Rising crude refining cost justifies need to harness Nigeria’s local capacity

for 2017 alone, Nigeria imported 22.5387 billion litres of petroleum products worth over N3.24 trillion from foreign refineries. This is likely going to soar this year given the rising crude prices in the global marketplace. STANLEY OPARA, in this report, examines the need to harness local refining capacity.

Between 2012 and 2017, the Department of Petroleum Resources (DPR), granted licences to 37 private firms, including the 650,000 barrels per day (bpd) Dangote Refinery Plc, for the establishment of private refineries in the country.

However, six years after being granted licences, 36 of the licensees are yet to record meaningful progress in terms of construction of their refineries. Among the licensed companies, which have capacity to refine 2.3 million bpd of crude oil, only the Dangote Refinery has reached an advanced stage in ensuring the completion of the refinery.

Despite being one of the largest producers of crude oil in Africa in the last four decades, Nigeria has consistently struggled to keep its refineries functioning optimally, but to no avail.

The coming on stream of these licensed refineries is expected to turn Nigeria into an exporter of refined petroleum products. Unfortunately, apart from the 650,000 bpd Dangote Refinery, many other licences have not moved beyond the initial level of obtaining permission to establish.

Some of these licences have expired with no efforts from the holders to re-apply, which is an indication that the project may have been put to rest.

The inability of the other private refineries to make significant progress, has now put so much pressure on the Dangote Refinery to bail Nigeria out of the burden of mass importation of petroleum products.

Reliance on Imports
In spite of having a nameplate capacity of 445,000 barrels per day with refineries and depots in strategic locations in the country, Nigeria imports over 80 per cent of refined products to meet its current domestic need.

The country is one of the largest consumers of petroleum products in Africa, and accounts for over seven per cent of Africa’s refined products consumption, importing over one million tonnes of Premium Motor Spirit (PMS) every month.

For example, total crude processed by domestic refineries are: Warri Refining & Petrochemical Company (WRPC) for the month of March 2018 was 271,215 Metric Tonnes (MT) while Port Harcourt Refining Company Limited (PHRC) and Kaduna Refining & Petrochemical Company (KRPC) only processed intermediate 7,675MT and 12,675MT, respectively.

For the month of March 2018, Nigeria’s three refineries produced 159,424 MT of finished petroleum products and 67,428 MT of intermediate products out of the 271,215 MT of crude processed at a combined capacity utilisation of 14.41 per cent, according to the Nigerian National Petroleum Corporation’s (NNPC) monthly financial report released recently.

Commenting on Nigeria’s refining revolution, Partner, Africa Oil and Gas Leader, PricewaterhouseCoopers, Pedro Omontuemhen, said the current supply gap in the country creates an opportunity not just for conventional refineries such as the Dangote refinery, but also for modular refineries which are set up primarily to meet domestic demand.

This, he said, provides the “bottom-up” supply into the fuels value chain. Another critical assumption is that the modular refineries’ yield will be limited to fuel oils and diesel as the lightest hydrocarbon produced.

Private Refineries’ Setback
With 37 licences already granted by the DPR to companies, including Dangote Refinery, to establish private refineries in the country, the world is earnestly waiting for Nigeria to halt importation of petroleum products and become net exporter of PMS come 2019 or early 2020.

The private refineries, which have capacity to refine over 2.3 million barrels per day, would not only make Nigeria a net exporter of petroleum products, but also make the country an importer of crude oil to meet local demand of the refineries, which is already more than the country’s daily crude oil production.

For example, Nigeria’s crude oil production, including condensate, was 1.97 million barrels per day (bpd) in July 2018, according to the Ministry of Petroleum Resources.

This is grossly inadequate to meet the total demand of the private refineries with total capacity of 2.3 mbpd and another demand of 445,000 bpd from the three Nigeria’s refineries.

Federal Backup
The Dangote refinery is so important to Nigeria’s self-sufficiency plans, and this informed the Minister of Petroleum Resources, Dr. Ibe Kachikwu’s announcement of the Federal Government’s support to the completion of the refinery.

Kachikwu, during a recent tour of the refinery, commended Dangote for the project, while assuring of total support in promoting the success of the project.
“Government will support to incentivise policies that will promote and attract investors to the refinery,” he assured.

Kachikwu, however, commended the management for the ways local communities were engaged and carried along while urging other companies to emulate the company.

Dangote Group is currently building the single largest refinery, petrochemical and fertiliser complex in Africa. The project is sited in the Ibeju-Lekki Free Trade Zone (FTZ), Lagos State, Nigeria.

The refinery will have the capacity to refine 650,000 barrels of crude oil per day. The petrochemical plant will produce 750,000 metric tonnes per year (MTPY) of polypropylene.

The ultra-modern setup, which has adopted world-class technology in its processes, is designed to meet domestic and international demand for fuel.
According to the Executive Director, Dangote Group, Devakumar Edwin, the refinery project is ongoing and it is expected to help Nigeria achieve self-sufficiency.

“Our primary focus is Nigeria, but we are also going to supply our products to Central and Western African countries. Our primary focus is Nigeria – to meet the entire local demand; but we have the capacity to export more than 50 per cent of what we produce, so the secondary focus will be on western Africa and central Africa,” he said.

He added: “There will be no more queues at the filling stations due to fuel shortage, which cause traffic and waste innumerable man hours. And, last but not the least, the quality of our products will be high because we are coming out with Euro V grade.

“In Europe and in the United States, the refineries are now being converted to Euro V grade. In our own case, we are building a refinery which will produce Euro V grade from day one. Finally, huge amount of foreign exchange will be earned from the export of gasoline, diesel, aviation jet fuel and polypropylene.”

For the Managing Director/Chief Executive Officer of Seplat Petroleum Development Company, Mr. Austin Avuru, it is only the Dangote Refinery that has the prospect to make Nigeria self-sufficient in petroleum products.

He said, “The only one that has prospects is Dangote. He is raising money from an existing business, so he has the fund to build it. He is going to open doors, anyway. Once he builds his own, the existing ones will rather be sold off or will die.”

Sad tales of existing refineries
Rather than becoming Nigeria’s sources of revenue generation, NNPC’s refineries have become main nexus of waste and revenue loss through their Domestic Crude Oil Allocation (DCA) and unending Turn Around Maintenance (TAM) processes.

For example, NNPC has been spending billions of dollars on TAM in the past 15 years with nothing tangible to show for it.
According to the Natural Governance Institute (NGR), the government allocates around 445,000 barrels per day to NNPC in so-called ‘domestic crude’.

The institute explains: “NNPC sells this oil to the Pipelines and Product Marketing Company (PPMC), one of its subsidiaries. PPMC is supposed to send the oil to Nigeria’s four state-owned refineries, sell the resulting petroleum products, and pay NNPC for the crude it received, and then NNPC is supposed to pay the government.

“In practice, the refineries only process around 100,000 barrels per day. NNPC ultimately re-routes most DCA oil into export sales or oil-for-product swaps.”

There are also indications that there are group of people who are against local production of petroleum products due to their selfish interest in the importation of petrol, kerosene and diesel.

A source, who craved anonymity, said there are people who will see to it that Nigeria does not refine one barrel of oil, “because if we do, then we will cut them out from all these importation and diversion.

“Look at our refineries that are not working. Why should that be the case? We are producing oil; all the other members of the Organisation of Petroleum Exporting Countries are refining crude oil efficiently. And with four refineries, we cannot refine the crude we produce,” the source said.

“NNPC should focus on revitalising Nigeria refineries, rather than signing new agreement. We need our refineries to work first before focusing attention on other major projects,” the source said.

Any hope for Nigeria?
The Group Managing Director of the NNPC, Maikanti Baru, is optimistic that Nigeria’s four existing refineries would begin full capacity utilisation before the end of 2019.

But stakeholders in the Nigeria oil and gas industry believe that the Nigerian refineries will not work until they are privatised. They opined that the production of petroleum products should be left to the private sector.

Former Executive Secretary of the Major Oil Marketers Association of Nigeria (MOMAN), Thomas Olawore, stated: “As presently owned, the refineries cannot work until they are privatised. Monies will be pumped into rehabilitation and maintenance, but they won’t take us anywhere. It’s not the first time that monies were budgeted for the refineries. Why should we continue to waste such monies?”

The Executive Secretary of Lubricants Producers Association of Nigeria (LUPAN), Obidike Emeka, said the Federal Government should channel its resources and actions towards eliminating the challenges inhibiting the development of private refineries, and make the prospect of modular refining more appealing and profitable to investors.

“This it can do by setting up investment friendly legal, economic and regulatory framework and policies, while minimising bottlenecks and stipulating moderate, practical licensing procedures,” he added.

He called for special funding mechanism to encourage investment in refineries.

Obidike stated: “Institutions like the Bank of Industry (BoI) were established to assist businesses all of which are afflicted with the same complications – asphyxiating criteria and crippling interest rates on loans, whose repayment plan most times put their beneficiary out of business.
“So far, none has effectually carried out their objectives and responsibilities.

Whatever incentives and policies the government proposes to extend to encourage prospectors into investing in this venture, should ensure punctual and constant availability of crude to the refineries, and guarantees to backstop investors’ obligations.”

“They should also ensure fiscal incentives such as access to loans with lenient interest rates and repayment plans, attractive pioneer status, and the occasional exemption from certain duties and taxes, and protection of their investment by addressing issues bordering on vandalism and oil theft”, he added.