Nigerian Refineries: Challenges and the Privatization Option

Warri-Refinery

Warri-RefineryNigeria’s minister of Petroleum Resources, Diezani Alisson Madueke, while speaking in London, United Kingdom in November 2013, stated that the country’s four refineries owned by the Federal Government will be privatized by the first quarter of this year 2014 to enhance efficiency, ensure maximum output and adequate installed capacity by the new owners. This is as a result of the nation’s continued quest to solve the problem of inadequate refined petroleum resources in the country since 1960.

Since the above commitment by the minister, nothing tangible has been done towards the realization of this plan as the refineries are still being run by the government despite the huge investment potentials from the private sector to resuscitate them. By now, it would have been expected that the refineries should have been bided for and possibly transferred to private operators as they have been non-operational under government control despite the claim that it is operating below capacity. The cost of maintaining the refineries, their current capacities per day/output and the justification why they must be privatized are the things we shall look into briefly here.

It will be recalled that oil was discovered in commercial quantity in Nigeria in 1958. Since then, efforts towards the provision of petroleum products to Nigerians through the indigenous effort of the Nigerian National Petroleum Corporation (NNPC) has proved insufficient as the nation’s four refineries have been operating below installed capacities despite huge funds pumped into it by the government through numerous Turn Around Maintenances (TAM) and other efforts and financial inputs made towards the resuscitation of the almost dead refineries.

It is also important to state that Nigeria, with a population of almost 180 million people definitely has high energy consumption requirements and also with the level of growth we have witnessed in the socio-economic facet of the country, Nigeria is the greatest  investment hub in Africa as stated recently by Barack Obama the President of the United States. With the Gross Domestic Product of the country which is ranked highest in Africa, huge FDI flowing into the country, the booming micro, small and medium scale Enterprises; it becomes imperative that adequate energy requirement should be met to sustain some of these reforms. Though, I will not dwell so much on power, there is however a great correlation between power and petroleum products and the later can actually be converted to the former which is a core requirement for a thriving real sector of any economy.

In order to understand some of the challenges facing our refineries, the Central Bank of Nigeria (CBN) in its recent Report stated that Nigeria’s four refineries with a combined installed capacity of 445,000 barrels per day (bpd), operates below installed capacity as the refineries operated at an average of 31.1 per cent of installed capacity in 2012. If one is wondering why they produce below installed capacity; the KPMG Oil and Gas Report of 2014 gave some hints. The Report states that problems of therefining industry on the continent of which Nigeria is part of include corruption, theft of petroleum products, poor maintenance and other operational challenges.

Corruption in the downstream sector which was exposed during the subsidy probe can be seen as one of the reasons why our refineries are not working as the petroleum marketers prefer importation thereby making the refineries comatose. It was very visible during the probe that some of the companies that took money for subsidy never imported refined products and till date some of the directors are still at large, with the funds unaccounted for no thanks to the lingering cases in our courts which has made it impossible for the culprits to be brought to book. It is widely known that some officials of the NNPC are part of this problem as the oil dealers are believed to always settle, sort or bribe the refinery operators.

The funds used in Turn Around maintenance (TAM) annually does not contribute to any meaningful progress in terms of capacity boost in production or in the output ofthese refineries. So, we can easily deduce that the funds enter into private pockets hence it is seen as part of the national cake. Sincerity by the operators would have enabled the government to know what to do with the refineries since efforts at revamping them has proved unsuccessful. It is however also very obvious that the only escape is for the refineries to be privatized of which might not go down well with members of PENGASSAN and NUPENG whose fear on job loss by its members will definitely wage a war against this.

The United States Department of Energy through its statistics arm, the Energy Information Administration (EIA); in its February 2014 Report, states that Nigeria emerged as the largest and second- largest importer of United States kerosene and jet fuel respectively. The Report showed that Nigeria imported 864,000 barrels of US jet fuel in February, rising from 292,000 in January. Nigeria has imported a record of 11.58million barrels since October 2013.

 

The case for private refineries/privatization

The only remedy to the nation’s energy challenges is to privatise the refineries and the justifications are not farfetched. In the Nigerian National Petroleum Corporation (NNPC) Annual Statistics Bulletin, the sum of N122 billion was used in 2011 on refinery maintenance which never produced to installed capacities as the refining output fell between 2011 and 2012 from 24 percent to 22 percent. A BusinessDay Report also stated that Nigeria spent about $30 billion in 5 years maintaining refineries.

It will be recalled that Olusegun Obasanjo, former president of the country had approved the sale of the refineries before he left office but late President Umaru Yar’ Adua reversed it because the process lacked transparency. In November 2012, President Goodluck Jonathan recommended that the refineries be sold as a result of inadequate finance and under-performance.

This call is still strong today as it seems to the only way the energy needs of the country can be met. The fears of the unions in the oil and gas sector must also be addressed as they had argued that privatization is a ploy by the government to award the deal to its cronies. This is an opportunity for all to believe in the Bureau of Public Enterprise (BPE) whose Director General has assured all that only visionary and competent investors would be considered in the privatization process.

A strong merit of privately run refineries is that corruption and unaccounted funds which are usually the norm in government owned refineries will be minimized if not totally eradicated. Secondly, a private refinery will source its funds and ensure that its operations are balanced for efficient service delivery and profit making too as such companies will not have access to pool of government funds as practised in government owned establishments.

Third, a private sector led refinery will be cost effective, efficient due to market forces and competition and be more transparent in its dealings. The government stands to gain more through tax, enhanced foreign exchange, increase in employment, reduction in the cost of refined petroleum products, reduction in corruption evident in the oil and gas sector and minimise the dependence of importation of refined products.

I firmly believe that that the relative success we have seen from the privatization in Telecommunication sector can be replicated in the refineries and power sectors if well managed.

 

*Eze Nwosu is a writer and analyst on business and energy related issues

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