A Review of the Nigerian Energy Industry

We’ve been selling products below cost with subsidies – Phil Chukwu

2 November 2011, Sweetcrude, Lagos – Mr. Phil Chukwu, the group executive director in charge of refining and petrochemicals at the Nigerian National Petroleum Corporation, NNPC, is a focused and driven man. Before his current posting at the corporation, he had occupied other portfolios including that of group general manager, NAPIMS, group executive director, exploration and production, among others. In this interview with Hector Igbikiowubo and Clara Nwachukwu of Sweetcrude, he speaks passionately about how the refineries fell into disrepair, plans to rehabilitate them and restore production to 90 per cent installed capacity. He talks about the need to position the refineries to operate in a deregulated environment, among other issues.
Can you give us an update on the state of the four refineries – the two in Port Harcourt, and the ones in Warri and Kaduna?
Let me first of all say that we see the refineries as three refineries because Port Harcourt has two refineries in one – so we talk about the 210,000 barrel refineries in Port Harcourt.
In Kaduna, we have a refinery and a petrochemical plant attached to it. Actually, in Kaduna there are two plants – the fuels plant which uses Escravos Crude, and there is the Lubes plant, which uses imported heavier crude. Also, there is the LAB, which uses some of the products from these refineries to produce linear alkaline benzene, which is a raw material for detergents. From this also, we produce base oil from the Lubes plant for lubes, wax for candles etc. So in Kaduna, you may be talking about three separate plants – the fuels, the lubes and the LAB. Then the tin and drum is for packaging.
In Warri, you have the refinery, and then the petrochemicals – the PP or clean plant as it is called and the carbon black plant as well, so you also have about three of them.
You can now see how complex these refineries are and for us to have the full benefits of these investments, we must have all of these units work. Unfortunately, over time, the refineries have not been operating optimally, they are not doing well, and we are doing very poorly.
I believe, if I may say that even though we can do about 60 percent, that is the inlets or DCUs- Crude Dispensing Units, if they can take about 60 percent of the name plate capacity, even though we can do that, the other units also have issues because they are not producing optimally. Therefore, you find that the yield slate we have is not being achieved in the refineries. This is because of many years of not investing in these refineries.
Although we have invested, we’ve done some turn around maintenance, but you find that these are usually very far in between. Instead of doing them in three year cycles, we wait till sometimes 10 years and more. So, many things have happened and what we are trying to do today is to look at the problems from different angles. We look at the plant itself, the different ones I have mentioned, we also look at the supply chain because crude comes from the fields and tank farms into the refineries. They go through pipelines and all that and when the petroleum products are produced, they also go through pipelines into depots, tank farms or hauled by road to where they are needed. These are all areas we must look at.
Then the third bit of the problem is the people. How have we been operating these refineries, do we have the necessary skills to achieve the objectives of these refineries. So we look at the plants, we look at the supply chain and then we look at the people. So, in our rehabilitation efforts, we are going to address these three key elements.
And how far have you gone with tackling any of these problems?
The programmes have started, we call it refineries rehabilitation programme. For instance, the Port Harcourt initially started with a turn-around programme, and they’ve gone as far as placing orders for long lead items, and we have also visited some of the contractors because what we are doing is that those who built the refineries will be the ones to do the jobs for us. We have understanding with Technimont that was proposed by JGC.
JGC is unable to come for several reasons – there is a Japanese Government’s advisory that Japanese companies should not come to the Niger Delta. So that is an issue, and we’ve visited them in Japan trying to make them understand, and the Ministry of External affairs is assisting us in this respect. So we are trying to convince them so that the Japanese Government can change their advisory from a high alert level, to maybe a moderate one so that these people can come. But the situation today is that they are unable to come. But they said they will work with Technimont, who has been partnering with them all around the world. So Technimont will be there to work, with JGC in the background.
For Kaduna, Kaduna was built by Chyoda, and Chyoda is going to come and they have agreed to come, even though they are Japanese as well, but they are not going to the Niger Delta, which is where they have an advisory. Chyoda have agreed to come, we were in Japan and we met with them and we are working at how we can come to an agreement for them to come.
For Warri, we have Saipem, which is the successor of Snamprogetti, who built the refinery. Snamprogetti has been acquired by Saipem, so it’s a unit of Saipem; they are ready because they are on ground in Nigeria so we don’t have a problem with them.
So all three contractors have been identified, we are also engaging NETCO, working with Technip, an internationally renowned company with a lot of experience in refinery work and they will act as consultants to NNPC. NETCO and Technip have formed a consortium, but NETCO is leading and they will now act as consultants to us. We have started going round the refineries to gather data, do the inspection and auditing, gather all the data, scope the work, schedule it and do the cost estimates, prepare all the documentations for negotiations with the afore mentioned contractors.
So we’ve gone along this route and we are currently engaging with NETCO and their partners to ensure that we wrap up agreements with them. But before then, they have already started work and their proposal is with us and we are in the process of negotiating with them.
Going back to Port Harcourt and JGC, in the event the advisory is not vacated, what happens, or do you have an alternative arrangement in place?
Let me assure you that Technimont is a very competent company, they’ve worked for us in that refinery and they partner with JGC all across the world, so they don’t have an issue. Actually, it was JGC that suggested we work with them and we believe that they have all the competences required. They even worked on the Eleme Petrochemical Company.
We also know that the Port Harcourt Refinery over the years has been bedeviled by electricity supply issues, is there any plan to tackle that problem head on?

Yes, we have two initiatives – one is to refurbish the existing electricity supply system, which is the steam turbine. The problem we have there is because of the water quality producing steam to drive the turbines. So we are fixing that. But the main plant, which removes all the minerals from the water, we have a contract in the process and once that is concluded, they will award contract for the placement of a mini plant, which produces the water, which goes to the boiler and from the boiler, you have steam that drives the turbine. So, this system is being worked on.
The second system is where you have a reliable power generation system just like you have in Warri, to have a gas fired generator. In that case what we are doing is, we are talking to two companies and as soon as we conclude, in fact, the papers are going to be considered in GEC, if the GEC meeting holds today, we will look at what has been proposed, select the best one and begin to work with them to install a turbo generator inside the compound in Port Harcourt. That will be an alternative to the existing system.
This doesn’t sound too salutary an alternative considering the issues we have with gas, so how will it play out?
We don’t have that many issues with gas because there is already a gas pipeline that comes into the Port Harcourt refinery. The volume of gas required is something like for 30 Megawatts power generation, so it won’t require that large volume of gas. Already there is a pipeline taking gas across that area and all we need is to key into the refinery.
The interventions or programmes you have mentioned so far appear to be moving at snail speed, which is usually the case with executing policies in Nigeria?
The snail speed you’re talking about, let me tell you that in engineering projects you don’t just jump into it, you must plan properly else, you’ll have problems in implementation and that is what you must avoid. If you want it to happen today, it’s not going to happen. When our consultants finish their work, then you’ll know the proper time schedule.
We are looking at three elements in the implementation. The first one is to revamp the refineries the way they are today in the immediate short term. We look at the refineries, there are things that need to be replaced, some cleaning up and all that and we’ll do that. The next stage is the upgrade; you’ll agree with me that in the time we are talking about 25-30 years that these refineries have been there, technology has changed, and if technology has moved on, you need to also adapt to new technologies. So we the upgrade segment, after the initial revamping, you have the upgrade and if subsequently you want to expand these refineries, you can go ahead and refine them. These are some of the things that we hope to do.
The first bit is to revamp the refineries, clean them up, change the parts that are rusty to make it more efficient, but it remains the way it is. Then you go to the upgrade side, this will increase the efficiency because we are introducing the latest technology in refining, then the final stage is if we want to expand the refineries. But we are not talking about that now. These are the things we plan to do and our schedule will address the first part – revamping, and then address the second one, and we take them in stages like that.
In order to address this concern, can we look at the time line, how soon do you expect a feedback from your consultants?
Let’s not look at my consultants because what we have or the directive we have from thee management – the minister and government is that we will do the Port Harcourt 1 for one year, the other one we will do for two years. The Port Harcourt 1 like I told you, we’ve already ordered for the long lead items. I personally went to Japan to speak to some of those who manufacture these components, so went to their offices one by one. We spoke with them and got agreement with them on when they can bring them in. the actual bit of during the time when they will actually do the work on ground will be say during a two month or three month period. What you have is from now to probably August-September will be for the manufacture of spares and equipment that we need and once they arrive, the actual work of installation and integration will commence immediately.
We have been given one year and we are trying to work within one year, but the revamping bit, if we now need to move ahead, then that is another segment of the work. Our objective at the end of the day is to achieve about 90 percent of the name plate capacity for Port Harcourt and all other ones. Today, Warri is the best that we have.
But you see, one of the problems we have in Port Harcourt is that it is the new Port Harcourt that we will address during this phase. The old Port Harcourt is really in totally bad shape and that one will be included in a longer term work and this will come in with the upgrade because you have to really go into it and do detail work in order to upgrade it to a standard where it can produce on the basis of the name plate capacity.
For the purposes of clarity, the 90% you’re looking at is for Port Harcourt 2, the 150,000 barrels?
Yes, the 150,000 of the new Port Harcourt. The old one has not been functioning for a very long time, therefore a lot more work needs to be done there. Port Harcourt is doing 66% as at yesterday. But you have to understand also that the FCC – Fluid Catalytic Cracking unit has not been working because of power issue. So once the power issue is solved, in fact, they are trying to bring back the FCC today.
A little more clarity, if you say the refinery is doing about 66%, yet the FCC is not working, how is that?
The explanation is that the CDU that is the unit that brings in crude and when refineries report their performance that is what they report. The other units will take input from the CDUs and other units to function; the FCC gets it raw materials from the VDU and then processes it. So what the FCC does is to increase the volume of PMS that you are producing. But in reporting the 90% I am talking about, is from the CDU, what the refinery can take in at any particular time. So now it is now our responsibility to ensure that these other units function optimally so that whatever is passed into them is also processed.
In real terms, the refineries supposedly get 450 000, barrels per day, what volume of this are you able to process?
I’ve given you an average for all the refineries, if you talk about an average of 60%, it will be 60% of 450,000. But this fluctuates because it is not that at any particular point in time you have just that same volume, it could be higher, it depends on how the refineries are functioning. But the issue with the refineries in terms of the restrictions of the crude you pass into it, is not because the refineries are not functioning all the time. There are other issues. There are the issues of bringing in the crude, sometimes, you are processing and the crude line is broken. You process what you have and if you finish processing that, you have to wait.
In sum, when you are looking at the average, you are doing lower than what you expected to do, and that is what the issue is. A lot of problems associated with the refineries come with the availability of crude.
Let us look at another level of the problem, the limited authority in terms of approval limits the managements of the refineries enjoy are rather small, has this been addressed?
That has been addressed. The federal Government has changed the level of financial authority for most of the ministries, departments and agencies and we have adopted that. Today, the approval limit at the refinery is substantially more than what it used to be in the past. So I don’t see that as a problem.
Given your explanations, it appears the turn-around maintenance will take longer than anticipated?What we are doing is rehabilitation not turn around. Rehabilitation is more of TAM + because you have to do a lot more. TAM is a routine thing, but this time around, we are not talking about the routine because when we should have done Port Harcourt, we are talking about several years back. Now we are trying to do it and in addition to that, we are talking about all the others like power system, the de-bottlenecking of the FCC.
When the Port Harcourt refinery was built, it was originally designed at 100,000 p/d, then I think there was a plan to build another refinery in Calabar, but that one failed, so government decided they should increase the Port Harcourt to 150,000 barrels. But in increasing it to 150, 000, the FCC unit was not increased. Recall also that the old Port Harcourt refinery was just a topping refinery but it didn’t have FCC, it had to also use the existing one. So you have to de-bottleneck it this time around. You have to increase its capacity or you add another unit that will handle it to increase the volume that it has to take. So the work on ground is beyond turn around maintenance.
Given these scenarios, from a layman’s point of view is it not just better to build new modular refineries?
No, I don’t agree. Having a modular refinery will be very small and I don’t see a company like NNPC going to have smaller refineries. But if we refurbish this one, we will do that at a cost that what you will spend here cannot even build one refinery. Do you know how much it will cost you today to build a refinery of this capacity? You’re talking about a combined 445,000 bpd refinery; it’s going to be a huge cost if you decide to build new ones. Why don’t you spend a fraction of the money you would have used to build this one up, do the technology upgrade. We have experts who have looked at them and can do it.
We are also looking at the market, the market in Nigeria today is different from the market in Nigeria when some of these refineries were built. Therefore, the question is, when experts look at it, am not saying that is what will be done, but we can reconfigure the refineries to produce more of the products desired in this market than products that probably we can’t handle.
Let’s take Kaduna for example, when it was designed, it was designed to produce asphalt, but how do we evacuate it, have we been able to successfully evacuate it. Yes, asphalt is needed in the country but since we have not been producing, have we not been using asphalt in the country?
These are some of the things we have to look at, we have to look at the market, what does the market want? And we must be able to address the issue. These are some of the issues we are carrying out studies on and we hope at the right time we should be able to say we can do this to the refineries or leave them the way they are. But some of the will need twitching here and there, and I gave the example of the Port Harcourt Refinery.
I also want note the situation in Warri, where there is a PC- Petrochemical plant, it has not worked for over 12 years and we hope that during this exercise we will be able to bring it back to life because it is also going to be a money earner for us.
This brings us to a grave concern out there, which is part of what has brought the refineries to where they are today with regard to the frequent policy shifts in government and management. Won’t you say the NNPC will be better off partnering with the private sector for greater efficiency and less interference from government?
Let me first of all say that the policies regarding refineries in Nigeria have been very consistent in the sense that there is hardly any government in Nigeria that does not desire optimum utilization of the capacity of the refineries, it has always been the same. They want the refineries to run well, they want them produce at optimum levels.
Once this is done you may say that in implementation, there is scarcity of funds because there are competing needs in this country so if the funds are not there and the money is not invested at that time, we have this kind of problems occurring. So talking about policies, the policies have been very consistent.
Secondly, am here today, am pursuing a policy of rehabilitating the refineries to make sure that the refineries are working at least 90% of their capacities, it is not just me but something being driven by the management of the NNPC and the government – the minister up to the president. They desire it and want this to happen. Why? From a selfish point of view, if we don’t do it, then we will b out of business tomorrow. If there is deregulation tomorrow and we are not able to do it we will be out of business, if we continue to produce at a higher cost, as an efficient organization, we should be able to sell below my costs; if I do that there will be no market for me. In the long run, I won’t even be able to refurbish my refineries, so these are some of the things that happened because the business structure was really such that we’ve been selling below costs with subsidies and all that, it distorts the market and we are unable to run a refinery in a business manner. And that is what deregulation will probably introduce and if we don’t do well, we’ll just phase out. So it is very important that we fix these refineries, from the NNPC’s point of view and bring it to the level where we are very competitive.
Then when you are talking about joint ventures, I believe it is beyond me, it is government’s decision on what they want to do because they own the assets. If they decide tomorrow that they want to do it then they will.
Would you then say the NNPC and the refineries are prepared for deregulation?
That is what this programme is all about, it is geared towards making the refineries efficient and if the refineries are efficient they will be able to compete effectively in a deregulated environment. For us to be competitive and bring our refining costs to a level comparable to refineries across the world, then we should be able fix tem, once this is done, the products prices will be competitive as well.
You raised a critical point about costs of your output; it’s contentious out there, because there are arguments that since the crude oil is here, the refineries here, the cost of producing a litre of petrol is relatively cheaper?
Let me explain that the way it is today, PPMC buys the crude from government at the international market price. It is PPMC that sends this crude to the refineries, the refineries process it for the PPMC, which takes its products and sends it to the market. For the refineries, what they earn is the processing fees from PPMC. That is the structure on ground today.
But we are looking at a structure where the refineries can buy their own crude, process and sell. This is happening in other places. I went to France to see how they are organized. They have what they call refining and marketing. They process their crude and sell the products. We are not running that today and we are looking at it. This is what was proposed in the PIB, where the refineries will buy their own crude, process it and sell to off-takers and that is an option we are looking at.
So you find that PPMC also has a lot of issues, lines are vandalized, they lose a lot of the crude before it gets to the refineries and same thing when the products are produced before it gets to the end users. They carry the burden of these losses. If they eliminate these vandalism and all, the costs will be lower.
I don’t know if this is still part of the PIB, it was proposed that the refineries will have a structure where they will become refining and marketing companies and take over most of the functions of the PPMC and a new company will be established to manage the pipelines such that when you use the pipeline, you pay a fee for it and it will be open for all users.
So why were all these not done before full deregulation?The question has been asked that can we survive deregulation. And the answer is that the way we are today, no. For us to survive we must look at how can we make the refineries efficient. If you look at manufacturing in Nigeria, it is done at a very high cost, no matter which sector you are looking at –m with having to provide their own power and other facilities and the refineries are not an exception.
Earlier on we were talking about how to give power the Port Harcourt refinery, you can’t rely on PHCN for power you have to build your own power plant and when you do this and buy gas and other inputs your costs will be higher than the ordinary power supplied by PHCN.
So for us to survive, we must move away from our current production levels of 60% and the fact that some of the units downstream are not functioning very effectively, so we must fix them. In fixing them, it is not a one-day thing, it is something that must be planned properly – gathering data, doing feasibility studies, scoping, doing the design and all and at the end of the day you are guaranteed the time when you finish and you are also guaranteed your costs.
But if you don’t do it very well, you are bound to mid-way start to go here and there, trying to solve problems that should have been solved before you started. This is what we are doing today, engaging those who must work with us and ensure that this thing works, those who have done it before. By the initial studies carried out, by March next year, we must begin to see changes for Port Harcourt. For the other refineries for the ones the items that we need to order, we have placed the orders so that by the time the ground work begins we have prepared everybody. We need also to address the skills of the workers, such that in upgrading the plants we are also upgrading the skills of the people.
To this end we are planning to establish a refining school where people both old and new will be trained and gradually over the years they will be going back for retraining. It’s going to be hands on, to sharpen their skills, and improve health safety and environment knowledge so that they won’t burn down the refineries accidentally. Those already there today, we need to give them top up training, because when people have been in a place for too long there are certain behaviors they acquire which are not right. You need to correct that and you can only do that through training and retraining. These are what we are doing
I also mentioned the supply chain as the third element, if we don’t get the crude, say you pass in 445.000 bpd to the refineries and you lose 20% of this then you are not efficient. So there are integrity and security issues. Integrity in the sense that are these facilities solid and in good shape or because of old age have lost their strength and therefore can be burst anywhere and lose the products passed through them.
The other is security, are we able to secure the pipelines and whose responsibilities are they? These ought to be addressed and once this is done you can be sure that when you pass in crude and get 99.9% into the refineries, your costs will be much, much lower. Same thing if you’re sure that you don’t lose your products, so the costs we are talking about today will be reduced. All these are parts of the costs that we incur in product losses along the pipelines.
What about local content input in all of these?
While talking about the refineries I mentioned all the contractors for the various refineries, I believe Nigerian content is also important. What we are doing is that because these companies built the refineries we decided that we invite them back for the big project. They know what it takes, they have the designs. In fact, when I went to Japan I met people who had fabricated some of the components for Port Harcourt and immediately they remembered and brought out drawing for Port Harcourt and gave to me. So that is the advantage of taking these people.
So for the Nigerian content, we are producing a list of local contractors who are competent and who have been working in these refineries and we are going to ask them to sub-contract to these international companies where they have competence. This is one thing we are consciously doing to promote local content.

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