Dangote Refinery IPO Hopes Face Oil Sourcing Headaches

Nigeria's Dangote Refinery is set to raise around $5 billion in Africa's biggest IPO listing yet, expected to take place in October. The refinery has been boosted by strong earnings due to the disruption caused by the Iran war, and is planning to double its capacity within three years.

However, investors are concerned about Dangote's ability to avoid squeezing profits while sourcing enough crude oil. Rob Thummel, senior portfolio manager at Tortoise Capital Management, said that if Dangote relies solely on Nigerian oil, it increases the risk of the refinery as an investment.

The refining industry has benefited from higher profits since the Middle East disruption increased demand for alternative sources of fuel. Dangote was well-placed to meet demand across Africa and beyond, reaching its initial maximum capacity of 650,000 barrels per day in February.

But sourcing crude oil is a challenge. Much of Nigeria's state oil firm NNPC's joint-venture crude is tied up in loans and pre-export deals, reducing the amount available for Dangote. David Bird, chief executive of the Dangote refinery, said imports account for 30-40% of crude intake.

Importing crude from other countries, such as the US and Guyana, can be expensive due to prices being set in dollars. This increases costs and compresses margins, impacting the refinery's commercial performance and valuation.