25 February 2014, Sweetcrude, Port Harcourt – Illegal oil refineries in Nigeria thrive on illegal oil bunkering, stolen crude oil, and vandalism of oil pipelines and other installations. Without a doubt, these illegal oil operations are reprehensible and should not be condoned for a number of reasons. Firstly, it is improper for citizens of this country to destroy oil installations in their bid to steal crude oil as feedstock for illegal refineries. Secondly, it is lawless to set up any kind of refinery without going through the licensing process with the relevant government agency (Department of Petroleum Resources, DPR). Thirdly, it is most inappropriate for anybody, Nigerians or Foreigners, to steal crude oil belonging to the Nigerian State with impunity. Finally, and perhaps the most worrisome is what the illegal oil refiners do with the residue (black oil) from crude oil distillation process. There are serious environmental issues involved regardless of whether they dump the ‘black stuff’ into the river or simply incinerate it.
I recently had a thought-provoking discussion on the issue of illegal refineries with Prof Goddy Igwe, the Director Centre for Gas, Refining & Petrochemicals, University of Port Harcourt. However, on further reflection I realized that there may be a few positive lessons to be learnt from these illegal oil operations. First lesson: there is a significant imbalance between our projected refining capacity and existing capacity, such that it has become very tempting to boil crude oil in drums knowing that there is a guaranteed market for the petroleum products (which they usually sell as diesel, AGO). Second lesson: small-scale (modular) refineries could be profitably sited close to oil flow stations and terminals. So, I thought that it may be unwise for government to ‘throw out the baby with the dirty bath water’.
BIG CAPACITY REFINERIES VERSUS MODULAR REFINING FORMAT
The capital outlay for any 100,000 barrel per day (bpd) refinery is about $1.5 billion, while a 24,000 bpd modular refinery is roughly $250m. Therefore, it is easier to access funds for the modular refining modules (through US Ex-IM Bank). The manufacturing time for plant, equipment and machinery for a plant of 100,000 bpd capacity is within the range of 3-4 years. Start-up for modular refineries of 24,000 bpd is within 18-20 months. The modular system allows the plant to be expanded to 100,000 bpd capacity in structured increments. The increments can be funded with the cash flows from phase 1 and additional phases, and so the refinery will not incur additional debt for the expansion. The expansion of the modular plant capacity can be done without shutting down production from existing equipment and plants. This is not the case with big capacity refineries.
Revenue streams and pay-back periods are faster with the modular refining format, than with the larger capacity refineries. The major short-coming with modular refineries are that the plants are semi-automated and less labor-intensive, i.e. not many jobs can be created directly. For instance, 20 to 30 personnel can operate a 24,000 bpd modular refinery. Most of the spin-off jobs created are of a secondary nature, and based on the location of the site.
In summary, modular refineries are simple, efficient and fast to start up. Such refineries usually operate at optimal capacity at all times. The relatively small investment cost allows for private investors to enter the refining business much easier. It also enables government to build the bigger capacity refineries using the modular format, but in incremental stages. However, government- built modular refineries should have full conversion facilities (i.e. catalytic reformers and naphtha hydrotreaters) to enable the refineries produce PMS.
A NATIONAL OIL REFINING MODEL WORTH CONSIDERING
There is a current over-reliance on government- owned refineries. Nigeria can also adopt a refining model that relies on modular refineries (built and operated by private investors) that will produce all refined products with the exception of petrol (PMS). The implication is that the modular refinery operators will not have to invest in catalytic converters and naphtha hydrotreaters that are required to convert naphtha to petrol. These equipments are capital intensive and complex. Therefore, the exclusion of such facilities in a modular refinery plant will further reduce the cost of set-up. This will enable the modular refiners to focus on producing diesel, marine diesel, dual purpose kerosene (DPK), aviation turbine kerosene (ATK), and low-pour fuel oil (LPFO).
On the other hand, NNPC refineries can focus on PMS production and become essentially transformed into PMS complexes instead of full conversion refineries. In this case, NNPC refineries will buy all the naphtha feedstock from the modular refinery operators and convert these to PMS. Other products that NNPC refineries can produce will include fuel oil, bitumen, asphalt, and petrochemicals. Based on 60% capacity utilization, NNPC refineries have the capability to process 20.3 million litres of PMS per day. These national refineries can add another 13.8 million litres per day if they are converted into PMS complexes, and thus satisfy the nation’s immediate PMS production needs. Once this target is met, the national refineries can be prepared for privatization to enhance further growth.
The major downside to this proposed model of refining is the transport cost of moving naphtha from each modular refinery to the NNPC PMS complexes. To mitigate the transport costs, modular refineries can be strategically located near the source of crude oil feedstock and the NNPC PMS complexes.
ROLE OF GOVERNMENT
The Federal Government of Nigeria can ensure success in the following ways:
Guarantee crude oil feedstock to each modular refinery operator for at least 10 years.
Guarantee a domestic crude oil price for local refining that is indexed to benchmarked price of crude oil for the yearly budgets.
Invest in PMS process equipment at the ailing national refineries to enable the refineries process naphtha into petrol.
Guarantee to purchase all naphtha feedstock from each modular refinery, and refine as much PMS at NNPC refineries as possible.
The business of crude oil distillation should be privatized as soon as possible, because the importation of refined petroleum products for local consumption is too paradoxical to say the least.
*Dr Chijioke Nwaozuzu, a petroleum policy expert contributed this article from Port Harcourt. Email: firstname.lastname@example.org.