refutes accusations of weak enforcement

For the feedstock portion that the Dangote Refinery is able to get from within the country, sources said the Nigerian government is supplying Dangote at a margin of $0.5 per barrel.

One contentious issue is that Dangote is trying to get the regulator to persuade the International Oil Companies to supply him crude but the IOCs have little spare capacity because they have Production Sharing Contract (PSC) with the Nigerian government.

The petroleum industry act or PIA, is also based on a willing buyer and willing seller arrangement. This means the product must be available, and the parties must agree on the price in line with Section 109 of the PIA, which deals with the National Crude Oil Requirement of Refineries.

Despite this, the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) says it has facilitated the supply of 29 million barrels of crude oil to the Dangote Petroleum Refinery.

“The Commission as part of its commitment to ensure the enforcement of section 109 of the Petroleum Industry Act, 2021 which provides among others, the domestic supply of crude to local refineries on a ‘willing buyer, willing seller’ basis, has ensured that Nine refineries are supplied crude despite low crude oil production,” it said over the weekend.

Dangote Refinery itself has acknowledged that NNPC supplied about 60 per cent of the 50 million barrels it lifted.

Oil producers for their part have told the regulator NUPRC that oil production is funded through pre-export financing. This means that crude has been pledged for funding and the whole transaction is guided by the ‘Doctrine of the Sanctity of Contracts’.

The parties already agreed that the licensees would pay the cost of the development and they explained to the commission that most of the funding was provided by traders at a mutually agreed price.

Aside from that, producers equally reported some operational challenges on the part of refiners.

“In fulfillment of the NUPRC mandate to enforce Section 109 of the PIA, the NUPRC has ensured that international standard practices are followed in a manner that will not scare investors and further worsen the already weak revenues from crude oil,” the NUPRC said.

“In pursuit of its mandate, if it becomes necessary for the NURC to withdraw licenses, the commission will do so but it will not resort to the ‘presumptuous and arbitrary’ withdrawal of licenses because of ‘Sanctity of Contract.”

[Culled from Money Central]