A Review of the Nigerian Energy Industry

Why fixing refineries can save Buhari’s economic plan

22 June 2015, Lagos – If reports at the weekend are anything to go by, the Transition Committee set up by President Muhammadu Buhari, to among other terms of reference, advise his government on “quick fixes” which will result in tangible, visible and practical measures, has recommended that the country’s refineries should be privatised and fuel subsidies removed.
NNPC refinery, PH.
NNPC’s Port Harcourt Refinery

The recommendation is reform-minded and is in lockstep with several analysts, within and outside the oil sector, who for years have advocated the privatisation of the refineries and full deregulation of the petroleum downstream sector.

Even the Petroleum Industry Bill (PIB), which was first drafted by the administration of former President Olusegun Obasanjo and sent to the National Assembly, provides for the deregulation of the downstream oil sector, privatisation of the refineries, and establishment of regulatory bodies responsible for enforcing the relevant sections of the legislation.
However, the recommendation to sell the refineries is not a “quick fix”. For one, the unions in the Nigerian National Petroleum Corporation (NNPC) and its officials who have abused the inherent loopholes in the subsidy regime, would move against it.
They were instrumental to the pressure that was brought to bear in 2007 on the late President Umaru Musa Yar’Adua, who reversed the sale of the Port Harcourt and Warri refineries to private investors just before his predecessor left office. The same unions threatened again to embark on strike in 2013 when the Jonathan administration toyed with the idea of privatising the refineries.
A “quick fix”, by this we mean in the short to medium-term, pending the passage of the PIB, will be for Buhari to ensure that the refineries are functioning at 60 to 80 per cent of installed capacity so that at least 50 per cent of the country’s petrol requirement is produced locally.
It is estimated that Nigeria consumes some 35 million to 40 million litres of petrol a day.
Fortunately, investigations undertaken by THISDAY have shown that the Kaduna, Warri and Port Harcourt refineries have been gradually rehabilitated and are in working condition, but have been starved of crude oil by the past Petroleum Minister, Mrs. Diezani Alison-Madueke, whose preference was to continue the crude oil swaps and Offshore Process Agreements (OPAs) with local oil traders.
Buhari must stop the swaps and OPAs that take up the 445,000 barrels of crude oil meant for domestic refining. Through the swaps, several billions are lost in under-delivered petrol cargoes, among other base products, that are not delivered by the traders.
Besides, by importing all of the nation’s fuel requirements, we export jobs overseas and considerable pressure is placed on Nigeria’s meagre foreign reserves, as the import bill on petroleum products alone accounts for 30 per cent of foreign exchange demand in the forex market.
If crude oil is made available to the refineries, the demand for foreign exchange will be halved, several thousand of jobs will be created locally, and the savings made thereof will accrue to the Federation Account for onward sharing by the three tiers of government, which are in dire need of funds to pay salaries and meet other pressing obligations.
Moreover, at the prevailing price of crude oil at slightly over $60 dollars per barrel, in-house computations by THISDAY arrived at N87 per litre as the price of petrol, ex-refinery gate. In contrast, the landing cost of one litre of imported petrol as computed by the Petroleum Products Pricing Regulatory Agency (PPPRA) was N120.86 as at June 18, 2015, resulting in a differential of N33.86.

The savings that could be made by halving our importation of petrol to 20 million litres a day would therefore be N677.2 million ($3.4 million) a day or N247.2 billion ($1.236 billion) per annum.
But a caveat must be added: it would be foolhardy if the government feels that it can rest on its laurels just because the refineries are functioning today. Like all plants, the turn-around-maintenance and procurement of spare parts for the refineries must be carried out as and when due.
If this means granting the refineries some semblance of autonomy that would enable them to retain a certain percentage of their margins for this purpose, then this should be given consideration by the federal government. However, this should not be viewed by the management of the refineries and NNPC as a blank cheque to circumvent due process and the Bureau of Public Procurement (BPP) in the contracting process for the maintenance of the plants.
Another “quick fix” available to Buhari is for him to seize the golden opportunity presented by low crude oil prices to fully deregulate the prices of petrol and kerosene. With full deregulation, the incentive to defraud the system by oil marketers shall no longer exist.
Deregulation will also provide the enabling environment for the eventual partial privatisation of the refineries in 12 to 24 months time, hopefully by which time a decision would have been reached on the methodology to be used for the sale of the plants, and perhaps shares in the plants set aside for the staff of NNPC.
But before the federal government gets to that point, the labour unions must do away with needless sentiments over the ownership of the refineries. Eleme Petrochemicals Company, once wholly owned by NNPC, is a testimony that government can be grossly inefficient at running purely commercial concerns.

Today, Eleme is a highly profitable company that not only pays dividends to its shareholders, including NNPC, but generates foreign exchange for the Nigerian economy through exports.
There could be no better example for any union with the best interest of the country at heart.

– Ijeoma Nwogwugwu, This Day
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