refinery1l

refinery1lNigeria has the third largest refinery capacity in Africa. The country boasts of an installed capacity of 445,000 barrels per day (bpd) only trailing behind South Africa with 540,000 bpd and Egypt with about 774,900 bpd. Unfortunately, Nigeria with its four refineries does not produce anywhere near this installed capacity, in fact the country’s refineries currently operate at only about 20 percent capacity. This is has occurred mainly as a result of neglect and the lack of a maintenance culture which has been the bane of every successive Nigerian Government since the 1980s.

This is despite the fact that Nigeria has routinely spent vast sums on Turn Around Maintenance (TAM) for these refineries, yet local needs still cannot be met and the Nigerian National Petroleum Corporation (NNPC) has had to rely largely on the foreign importation  of petroleum products especially premium motor spirit (PMS) to meet the daily consumption needs of Nigerians. In January 2013, the government made it known that, as usual, it would be embarking on another TAM that would gulp up to $1.6 billion and which would likely end by October 2014. However, just as it has always been, it appears nothing positive will come out of the entire process.

 

THE ARGUMENT FOR THE PRIVATISATION OF THE REFINERIES

As briefly highlighted above, successive administrations in Nigeria have embarked on costly exercises in TAM, for instance, General Sanni Abacha awarded a contract which was valued at $215 million in 1997 for the Kaduna refinery, while Abdulsalami Abubakar’s administration in 1998 also awarded $92 million for the four refineries and there was no visible impact on the refineries. Also apparently encouraged by the country’s attainment of democracy, Obasanjo during his first term in office between 1999-2003, spent about $254 million and $400.4 million alone on the repairs of refineries and pipelines. However, there is still no evidence to show that such huge amounts of money have been spent on the refineries at all. Furthermore, it is invariably clear that certain unscrupulous individuals are benefitting from the system through their influence on the award of TAM contracts each time a new government is in place.

Another potential reason behind the need for privatization is the evident gross incompetence of the government in managing the refineries. Not surprisingly, in a study carried out by the National Refineries Special Task Force (NRSTF) of 42 oil refineries operating in Africa in 2012, the four refineries in Nigeria recorded the worst performance in both efficiency and utilization capacity with an average capacity utilization of only 18 percent compared to 81 percent and 85 percent respectively for Egypt and South Africa in the period of 2006-2009. Asides from the refineries gradually rotting away due to neglect there have also been incessant fire outbreaks which have been attributed to sabotage efforts by some quarters. The refineries have gradually become obsolete over time and can no longer compete with other refineries in the developed and developing world which are built and fitted with state-of-the-art equipment. Moreso, they are not well managed like private concerns that are maintained and protected from damage that could impact negatively on the refineries in the long run. Countries such as Brazil, India, South Africa and Singapore have refineries that are managed by private firms and which are also extremely efficient. Therefore, provided the refineries are sold through a transparent process to independent private firms with the requisite capital and technical expertise, there is no reason why the same would not be possible in Nigeria’s case.

It is indeed shameful that despite her rating as one of the biggest oil producing countries in the world, Nigeria still imports petroleum products from countries like Brazil and India, which were no where on the oil map of the world when Nigeria discovered oil in Oloibiri in 1956. Absurdly, Nigeria has also been importing petroleum products from Niger, a neighbouring West African country which has a modest refining capacity of 20,000 bpd.  It is instructive to note that the Soraz Refinery in Niger is 60 per cent owned by Chinese state owned oil company CNPC and was built with $980 million (due to unforeseen costs) while Nigeria earmarked more than $1billiion for one TAM exercise on its refineries.

Furthermore, the privatization of the refineries would also go so far as to minimize the alleged corruption and mismanagement associated with the NNPC in relation to issues such as unremitted subsidy funds, the crude for petroleum products swap deals and also the hollow process that is TAM. For years, the Port-Harcourt Refinery I and II, the Warri Refinery and Petrochemical Company; and the Kaduna Refining and Petrochemical Company, have been used as conduits to cream off billions of dollars under the guise of carrying out TAM. The private sector might therefore fare a lot better in terms of transparency if given the chance to take over and maintain these refineries.

 

SOME ISSUES WHICH MUST BE ADDRESSED

Subsidy

Government interference in the form of market regulation and price control in the form of subsidies urgently needs to be addressed. The removal of the subsidy will foster transparency in the downstream sector and will encourage investment into the existing refineries as well as to the construction of more private refineries as well. The Petroleum Products Pricing Regulatory Agency (PPPRA), made it known through the immediate past Executive Secretary, Reginald Stanley, that it paid N832 billion as subsidy claims to petroleum products marketers under the Petroleum Support Fund (PSF) in 2013 and it is instructive to note that this figure was primarily due to the fact that cost cutting measures had actually been implemented. It would appear that the moribund refineries have further paved the way for unscrupulous persons to benefit from the subsidy regime. There is clearly a financial and structural imbalance created as a result of the huge sums of money currently being expended on subsidies and this will need to be addressed before adequate levels of privatization or investment can occur.

 

Pipeline Vandalism and Oil/Petroleum Theft

It must be noted that refineries in Nigeria also possess the unique conundrum of pipeline vandalism and oil/petroleum product theft.  There have been several unforeseen shutdowns at refineries as a result of the vandalism of oil pipelines and the theft of crude being transported to the refineries and petroleum products from them. This will no doubt have had a negative impact on the overall performance of the refineries. If such issues are not resolved adequately, there is unlikely to be wholesome interest by investors in the refineries going forward.

 

Regulatory Framework

Refining operations in Nigeria are governed by the provisions of the Petroleum Refining Regulations of 1974 and the Hydrocarbon Refining Act CAP 170, laws of the federation of Nigeria, 1990. The Petroleum Refineries Regulations amongst other issues also provide the fiscal incentives for establishment of refineries in the country (by private individuals/foreign investors). Crude and petroleum products transportation and storage are overseen by the provisions of the Oil Pipelines Act, CAP 338 of 1990 and the Petroleum Product and Distribution Act, CAP P.12, LFN 2004. Petroleum Product Pricing is regulated primarily by the PPPRA Act of 2003, while the safety and environment provisions of refining operations on the other hand are guided by Environmental Guidelines and Standards for Petroleum Industry in Nigeria (EGASPIN) of 2002.  The multiplicity of Laws and regulations no doubt impedes on the efficiency and effectiveness of industry operations this could further discourage prospective investors. The swift passage of the Petroleum Industry Bill is crucial in replacing the current disjointed legislation and regulatory authorities in the downstream sector.

 

Labour’s Perspective and Opposition

The two major labour petroleum unions have frowned on the proposed sale of the refineries owing to the fact that it will amount to selling the country’s national monuments and could more worryingly mean the transfer of the country’s oil wealth to Government cronies. The Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN) president, Babatunde Ogun believes that the refineries can still be put back on the right track while his counterpart in the Nigerian Union of Petroleum and Natural Gas Workers (NUPENG) president, Comrade Igwe Achese towed the same line with Ogun as he opposed the sale of the refineries. It is important for Labour to wake up to the reality that the current situation with regard to the state of our national refineries is not an optimum one and nothing short of privatization will solve the current problems facing them. Irrespective of the foregoing it is also the duty of the Federal Government to foster transparency in any potential privatization process and to carry the labour unions along every step of the way if their opposition is to be countered.

 

THE DANGOTE FACTOR

The Federal Government, since 2002, has issued over 39 licences to private operators to establish refineries of various capacities in the country, but thus far, only the Niger Delta Petroleum Resources run refinery, located in Ogbelle, Rivers State has commenced production of 1,000bpd of refined oil. As such, the decision by cement mogul, Aliko Dangote to establish a refinery in the Lekki Free Trade Zone that will cost around $9 billion is laudable given the current state of affairs in the refinery sector.

The Dangote refinery is envisaged for 2016 and the 400,000 barrels refinery is expected to add to the 445,000 installed capacity of the four existing refineries in Nigeria. It will definitely end the practice where unrefined petroleum products are exported at low prices processed overseas and brought back at high cost to local consumers. The establishment of the refinery will also give room for employment opportunities with the envisaged creation of 85,000 direct and indirect jobs for Nigerians in the long run.

It must however be noted that Dangote’s refinery will not be immune to the problems that have plagued Nigeria’s existing refineries. It is likely to be several years before it is operating at full capacity depending on whether some of the outstanding issues highlighted above are adequately resolved. Further to this is also the issue of pricing. Refining oil is a costly process and in the early stages of production, massive start-up costs will prevent the new refinery’s petrol from being significantly cheaper than foreign imports. It is likely that it may even be more expensive. Given these issues one must be cautiously optimistic about the overwhelming success of this project. Nevertheless, it is likely that Dangote will be able to convince the current and successive administrations to continue to be supportive of the project with regard to financial incentives and in granting the all important operating permits given the enormous economic advantages of this project.

 

CONCLUSION

In conclusion, if Nigeria continues to operate the moribund refineries with its ambiguous surreptitious TAM contracts in conjunction with the subsidy regime which is currently in place, it is highly unlikely to attract competent investors to the downstream sector. Therefore, the government needs to take its hands off simultaneously from the refineries and control of the pricing mechanism in the downstream sector so as to revive the industry. The resultant effect will be the heightened interest of foreign investors who will ultimately identify with the transparency and financial viability within the downstream industry.

 

* By Felix Jaro and Noma Garrick

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