A Review of the Nigerian Energy Industry

Dangote’s Refinery – Making the impossible possible

Refinery, PH16 September 2013, Lagos – Until penultimate Wednesday, the impression abroad in Nigeria was that establishing a private refinery in the country was impossible, with analysts citing a whole lot of political and economic encumbrances that were believed to have stifled past efforts in that direction.

Even the federal government itself didn’t effuse much optimism on wholly private refineries; rather, it signed, between 2011 and 2012, its own various deals worth between N51.8 billion and N8.1 trillion with local and international investors to construct 10 new refineries across the country. But then, admitted the Minister of Petroleum Resources, Diezani Allison-Madueke at the 2013 Oil & Gas Offshore Technology Conference and Exhibition in Houston, USA: “Government has not been able to achieve much progress, as investors have not been able to meet deadlines and progress to the next level of negotiation. No investor would want to invest in a regulated environment.”

One investor is taking up the gauntlet. To Alhaji Aliko Dangote, President/Chief Executive Officer of the Dangote Group, “Nothing Is Impossible”, as the plaque on the table ear in his sanely-appointed office in Ikoyi, Lagos State enthuses.

Two weeks ago, on September 4, Dangote once again accorded that inspirational philosophy his can-do signature when he inked a $3.30 million (about N528 billion) loan facility with a consortium of Nigerian and South African banks to underline his commitment to build a multi-faceted refinery in Nigeria. Undertaking the transaction are Standard Chartered Nigeria, Guarantee Trust Bank, Fidelity Bank, Ecobank Nigeria, Zenith Bank, United Bank for Africa, Access Bank, Standard Bank of South Africa, Diamond Bank, First Bank, First City Monument Bank and First Rand of South Africa. Standard Chartered will be coordinating the facility globally, while Guarantee Trust Bank is the home coordinator. The Central Bank of Nigeria (CBN) is also throwing into the project a N50 billion loan contribution with a 7 per cent interest rate to be repaid over 15 years.

The new Dangote initiative is an ambitious three-phase greenfield project incorporating a petroleum refinery, and petrochemical and fertiliser plants. The total cost of the three projects is put at $9 billion. Oil and gas contractor, Saipem, a subsidiary of Italy’s Eni, is already working on the fertiliser plant located in Edo State. The petrochemical and petroleum refineries plants are being situated at Olokola Free Trade Zone (OK-LNG FTZ) bordering Ogun and Ondo states. Dangote informed that the project would be the largest industrial complex ever in Nigeria.

The Dangote Group has awarded contract for the refinery and petrochemical plants to UOP, a subsidiary of Honeywell International, a Fortune 500 company and United States-based conglomerate that specialises in consumer products, engineering services and aerospace systems. The project manager is India Engineers Limited, an Indian government-owned company credited with the setting up of refineries in India.

The fertiliser plant is designed with a capacity to produce 2.75 million metric tones per annum (mtpa) of ammonia and urea. But it is in the refineries that Dangote is surpassing himself. Designed as the biggest in Africa, the petroleum refinery will have an overall production capacity of 400,000 barrels per day (bpd), while the petrochemical plant’s production capacity for polypropylene is 600,000mtpa. Slated to be completed in 2016, the petroleum refinery is expected to produce 7.684mtpa of petrol, 5.30mtpa of diesel, 3.740mtpa of jet fuel/kerosene, 0.213mtpa of liquefied petroleum (cooking) gas and 0.625mtpa of slurry/fuel oil.

The plants are being established to conform with the environmental requirements of Euro 5 quality standard, as compared with the Euro 3 currently supplied in the Nigerian market. The Euro 5 and 6 standards are the contemporary recommendations for engineering and technological products spewing gas emissions with a view to maximally eliminating those emissions and achieving environmental purity.

The Dangote initiative promises to end the many futile efforts at establishing functional private refineries in Nigeria, and more important, stem or even stop completely importation of petroleum products (ipp). Nigeria became consigned to perpetual ipp from the 1990s when production capacity gradually began to decline and import substituted export. Up till 1991 and 1992, Nigeria still earned $124 million and $156 million respectively from exporting petroleum products refined at its three refineries in Port Harcourt, Warri and Kaduna, which have a combined production capacity of 445,000 barrels per day.

But the story has since changed, with Nigeria’s refineries currently performing the poorest among the 42 in Africa. The country’s combined production capacity should have been the third largest on the continent, topped only by Egypt’s nine refineries with a combined production capacity of 774,900bpd (85 per cent of installed capacity) and South Africa’s two refineries of 545,000bpd (81 per cent). A report by the Petroleum Refineries Special Task Force constituted last year by the federal government and headed by former Minister of Finance, Dr Kalu Idika Kalu, put Nigeria’s average capacity utilization by last year at a sorry 18 per cent.

In 1995, the administration of then Head of State, General Sani Abacha moved to address the degenerating situation when it granted Brass Refinery Limited, Okpoma, Bayelsa, the first licence to build and operate a private refinery. But, as the refinery’s Project Manager, Mr. Joel Dappa, told Sunday Trust in January last year, the project failed because the conditions government gave for the establishment of private refineries were too regulated. Moreover, and more instructive, there was a cabal, Dappa alleged, benefiting from refined imported petroleum products who would not allow the local refineries in the country to work.

Since then, government has been issuing a rash of licences to private investors to build and/or operate refineries – with no remarkable results. The Idika Kalu committee identified a total of 35 firms, both those already granted licences (licencees) and licence applicants across the three categories of refinery operation. The categories are Licence to Establish (LTE), Authority to Construct (ATC) and Licence to Operate (LTO). Of all the 35 companies that the committee invited to appear before it to clarify their situation reports, only 21 turned up. The committee could not even obtain information, including contact addresses, from the Directorate of Petroleum Resources (DPR), the supervising body for private refinery projects, on three licencees that failed to appear.

Even for those that showed up to defend their licences, the committee discovered it was all paper and no refinery. Only three plants passed as functional in each of the three categories, but, of course without the capacity to impact on the nation’s consumption requirements.

Under LTO, the Niger Delta Petroleum Resources (NDPR), a marginal field oil producer, is the only private company the committee deemed as possessing a valid licence. The company then just recently commissioned a 1,000bpd refinery, producing only diesel at Ogbelle, Rivers State. The refinery feeds from NDPR’s crude oil production and the bottoms are injected back into its crude oil line. This the committee considered as an illustrious example of a successful value-chain related refinery development.

But it was one illustration that was advised should not encouraged, because of the bottoms feedback. “If such diesel refineries are quickly replicated in many places”, the committee warned, “the result will be a significant downgrading of the aggregate crude oil quality, with possible consequences on crude oil export and /or local refinery feedstock.”

The Amakpe Refinery, proposed to be sited at Eket in Akwa-Ibom State, had a valid ATC licence it had been granted since 2007. But there had been no real progress on the project due to funding constraints. Eleven other ATC licences had expired or been cancelled and the owners unable to revalidate them.

Five companies had expired LTE. But two companies, the Kainji Refinery and Omega-Butler, were by 2011, pursuing their LTE approvals. All licencees, the committee pointed out, were bedevilled by funding constraint, lack of technical depth and operational capability, and failure to obtain crude supply agreements.

Another proposed refinery that has been raising so much production hope over the past nine years is Oriental Refineries to be operated by Oriental Petroleum Resource Limited (OPRL) in Otuocha, Anambra State. OPRL was among the first batch of 18 firms the federal government awarded licences in May 2002 to establish petroleum refineries. But the company has since been struggling to overcome the funding problem.

Mid-last year, the Governor of Anambra State, Peter Obi, announced his administration had spent N4 billion on the refinery and it would be commissioned before the year ran out. But it was another commissioning dream dashed. OPRL chairman, Dr. Emeka Anyaoku has, however, given a new date. Anyaoku said Oriental Refinery would commence production by the end of this year with an initial production capacity of 20,000bpd.

As in Anambra State, Imo State indigenes have also been waiting for the Royal Oak Refinery, Abacheke, proposed by the Imo State Government in partnership with the Royal Oak Group of the United States of America. In 2009, Ben Ekwueme, the Special Adviser to the then Governor of Imo State on Project Monitoring, assured that the refinery would be completed in 2002 and would start production immediately. Sunday Trust’s inquiry last Friday to the Imo State Liaison Officer in Abuja on the extent of work on the refinery and when production would commence there could not be immediately answered by the lady official.

It is against the background of these “impossibilities” that Dangote is announcing his intervention with his proposed refinery. He described the project “the single largest individual investment since the commencement of the democratic government in Nigeria.” Unlike those abandoned petroleum refinery projects, industry analysts are not entertaining any fear of fund constraint, the major nemesis against establishing private refineries, in the Dangote Refinery.

The Dangote Group is a big toast with local and international banks in loan-financing. In 2003, the Group syndicated N60 billion multiple credit facilities from a consortium of 14 banks to restructure existing Dangote Industries Limited short-term facilities into medium-term and finance the construction of Obajana Cement, Kogi State.

And in 2010, while the construction of the Ibeshe, Ogun State cement plant was ongoing, Alhaji Dangote gathered 10 banks at the site to liquidate, in one fell swoop, a $1.27 billion loan facility he had obtained on behalf of his organisation from the financial consortium in May 2008 to finance its cement division’s expansion.

He was liquidating the loans five years ahead of schedule. The banks involved in the loan syndication were Access Bank, Afribank, Bank PHB, FCMB, Fidelity Bank, First Bank, Guaranty Trust Bank, Stanbic IBTC, United Bank for Africa, and Zenith Bank.

The $3.5 billion facility secured two weeks ago is the first tranche. The banks are waiting to avail the Dangote refinery project a second call.

This latest Dangote initiative will further jack up the Group’s over-all market profile, which has in the last five years increased 10-fold to a market capitalisation of $22 billion. The Dangote Group currently accounts for over 30 per cent of the total market capitalisation of the Nigerian Stock Exchange (NSE).

– Daily Trust

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