Most Nigerians will be surprised to learn that the small West African Francophone country Togo, with a population of 8.1 million, half the population of Kano State – and no crude oil reserves has quietly emerged as a regional hub for refining crude oil and exporting petroleum and diesel.
This revelation-which escaped Nigerians, came when the Dangote Refinery reported that Nigerian oil marketers were importing diesel from Lomé Togo and boycotting its diesel. Arbiterz checks have revealed that Lomé, the capital of Togo is host to well-capitalised oil marketers who import crude in huge volumes and export petrol and diesel to destinations in Africa and Asia.
As we revealed in our explainer piece, Dangote Refinery had chosen to sell its diesel to these major players who buy very large volumes and have the financial muscle to pay in dollars. Nigerian marketers have much less operating capital and buy low volumes, an effect of the domination of the oil and gas distribution system in Nigeria by the state-owned Nigeria National Petroleum Company Limited (NNPCL)
This situation raises a crucial question: how did this small city become a center for refined petroleum distribution, and what does this mean for Nigeria’s oil sector going forward, especially with Dangote Refinery’s entry into the market?
The Dangote Refinery and Nigeria’s Oil Crisis
The Dangote Refinery, a project owned by Aliko Dangote, represents a huge shift in Nigeria’s oil landscape.
Located in Ibeju-Lekki, Lagos, the refinery is set to become one of the largest in the world, with the boast of producing a capacity to process up to 650,000 barrels of crude oil per day.
Its objectives were to end Nigeria’s reliance on fuel imports, provide hope to ordinary Nigerians, and resolve long-standing problems in the nation’s oil industry.
Corruption, enormous subsidies, and inefficiencies have long plagued the nation’s oil sector.
For over a decade, the government’s fuel subsidy program was used to keep petrol prices low for the average Nigerian. However, the subsidy resulted in substantial financial losses for the government and is a major source of corruption.
Fuel imports, despite Nigeria’s vast crude oil reserves, have been necessary due to insufficient local refining capacity—a problem the Dangote refinery wishes to solve.
However, the refinery’s entry into the market has revealed the competitive dynamics at work, particularly its ongoing rivalry with Lomé.
Togo’s 2022 Petrol and Diesel Exports
In 2022, Togo exported over $1.07 billion worth of refined petroleum products to Cote d’Ivoire ($385M), South Africa ($179M), Brazil ($118M), Angola ($97.4M), and the Democratic Republic of the Congo ($87.7M).
It also imported products worth $10.5 billion mainly from India ($4.82B), South Korea ($2.32B), Chinese Taipei ($649M), Belgium ($484M), and the Netherlands ($438M).
In 2022, Togo’s $10.5 billion worth of petroleum imports made the country the 29th largest importer of refined petroleum in the world. You must be wondering – do Togolese drink petrol and how do they find the dollars to pay for this habit if they imported $10.5 billion worth of petrol in 2022 but exported only $1.07 billion worth of refined petroleum?
Backwardation- How Togo Became a Petroleum Powerhouse
Backwardation refers to a situation when the future (expected) price of a commodity is higher than the spot or current price. By the end of September 2020, the COVID-19 pandemic led to a lot of unused fuel being stored on ships in Northwest Europe, reaching over 23 million barrels.
After the pandemic, a lot of fuel was coming to the market, leading to fears that producers would invest in producing more crude oil which will lead to a glut and hence a fall in the price of diesel and petrol in the future. In this situation of expected low future price, it did not make economic sense to store petroleum products given the high cost of storage on ships or at offshore facilities in Europe.
Oil traders started looking for opportunities to sell refined petroleum products on the spot market or in stores where costs are lower. Traders started using Lomé, Togo, as a storage and transit point i.e. a convenient place to ship from when they find opportunities to sell on the spot market at good prices. They started sending surplus fuel from East Asia and elsewhere to Lomé.
The excess $9.43 billion of refined petroleum products that Togo imported in 2022 are products waiting in the country to find good spot market prices.
Lomé’s Strategic Advantage- Fine Preparation Meets Crude Opportunity
Lomé Port is the busiest port in West Africa. With a depth of depth of 16.60 unrivalled by any other port in West Africa, the port can accommodate high-tonnage vessels that offload cargo to smaller vessels meant for other destinations in West Africa. The port increased its cargo volumes from 300,000 TEUs in 2013 to 1.5 million in 2019. Lomé has used its strategic location and prudent investment in and management of port facilities to beat Nigeria to becoming the hub of refined petroleum distribution despite Nigeria’s advantage of having an upstream large oil and gas industry and a vast market for refined petroleum and diesel.
The Togo Free Zone, with its tax incentives and business-friendly regulations, has attracted numerous international oil companies, individual oil marketers, and even suppliers of “illegal” oil (e.g. stolen crude from Nigeria or Russia’s sanctioned crude oil) and its buyers).
The Refined Petroleum Value-Chain in Togo
Togo’s strategic position and investment in the infrastructure enable the trading of refined crude products generating many jobs-creating activities:
Blending of Crude Oil: Lomé serves as a site for blending different grades of crude oil to produce various refined products. This process helps meet specific market demands and quality standards.
Storage Facilities: The city has several storage tanks that allow the holding of crude oil and refined products. This infrastructure is crucial for managing supply and ensuring timely distribution.
Distribution Logistics: Lomé functions as a distribution center for refined petroleum products to neighbouring landlocked countries. Efficient logistics networks, including road and rail transport, facilitate the movement of these products.
Transshipment Activities: The deep-water port in Lomé supports transhipment operations, allowing vessels to transfer refined products to smaller ships for distribution to inland destinations.
Quality Control and Testing: Local facilities engage in quality control and testing of refined products to ensure compliance with international standards before distribution.
Import and Export Operations: Lomé is actively involved in the importation of crude oil, which is then refined or blended, and the export of finished products to other West African countries and beyond.
Collaboration with Oil Companies: Local and international oil companies operate in Lomé, engaging in various activities from refining to marketing, enhancing the city’s role in the regional oil market.
How Nigeria Created a Vacuum for Togo’s Refined Petroleum Products Industry
Bad policies and inefficiencies in Nigeria’s National Petroleum Corporation (NNPC) have opened up opportunities for Togo to become a hub for crude oil refining and distribution.
Five Decades’ Old Subsidy: Nigeria’s longstanding fuel subsidy programme created financial strain and corruption within the oil sector. This led to frequent shortages and increased reliance on imported fuel, prompting traders to seek alternatives in neighbouring countries like Togo and beyond.
Insufficient Refining Capacity: Despite having vast crude oil reserves, Nigeria has struggled with inadequate refining capacity due to mismanagement and a lack of investment. This has forced Nigerian marketers to import refined products, making Togo’s ports and distribution networks attractive.
Logistical Advantages: Togo’s strategic location, deep-water port, and free trade zones provide an efficient framework for the import and export of refined products. While Nigeria’s infrastructure has often faced challenges, Togo has leveraged its strengths to attract oil companies and traders.
Regulatory Environment: Togo’s more favorable business climate, with fewer bureaucratic hurdles and tax incentives, has encouraged companies to operate there. This contrasts with Nigeria’s complicated regulatory environment, which has deterred investment.
Increased Trade Activity: Togo has taken advantage of the gaps left by Nigeria’s inefficiencies to develop its refining and distribution capabilities. It has attracted traders looking to capitalize on the demand for petroleum products in West Africa.
The Impact of Dangote Refinery Petrol and Diesel on Togo’s Refining and Trading Business
The entry of Dangote Refinery into the petrol and diesel market creates opportunities and challenges for Togo. As the Nigerian market settles issues like pricing for petrol and off-taking for diesel (local marketers have to develop capacity), opportunities for exporting refined crude products will disappear. But Dangote Refinery will produce more diesel and petrol than Nigeria needs when it attains its full 650,000 barrels capacity, established oil traders in Togo with networks in West Africa and beyond will buy, store and trade DRL’s products as market dynamics dictate.
