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Fuel subsidy –When will price modulation fail? (3)

By Izielen Agbon   |   24 February 2016   |   5:59 am

NIGERIAN-FUEL-STATIONContinued from yesterday

We need to know how much petroleum products we produce, import and consume per day in Nigeria. In 2012, N996.8 billion was paid as subsidy to NNPC and 49 marketers for importing 17,451.45 million litres or 47.68 million litres of PMS per day. But, daily national PMS consumption was 38.4 million litres. The remaining 9.28 million/day litres of PMS were never delivered. We need better meter measurement and monitoring. More Coriolis meters can be installed on the inlet/outlet of every nodal point (process control, storage, truck loading, transfer to tanks, jetty, depots etc) in the downstream system. These meters will provide direct accurate real time measurement of petroleum products flows. They can detect pipe blockage and leaks as well as send data wirelessly to a centralised control station using SCADA (Supervisory Control and Data Acquisition System). We will then know how much petroleum products we produce, import and consume per day in Nigeria and help stop the corruption and looting of public funds in the downstream sector.

Refinery turnaround maintenance (TAM) is a planned partial or full shutdown of one or more units of a refinery in order to perform inspection, repair, and maintenance of equipment to ensure safe and efficient operations. Material and obsolete equipment are replaced. A refinery TAM takes place every three to five years and requires about one to two years of advance planning. The actual TAM operations take about six to 12 weeks. A well-implemented TAM programme reduces unplanned disruption of production activities in a refinery and helps maintain operations at more than 85 per cent capacity utilisation.

A TAM requires about 18-24 months advance planning covering its 4 phases (planning & preparation, shutdown, maintenance and startup). The planning & preparation stage is essential for a successful TAM. Pre-planning starts about 2 years before the TAM. Pre-planning requires an inspection of the refinery with testing and critical analyses of the units. The integrity of each unit is evaluated. We need to ensure TAMs are done by proven competent companies with a history to turning brownfield refineries around. The TAM needs to be scheduled well ahead of time and the funds accumulated from a TAM tax on petroleum products whose prices were determined by the production cost-pricing model.

Technical options available for the update of brownfield refineries (like the Port Harcourt, Warri and Kaduna refineries) include Splitter, Naphtha Stabilizer, Continuous Catalytic Reformer Unit, Kerosene Hydrotreater Unit and Fluid Catalytic Cracking Unit (FCCU). In 2013, a continuous catalytic reformer unit with a capacity of 50000 bbls per stream day and construction time of 24 months cost $140 million (2013). A splitter with a capacity of 50000 bbls per stream day and construction time of 18 months cost $100 million (2013). A Naphtha stabilizer (no stripper) with 20000 bbls per stream day and a construction period of 18 months cost $30 million. Turnkey projects with these technical options in the Port Harcourt refinery will cost $270 million. The same amount will update the Warri Refinery giving a total of $540 million.

A kerosene hydrotreater unit with a capacity of 50000 bbls per stream day and construction time of 18 months cost $140 million (2013). This can be added to the Port Harcourt refinery. A Fluid Catalytic Cracking Unit (FCCU) with a capacity of 60000 bbls per stream day and construction time of 30 months cost $150 million (2013). (‘Technical Options for Processing Additional Light Tight Oil Volumes within the United States’, US EIA, Apr.2015). We can therefore invest a grand total of $830 million (N163.51 billion). This amount can be generated in 30 months with a N4.47/litre tax on profit obtained from using the production cost pricing method. The refineries can pay for themselves if well managed (more revenue from the sale of products other than PMS have not be included here). A Greenfield (new ) refinery with a capacity of 250000 bbls per stream day and construction time of 36 months cost $3.39 billion (2013) or $4.12 billion with accrued interests during construction. This is a lot of capital that is best left to a time when the brownfield refineries are functioning at 85% efficiency and crude oil prices are high. Furthermore, a greenfield refinery might find it hard to compete with the larger planned Dangote refinery (more economy of scale).

Currently, NNPC is responsible for importing 75% of refined products into Nigeria. In future, NNPC should be the sole importer of petroleum products. The NNPC storage tanks need to be repaired and more need to be built. The dependence on private storage tanks should be discouraged. The practice of marine storage of petroleum product inventories (I billion litres) should be stopped. The demurrages incurred by these floating ships while they are being used for permanent storage is very high. All permanent inventory storage facilities should be onshore.

Most forecasts are that Bonny Light crude oil prices will increase from its $29.47/bbl on January 21, 2016 to about $62/bbl by 2019. At $46/bbl and an exchange rate above N197/$1, PMS prices will break the N87-N97 barrier with the present price modulation strategy. This might happen by mid-2017. The price modulation strategy is not a permanent solution. By 2019, the PMS Expected OMP prices will be well over N127/litre (crude oil price of $62/bbl).The FGN will be faced with returning to an explicit subsidy or fighting the Nigerian masses politically in the streets. The other alternative is to eliminate corruption from the refining sector and introduce production cost pricing.

All the past recommendations of NEITI and all the recommendations from the numerous probes and investigations of the fuel subsidy regime/refineries in Nigeria should be implemented. All those found quality of corrupt practices should be put on trial and sent to jail. It is unacceptable that nobody from the list of suspected corrupt firms identified by the 2012 Farouk Lawan fuel subsidy investigation has been found guilty and sent to jail.

The FGN should go back to a production cost-pricing model. Using the production cost-pricing model, the FGN can maintain PMS prices at N87/litre by imposing varying crude oil production taxes and petroleum products sales taxes across the production-petroleum product sales chain. This will encourage NNPC to operate efficiently and raise some FGN revenue. Private participation in petroleum products imports should be discouraged in favor of private participation in refining with proper incentives until FGN participation in the refining business is reduced to a non-operational minimum level. The FGN should pass the PIB and create the enabling environment for the success of this new policy.

We will not pay for corruption. We must organize, mobilize and join the Nigerian masses for the upcoming struggles “to win material benefits, to live better and in peace, to see our lives go forward, to guarantee the future of our children”.
Concluded

• Agbon presented this Paper at the Nigerian Labour Congress Organised Stakeholders Meeting on Fuel Subsidy and Petrol in Lagos, January 28, 2016.
Izielenagbon@yahoo.com Twitter: @izielenagbon




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