A Review of the Nigerian Energy Industry

Making modular refineries profitable


07 October 2015, Abuja – Nigerians await the coming on stream of modular refineries, operators and stakeholders in the petroleum sector have emphasized the need for a clear commercial framework, proper logistics, deregulation of the downstream sector and certain government guarantees.

They argued that without these, investors will face difficulties in recouping their investments, while the country will not achieve any meaningful benefits from the refineries.

President Muhammadu Buhari had in the wake of his administration granted licenses to investors to build 65 modular refineries in the country. This was after previous licenses issued by past administrations failed to yield any positive results, as only one, Niger Delta Petroleum Development Company, was able to install a modular refinery.

Stakeholders, however, attributed the success of the Niger Delta Petroleum refinery to the fact that it produces only automotive gas oil, AGO, popularly called, diesel, which is not a regulated commodity.

Commenting on the ways to make modular refineries profitable to investors and beneficial to Nigeria, Mr. Chijioke Nwaozuzu, a Professor of Petroleum Engineering, University of Port Harcourt, River State, emphasized the need for government guarantees to investors that it is possible to recoup investments made in private refineries.

He further said the government must guarantee 100 per cent crude oil system for refiners for at least 10 years.

Continuing, Nwaozuzu said: “It is a no-brainer that these are capital-intensive projects and most of the risk capital required can only be sourced from abroad. Such huge foreign loans need to be backed with guarantees and I am not certain that the licensees can afford these guarantees. So, government may need to step in to provide guarantees for the foreign loans required by the domestic companies to construct these private refineries.

“Another point is that government has to guarantee 100 per cent refined products off-take by government. The way refineries work is that they work continuously for two years, then the refinery is shut down for routine maintenance and it runs for another two years. Products are constantly being produced on a daily basis and these products have to be evacuated from the storage tanks to the markets.

“So, if government does not guarantee that these products that are refined on daily basis are taken by PPMC, which is the relevant subsidiary within the NNPC, then, how can our refiners operate? It means if the products are not off-taken, they keep shutting down and refineries are not built to be shut down like electric pumps.”

Also speaking, the Chief Executive Officer, International Institute for Petroleum, Energy Law and Policy, IIPELP, Mr. Timothy Okon, argued that the commercial framework needs to be right. According to him, no one can get financing to build a refinery and then sell the product at less than the cost of the crude.

Okon, a former executive of the Nigerian National Petroleum Corporation, NNPC, said: “The economics of refining is an important discussion to have, so let us be sure that the commercial framework for refineries, whether they are modular or not, are quite clear and they deliver. No one wants to invest in something and get less revenue from it. The economic basis for modular refinery has to be clear for sustainability.”

However, he warned that, “We need to be careful about government guarantees and etcetera, because, again, we do not want to go into a position where government now acts like a businessman. Every business involves some risks and people should run economics properly to be able to get the financing based on a sound project proposal. Government cannot step in to be providing risk cover for every normal business.

“Refining petroleum products is a normal business; it is done all over the world. There is nothing unique about refining in Nigeria, and we just need to get the commercial framework right. Government being the guarantor of every business risks, we need to be careful with that because again, it would end up being another subsidy scheme that we cannot afford.”

Similarly, the Chairman, Board of Trustees, Society of Petroleum Engineers, SPE Nigerian Council, said: “It would be very unwise for anybody to go and apply for license for a modular refinery without doing all the basic economics and engineering. You must put these things together. Nobody is going to put his money on the table for you without some sound feasibility studies.

“There is also the issue of the environmental impact. There must be controls, because if there are no controls, we might end up like the ones in the swamps. With modular refineries, there are standards and controls you cannot beyond. There are all kinds of things you put in place, so it is not a question of go and do it and pollute the place.”
*Michael Eboh – Vanguard

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