Modular refineries: Prospects and challenges

Over the previous 10 to 15 years, Nigeria oil and gas sector has been comatose or at best seen very sluggish growth. In the upstream sector, the rig count has dropped from a high of 200 to a current low of 10. In the midstream sector, our refineries have continued to operate inefficiently. As a result, about 80 per cent of our petroleum products are imported. This has led to a lively debate on the need for modular refineries as a quick fix to the shortages rather than continue to import at very high cost to the nation.

There has been corresponding interest by many in the private sector to invest in construction and operations of refineries so as to take advantage of the opportunities presented by the very high spend in importation of petroleum products. Conservative estimates put consumption of petroleum products in Nigeria at approximately 55 million litres per day, with Premium Motor Spirit (PMS) and diesel accounting for 35 million and 12 million litres respectively. Dual Purpose Kerosene (DPK) demand is put at about 8 million litres per day. There were periods when PMS demand was as high as 45 million litres per day, most of it imported. This is the driver for the interest in refining.

Refineries have historically not been very profitable, as the industry has been plagued worldwide by historical low margins during the years of high crude oil prices in the neighbourhood of $100 per barrel. In that era, about 90 per cent of the operating cost in most refineries was simply cost of purchasing and delivering crude oil to the plant.

With the drastic decline in crude oil prices, which commenced in 2014, we have seen a significant improvement in the fortunes of petroleum refineries. Low crude oil prices meant that reserve asset values plummeted, and most oil majors lost upstream asset book values. Exxon Mobil, the biggest integrated Oil and Gas major in the world remained in the black in its end of 2014 profit and loss statement simply because it made good profits in its refinery assets.

Crude oil prices at one time dropped below $30 per barrel, and have remained currently hovering around $50 per barrel for the benchmark Brent crude and our premium Bonny light sweet crude. We are therefore in the golden era of petroleum refining worldwide. The picture for Africa is even more inviting. There is currently a deficit of 87 million metric tonnes per annum between demand and refining capacity in Africa. The International Energy Agency estimates that this deficit will increase to over 200 million metric tonnes by 2030. This provides very significant opportunities for installation of more refining capacity in Africa.

The countries that can take advantage of this opportunity are those that have access to crude oil within their borders, access to a large market for the finished refined products and access to experienced personnel who can operate the assets.

Nigeria satisfies all three, being the largest producer of crude oil in Africa and also having the largest population in the continent. A large pool of experienced personnel has been built up over the years of operating the four refineries in the country. Therein lie the prospects for refineries in Nigeria: whether large scale or modular.

African refineries will inevitably face competition from the mega refineries in Asia, the Middle East and USA which currently also target Africa. Which refineries will survive or thrive will inevitably be determined by a number of factors. These factors include; a liberalised market. Regrettably, the current situation, in which prices are of oil, is regulated by governments lead to inefficiency in asset capacity utilisation and product pricing.

Price recovery is also not assured for the private investor as it depends on the preparedness or ability of the governments in question to pay the subsidies resulting from price regulation. This poses a challenge to any investor seeking to go into the venture. It is therefore necessary that governments fully deregulate pricing of all petroleum products. Without this, going into refining for local consumption will be a risky undertaking.

Another factor is economies of scale, the chances of making money are significantly higher for large capacity plants, as they are able to spread the cost of the infrastructure required to receive crude oil, refine it and dispose of the products. Over the years, most closure of refineries especially in Europe was of small and medium sized refineries as they were unable to compete price wise. The combined installed capacity of the existing refineries in Nigeria is 445,000BPSD. Current aggregate national demand is put at about 600,000BPSD equivalent.

The forecast is that by 2020, the national demand will rise to 750,000BPSD. Dangote Mega Refinery has a capacity of 650,000BPSD, out of which 200,000BPSD will be providing feedstock for petrochemicals. The implication is that once that refinery is commissioned in 2020 or thereabouts, the modular refineries will struggle to compete and may shutdown.

Also Complexity is a factor in the process. The profitability of any refinery is related to its Nelson Index or complexity. The refineries with more complex conversion plants like catalytic reformers and Fluid Catalytic Crackers (FCCUs) or Residue Catalytic Crackers (RCC) are able to convert the lower value Atmospheric residue and Fuel oil stocks to higher value diesel and PMS.

At this point, let us establish some definitions of what a modular refinery is? The root word from which the term is derived is ‘modules’. A modular refinery technically speaking is a simple or complex refinery whose parts are fabricated or constructed in several component parts or units called modules. These modules can then be assembled easily to form the plant. Furthermore, they can be transported in modules across distances and put together at the location desired. This in theory is the advantage of modular refineries. You can also start with a small capacity of 5,000BPSD or 10,000BPSD, and grow the overall capacity over time by adding more modules. A modular refinery may therefore be composed from skid-mounted modules of small capacities, put together to achieve a refinery of even up to 100,000BPSD. This is the strict technical definition.

Most people who use the term however mean small-sized refineries usually in the range of 1,000 to 20,000BPSD. The challenge for modular refineries lies in the fact that it is not economically profitable to include conversion plants in the design of such small-scale refineries.

The premier Nigerian Petroleum Refining Company was initially constructed as a simple hydro-skimming plant of capacity 32,000BPSD. It is only after it has been debottlenecked to 45,000BPSD that a catalytic reforming plant was added to convert some of the straight run naphtha to higher RON (research octane number) and higher value PMS. The capacity was later increased to 60,000BPSD. The Tema Oil Refinery in Ghana was initially built as a simple hydro-skimming plant of capacity 28,000BPSD. The capacity was increased to 45,000BPSD in 1997. It was subsequent to this that a Residue Fluid Catalytic Cracker (RFCC) was added in 2002 to increase the yield of higher value PMS and Diesel.

The debate in Nigeria on modular refineries has focused on small sized plants in the capacity range of 1,000 to 10,000BPSD. These will struggle to be profitable assets to their owners. They will simply not be able to compete with the larger scale refineries.

Realistically, in the modern age, the threshold for profitability is above 100,000BPSD with conversion units. The plants must have access to crude oil by pipeline in their contiguous location, and facilities for disposal of their products within the neighborhood.

There is the challenge of pipeline vandalism, which has in recent times resulted in disruption of crude supply to the existing refineries in Warri, Port Harcourt and Kaduna thereby crippling their operations. Private refineries may face the same challenge. Modular refineries may however avoid this and succeed if they are sited next to their crude supply source.

In reality, the only existing modular or small-scale refinery in Nigeria is the 1,000BPSD plant owned by Niger Delta Petroleum Resources Company in Ogbelle. It is built right next to its crude oil production facility from which it receives its feedstock. The essential product is diesel oil. The company has an offtake agreement with a buyer who comes and lifts the product right from the plant. The balance of the residue is spiked back into the crude oil, which is then exported.

Talking about the advantages/prospects of Modular Refineries versus Full Scale Plants. I quote from a paper presented by an industry cross-functional Team in 2012: “Small-scale (modular) refineries could be profitable if sited close to crude oil flow stations and terminals and have some advantages when compared with the full scale refineries”.

*The capital outlay for any 100,000-barrel per day (bpd) refinery is about $1.5 billion or more, while a 24,000 bpd modular refinery is roughly $250 million. Therefore, it is easier to access funds for the modular refining modules.
*The manufacturing time for plant, equipment and machinery for a plant of 100,000 bpd capacity is within the range of three to four years. Start-up for modular refineries of 24,000 bpd is within 18-20 months.
*The modular system allows the plant to be expanded to 100,000 bpd capacity in structured increments. The increments can be funded with the cash flows from Phase 1 and additional phases, and so the refinery will not incur additional debt for the expansion. The expansion of the modular plant capacity can be done without shutting down production from existing equipment and plants. This is not the case with big capacity refineries.
*Revenue streams and payback periods are faster with the modular refining format, than with the larger capacity refineries.
*One major shortcoming with modular refineries is that the plants are semi-automated and less labor-intensive, i.e. not many jobs can be created directly. For instance, 20 to 30 personnel can operate a 24,000 bpd modular refinery. Most of the spin-off jobs created are of a secondary nature, and based on the location of the site.
*Two or more plants can be installed on a single site allowing the simultaneous processing of more than one type of crude oil and one plant can still be in operation in the event that one plant is down. The plant sizes can be increased in stages.
* Can be set up and be in operation within several weeks after arrival at a fully-prepared and completed site,
* Some modular plants allow a single operator to restart the plant from a cold start in less than four hours and have the plant in full operation,
* Some modular plants can be completely automated and once an operator sets all the controlling points, all product temperatures and flows are controlled automatically. If a product specification drifts off, or if   a potentially hazardous condition develops, the plant automatically turns itself off to a safe condition without the help of an operator. A “First Out” annunciator signals the reason for the shutdown by a flashing red light”.

In summary, modular refineries are simple, and fast to start up. Such refineries usually operate at optimal capacity. The relatively small investment cost makes it easier for private investors to access funds and enter the refining business, and may assist the government in generating employment for our young engineers, technologists and technicians.

Permit me to end my presentation today with a quote from Bishop Kukah:

“The Nigerian educational systems have surprising outcomes. The smartest students pass with First Class and get admitted to Medical and Engineering Schools. The Second Class students get MBAs and LLBs to manage the First Class students. The Third Class students enter politics and rule both the First and Second Class students. The failures enter the underworld of crime and control the politicians and businesses. And best of all, those who did not attend school become Prophets AND Imams and everyone follows them. What a paradox of life. This can only happen in Nigeria where corruption is the order of the day”.

The uninformed have dominated the discussion calling for modular refineries. Let us the informed, step in and lead the discussion so that correct decisions can be made. The illegal ‘drum’ refineries dotted all over the Niger Delta have resulted in significant environmental degradation and pollution. Some are calling for the Government to legalize them and ‘grant’ them licenses. Where will they get crude oil from after obtaining licenses? What will they do with the residue which they have been dumping into the creeks and thus causing terrible atmospheric pollution? If they have to pay for the crude oil, they will quickly find that it is no longer profitable to continue in business.

Some have called for Government to build these “modular” refineries in each Niger Delta State as a social service to the people. It also appears that Government interest in this subject is driven by the need to be seen as doing something to assuage the calls for more investment in the Niger Delta so as to eliminate further agitation and attacks on crude oil pipelines and disruption of exports.

However, experience over the years has led us to conclude that investment in and operation of refineries is best left to those capable to do so on commercial terms and based on proper governance devoid of political interference. We advise that government should limit itself to creating a favourable investment environment, by fully deregulating product prices and issuing licenses.

Private sector individuals should carry out feasibility studies to determine the profitability of their intended refinery investments. This will guide their choice of location, configuration and size. They will then decide how to proceed and ensure that the resulting plants are properly managed along commercial principles and arrangements. The refineries, whether full scale or modular should be run as businesses, not social services.

Ogbuigwe delivered this lecture at Nigerian Academy of Engineering (NAE) recently.