A Review of the Nigerian Energy Industry

Nigeria deliberately limits oil refining capacity – Exclusive

Refinery at night*Single largest source of drain on Forex
*Odds against private refining

Chuks Isiwu

18 October 2013, Sweetcrude, Lagos – NIGERIA’s domestic crude oil refining capacity may have been deliberately limited over the years by successive management of the Nigerian National Petroleum Corporation, NNPC, and the Ministry of Petroleum Resources to perpetuate the interests of a petroleum products imports cartel.

Owing to the limited domestic refining capacity, the International Monetary Fund, IMF, projects that Nigeria will this year spend $15.898 billion or N2.54 trillion on importation of petroleum products, while SweetcrudeReports investigation reveals that another $6 billion or N960 billion will be spent on fuel subsidy.

Cumulatively, both expenditure accounts for the largest single drain on Nigeria’s foreign exchange earnings.

But even as hapless petroleum product consumers in the country struggle to come to terms with the Ministry of Petroleum Resources and NNPC’s deliberately contrived poor management of Nigeria’s crude oil refining capacity, the odds stacked against domestic petroleum refining continues to mount.

Under the President Olusegun Obasanjo administration, hundreds of millions of dollars was voted for the supposed rehabilitation, albeit turn-around-maintenance of the Warri, Kaduna and Port Harcourt – old and new – refineries. These refineries have a combined installed capacity to process 445,000 barrels of crude oil per day.

However, these NNPC refineries are currently unable to process up to 100,000 barrels per day prompting the ministry of petroleum resources to resort to a programme it christened ‘Crude oil Swap’.

Under the ‘Crude Oil Swap’ programme, the government licensed some oil marketing companies to lift portions of the crude oil originally earmarked for domestic refining by the NNPC, export same for refining abroad and to import derivatives.

Five companies licensed under the ‘Crude oil Swap’ programme get 210,000 barrels per day which they export and are supposed to bring back derivatives.SweetcrudeReports investigations however reveal that these companies export the crude oil they lift but don’t bring back commensurate volume of derivatives.

Each year, millions of dollars is voted by the NNPC and approved by the Ministry of Petroleum Resources, for the supposed maintenance of the refineries which have perpetually failed to function optimally.

Two years ago, Diezani Alison-Madueke, Nigeria’s Minister of Petroleum Resources, disclosed that the contractors who constructed the refineries had been contracted to restore same refineries to optimal performing standard, but, today, there is absolutely nothing on ground to show for the millions of dollars voted for the contracts.

Odds against private refineries
Due to limited local refining capacity, the nation spends billions of dollars yearly on fuel importation, money that would have been invested in-country had the nation’s currently existing four refineries been operating optimally.

Industry observers point to the capital flight that fuel importation has imposed on Nigeria as one of the reasons local refining of petroleum products is a must for the nation. With a population of over 160 million people, local fuel consumption is estimated at over 40 million litres per day. Analysts say the large population and huge consumption strongly support local refining.

It is obviously against this background that the Olusegun Obasanjo administration in 2002 granted licence to 18 investors to build and operate private refineries. Eleven years after, however, none of the refineries has taken off the ground.

“Those in the fuel import cartel know that the private refineries cannot become reality for now and that so far as this is so they will continue to be in big business. They also need for the government-owned refineries to continue to operate below capacity,” a source said.

The industry regulator, the Department of Petroleum Resources, DPR, in its latest update on the private refineries, affirmed that none of the private plants was anywhere near completion.

According to the recent update on the status of some of the refineries on the DPR website, many of the refineries are yet to make meaningful progress. Six of them which had seen initial progress as far back as 2009 are yet to commence construction. The agency reported, for instance, that the 27,000 barrels per day capacity mini-conversion refinery, owned by Antonio Oil, commenced civil and structural works on site in 2010, but has up till present not progressed further. No further work has also been done on the “modularised” 1,000 barrels per day diesel-extraction plant in Ogbelle, Rivers State, owned by the Niger Delta Petroleum Resources, after it began installation of units of the plant in 2009.

On the other hand, the 100,000bpd refinery owned by Sapele Petroleum Limited in Okpe-Sobo, Sapele, Delta State, appears stuck after completing configuration and marketing studies in August 2010 while work on the 100,000bpd capacity refinery in Ikot Abasi, Akwa Ibom State, promoted by Resource Petroleum & Petrochemicals International Incorporated in Ikot Abasi, Akwa Ibom State, remains at the design basis.

DPR further stated that Rehoboth Natural Resources Limited which was granted license in 2008 to construct a “topping (hydro-skimming) 12,000bpd capacity refinery” has not firmed up the project execution strategy even as it “works at retrieving commitment deposit”, disclosing that lack of financing has stalled progress at the 100,000bpd Amexum Corporation refinery in Ikang, Cross Rivers State.

“The problem is lack of policy clarity on the part of government. There is no clear direction as to which way we are going. The other issue is fiscal – difficulty in securing financing and pricing in a regulated regime,” an investor in one of the licensed private refineries who craved anonymity toldSweetcrudeReports.

Indeed, the odds against the private refineries are myriad, most of them bothering on policy. There is the unresolved matter as to how much the private refineries would purchase raw crude from the NNPC and at what price they would sell given Nigeria’s regulated downstream petroleum sub-sector.

“Funding is the immediate problem confronting the refineries, but the bigger issue relates to how the refineries will operate after completion. It is yet to be resolved how they would operate under a regulated market. Are they (operators of refineries) going to be buying crude oil at prevailing international market prices? Is the government going to subsidise their crude? If the government is not going to subsidise your crude, and the market remains regulated after you finish building your plant, of what relevance is your plant to you? It all means you will be buying your raw material at very high price and then you are expected to sell at lower price. That’s not business because a business man is in business to make profit, even if it is going to be very marginal. This is a major problem,” a promoter of one of the refineries observed.

He added: “The coast is not clear yet. There is no clarity in the water we are swimming. I can tell you this is the greatest fear of investors in the refinery business in Nigeria. Even those you are approaching for financing are wary of the problem, and so, no matter how convincing your proposal appears, they would not lend you a dime. If there is clarity on this issue, the funding will come and we will have our private refineries. The question is whether the government has the necessary courage and commitment to make this happen.”

On completion, the new private refineries would also have to grapple with the problem of pipeline vandalism which has in the past seen crude supply to the Warri, Port Harcourt and Kaduna refineries cut off, thereby crippling their operations. There is no sign yet of a possible end to this practice, meaning that private refineries will not be spared this agony when they begin to come on stream.

Apart from the 18 licensed private refineries, the Federal Government had three years ago reached an agreement with Chinese investors to build three greenfield refineries in Lagos, Kogi and Bayelsa States. An agreement on the sourcing of funds for the construction of the refineries and a petrochemical plant was later reached with the China State Construction Engineering Corporation Limited in May 2011.

Last year also, the government reached another agreement with a partnership of a private United States and Nigerian companies for the construction of six modular refineries in the country at a cost of $4.5 billion. The refineries were expected to be in place in 30 months, each processing 30,000 barrels of crude per day, making a total of 180,000 barrels per day.

Industry observers lauded this development, saying 180,000 barrels of crude refined locally would mean the nation, at least, had a foothold to begin to build its local refining capacity on. Sadly though, like the 18 licensed private refineries, these efforts are yet to materialise due mainly to the same unresolved issues hampering the licensed private refineries.

Dangote joins the fray
Amid the uncertainty over the fate of the private refineries and the unresolved problems working against them, business mogul and Africa’s richest man, Alhaji Aliko Dangote, announced plans earlier in the year to join the petroleum refining fray.

Luckily for the renowned businessman, financing may not be a hindrance to the successful execution of the Dangote Refinery project, to be located in Olokola in Ogun and Ondo States. He has already put together the required funding for the project through a consortium of banks.

But putting the funds required for the project together successfully might not guarantee a 100 per cent success for the project. Industry watchers fear, for instance, that the problems hindering the successful construction and take-off of the other private refineries would still hit the Dangote Refinery.

Some pessimists insist that the planned refinery, which recent funding signing ceremony was attended with fanfare and pageantry, was merely political and that it was designed to give credit to the Jonathan administration in terms of attracting investment ahead of the 2015 elections. Proponents of this theory say the project, planned to come on stream in 2016, would not see the light of day if the issues hampering the take-off of the other licensed refineries are not resolved. Indeed, the fear is that pursuit of this project would be abandoned soon after the 2015 elections.

A source close to the highly successful business man, however, maintained that the project has nothing to do with politics.

“Forget about that. Business is business, and politics is politics. He (Dangote) can’t be playing with his money. He is putting his $9 billion on this project and someone is talking about politics. He is not a politician, he is a business man,” the source said.

On how the managers of the new project plan to deal with the problems associated with private refineries, he revealed that the business man had done his homework properly before deciding to take the plunge. “He has done his homework and he is determined. He has succeeded where people gave him little chance,” the source stated as he stressed that Dangote would make a success of the refinery business and that the project would be saving huge foreign exchange for Nigeria on take-off.

On the issue of pricing as it affects the regulated domestic market, he said the Dangote refinery would not concentrate on the domestic market but would seek market opportunities outside the shores of the country. He said: “The market for petroleum products is huge. We can’t be targeting the Nigerian market alone. We should be thinking of exporting some of our products. That’s what Nigeria needs. This will go a long way in saving foreign exchange for the nation. We all know how much we spend on fuel importation as a nation. It’s quite huge and that’s what Dangote Refinery would be saving for the nation”.

Indeed, Alhaji Dangote himself calculates that the plant would on take-off in 2016 make Nigeria self-sufficient in fuel consumption, thereby saving the nation the huge funds it spends annually on fuel imports.

No alternative to local refining – Experts
With Nigeria importing almost the entire volume of its 40 million litres daily fuel requirement, analysts insist that boosting domestic crude oil refining capacity is an option the Federal Government should pursue as a matter of urgency.

Rather than spend scarce foreign exchange to fund fuel importation, the establishment of local refineries would ensure Nigeria is self-sufficient in fuel, in addition to growing the national economy, the GDP and creating employment, they say.

Mr. Babatunde Ogun, president, Petroleum and Natural Gas Senior Staff Association of Nigeria, PENGASSAN, would want the government to grant incentives that would encourage the establishment of private refineries in the country.

According to him, fuel importation, orchestrated by the inadequate local refining capacity, has increased the hardship on Nigerians.

He is of the view that besides the local scene, markets equally exist in the West African sub-region and across Africa, which Nigerian refiners could tap into.

“Market exists across Africa. Ghana, Angola and other countries may be producing oil, but they themselves are still net importers of petroleum products. This means that the market is there,” he said.

Besides providing direct incentives to investors, he advised the Federal Government to assuage the fears of investors by “bringing clarity to bear on the process and modalities for the establishment of private refineries”.

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