Friday, 22nd September 2023

Grappling with challenges, monopoly fears, others posed by Dangote Refinery

By Kingsley Jeremiah, Abuja
04 June 2023   |   3:01 am
Nigeria started the business of oil refining with a simple hydro-skimming plant of 38,000 barrels per day (bpd) refinery built by Shell-BP, at Eleme, near Port Harcourt, in Rivers State in 1965. The plant was then wholly owned and operated by Shell-BP.

Dangote Refinery

Dangote Refinery is at the moment the best news in the downstream segment of the petroleum industry in Nigeria, and Africa. But there may be many critical and untold stories that could have grave consequences in the polity.

Nigeria started the business of oil refining with a simple hydro-skimming plant of 38,000 barrels per day (bpd) refinery built by Shell-BP, at Eleme, near Port Harcourt, in Rivers State in 1965. The plant was then wholly owned and operated by Shell-BP.

The Federal Government later acquired a 50 per cent share with a participatory agreement with Shell-BP and the refinery was renamed the Nigeria Petroleum Refining Company (NPRC) in 1972 as the government increased its share to 60 per cent but under the control of Shell-BP.

In 1972, a Naphtha Catalytic Refining Unit (CRU) was added and the capacity went up to 60,000 bpd to meet the country’s domestic demand.
In 1978, the country further acquired the remaining 40 per cent share of the asset in an outright buyout and renamed it the NNPC Refinery, Port Harcourt, nationalised the asset, and assumed control.

Warri Refining and Petrochemical Company, with a capacity of 125,000 bpd was later commissioned in 1978, and Kaduna Refining and Petrochemical Company with a capacity of 110,000 bpd came on board in 1980, before the new Port Harcourt Refinery was upgraded to 150,000 bpd in 1989. These brought the total installed refinery capacity in Nigeria to 445,000 bpd.

These refineries were purely owned by the Federal Government and in some ways operated efficiently until decision-making at the then NNPC was subjected to political considerations against economic or professional interests.

From Political Turnaround Maintenance To N23 Trillion Subsidy In 18 Years
With the grip of the military government in the 1990s forcing the NNPC to close its accounts in commercial banks and transfer them to the Central Bank of Nigeria, the NNPC later lost its autonomy, and this made the maintenance of the refineries a major challenge. The refineries’ utilisation capacity dropped gradually until the assets were shut down in 2020 after making billions of naira yearly losses.

A report published by the National Resource Charter (NNRC), revealed that the NNPC spent a whopping $396.33 million between 2013-2017 to carry out repair works under the Turn Around Maintenance (TAM) scheme on its refineries.

Also, the NNPC spent N276.872 billion on the operating expenses of the refineries between 2015-2018. Since it was shut down in 2019, The Guardian reported that the nation has recorded N136 billion as operational deficits across the three refineries in Kaduna, Port Harcourt, and Warri. The fund goes into paying the 1,701 workers at the refineries.

About 660 staff, representing 8.99 per cent of the company’s total workforce are at the Kaduna Refining and Petrochemical Company (KRPC), 506 are at the Port Harcourt Refining Company (PHRC) and 437 are at Warri Refining and Petrochemical Company (WRPC).

Since shut down, Nigeria has been relying mainly on the importation of petroleum products, a development that has dealt a sucker punch on the country’s economy.

Apart from eroding the foreign exchange on the export of crude oil, the outgoing Secretary to the Government of the Federation (SGF), Boss Mustapha, admitted that over N13 trillion was expended on the payment of subsidy between 2005 and 2021.

In 2022 alone, the government spent N7 trillion, and N3.5 trillion has been budgeted to be spent from January to June this year. By implication, Nigeria has spent a whooping N23.5 trillion on subsidies in the last 18 years.

Bringing Private Investors to Refinery Business 
Under the former President Olusegun Obasanjo-led Federal Government, the Department of Petroleum Resources, now broken into the Nigerian Upstream Petroleum Regulatory Authority (NUPRC), and the Nigerian Midstream Downstream Petroleum Regulatory Authority (NMDPRA) awarded licenses for the establishment of private refineries.

As of May 2021, Nigeria had 68 refinery licenses with different degrees of approval granted to about 28 while 40 of them remain inactive. Although the conventional refineries are about eight, the others are modular refineries. The capacity of the active refineries currently stands at about 1.09 million bpd, while all the licences combined have a capacity of almost two million bpd.

Eight of the refineries that have active Licence to Establish are BUA Refinery and Petrochemicals, Ogini Refinery Limited; Excel Exploration and Production, Lowrie Refinery Limited, NPDC/ND WESTERN OML 34 JV, Ogini Refinery, Eghudu Refinery and Kingdom Global Trading Petroleum and Gas Nig.

The 20 refineries with active Approval to Construct/Relocate include Dangote Oil Refinery Company, OPAC Refineries, Waltersmith Refining & Petrochemical Company, Niger Delta Petroleum Resources, Edo Petrochemical Refinery, Etopo Energy Plc, Resource Petroleum & Petrochemicals International Incorporated, Duport Midstream, and Conodit Refinery Nigeria.

Some of the refineries listed as being dormant are Platinum Hydrocarbon Resources, Mondonat Nigeria Limited, Southfield Petrochemical and Refinery Limited, Don Mac Limited, Shepha Petroleum and Petrochemicals Company Limited, Energia Limited, Associated Worldwide Company Limited, All Grace, Energy Limited, Kainji Resources Limited, Aiteo Energy Resources Limited, American Exploration Company Nigeria Limited, Epic Refinery, and Petrochemical Industries Limited, Masters Energy Oil and Gas Limited, Grifon Energy Limited, Sifax Oil and Gas Company Limited, Capital Oil and Gas Industries Limited, Green Energy International Limited, Fresh Energy Limited, Chyzob Oil and Gas Limited, Ibafon Oil and Gas, FZE Refinery Limited, Owena Oil and, Gas Limited. Tonwei Refinery, NSP Refineries, and Oil Services, Rehoboth Natural Resources Dev. Limited.

Others are Gbaramatu Oil and Gas Producing Trust Fund, NME Consolidated Limited, Niger Delta Petroleum Resources and Petrochemical Limited, RG Shinjin Petrochemicals Limited, and Jil-Amber Consortium PHRC. Dee Jones, Hi-Rev Oil Limited, Starex Petroleum Refinery Limited, Eko Petrochem & Refining Company Limited, Petrolex Oil & Gas Limited, Ikwe-Onna Refinery Limited, Clean Waters Refinery, Southwest Refineries and Petrochemicals Company Limited, Obat Refinery Limited, and Antonio Oil Company Limited.

Dangote’s 650,000bpd A Game Changer 
On Monday, President Muhammadu Buhari alongside some of his African counterparts, as well as eminent personalities across the world gathered in the Lekki Free Trade Zone, in Lagos to commission the Dangote Refinery and Petrochemical Complex, which is currently the biggest single train refinery in the world.

Covering a land area of approximately 2,635 hectares and with an investment of over $19 billion, the idea of the refinery was first announced in September 2013, after Dangote secured about $3.3 billion for the project, which was initially to cost about $9 billion.

Reportedly over five times the size of Victoria Island, the refinery initially planned to be located around the Ogun Development Master Plan with Olokola Free Trade Zone in Ogun Waterside, was moved to Lekki due to political reasons. The location change has been linked to the delay and the over $10 billion increase in the project.

Dangote Refinery

Dangote Refinery is meant to produce three billion standard cubic feet of gas, 65 million litres of premium motor spirit (petrol), 15 million litres of diesel, and four million metric tonnes of Jet A1 better known as aviation fuel each day and approximately eight million tonnes of petroleum products annually.

At the commissioning, the President of The Dangote Group, Aliko Dangote, said that the refinery would generate “massive” direct job opportunities for Nigerians.

“The refinery operations will generate massive job opportunities in their hundreds of thousands. The refinery will make available to our industries vital raw materials to a large range of manufacturers in the pharmaceuticals, food, beverages, construction and many other industries.”

Besides the direct 5and indirect jobs, Dangote said that 60 per cent of the production capacity of the petroleum refinery would meet the country’s entire petroleum needs, while the remaining 40 per cent has been earmarked for export.

“Exporting refined petroleum products will not only save huge amounts of foreign exchange but will also trigger a massive inflow of the same into the domestic economy. The retained market foreign exchange can be invested in other projects that will stimulate more diversification of the Nigerian economy,” he said, adding: “We surmounted numerous obstacles in our journey to build this refinery. To bring over dimensional cargoes close to the site, we developed a port with four quays, which has a quay loading bearing capacity of 25 tonnes per square metre. This was done to bridge the distance between Apapa Port and our project site. The company also invested in 2,570 pieces of construction equipment including 2,238 civil construction equipment and 332 mechanical construction equipment,” Dangote said.

Statistics from the company showed that the petrochemical plant will produce 77 different high-performance grades of polypropylene.
The Governor of the Central Bank of Nigeria (CBN), Godwin Emefiele, remarked that the Dangote Group had paid back about 70 per cent of the loans that it took to construct the refinery, adding that project saved the country up to $30 billion foreign exchange yearly, and additional $10 billion in inflows.

It is significant to note that the facility would maximise gasoline production, which accounts for 53 per cent of the production capacity, compared to most of the refineries in the world, which produce between 20 to 25 per cent of gasoline.

Between The import of dirty fuel to Africa and Dangote’s AFRI-6 Refinery 
For a long time, most European countries, which export petroleum products to Africa, drive their vehicles on less than 10 particulate matter (PM), but the sulphur content in petroleum products sold on the African continent is over 10,000 PM. The consequences are dire as reflected in the growing health burden, environmental issues, and damage to vehicle engines.

According to African Refiners and Distributors Association (ARDA), there are 11 different permissible grades of gasoil/diesel ranging from 10 ppm to 10,000 ppm sulphur, and 12 different permissible grades of gasoline ranging from 10 ppm to 2,500 ppm sulphur.

Being a development, which has adversely impacted regional trade and implementation of pan-African regulatory frameworks to promote investments, ARDA and the African Union Commission (AUC) have been collaborating since 2019 on the adoption of harmonised, pan-African standards for cleaner fuel specifications (AFRI-6 or 10 ppm sulphur) by 2030 to promote clear health and socio-economic benefits.

Due to weak regulations, greed by operators, and collaboration of state actors, the Nigeria National Petroleum Corporation (NNPC) and other marketers, last year, imported into the country, dirty fuel, which was later withdrawn after it was found to have excessive levels of methanol, which was causing engine damage in vehicles.

For countries that are already driving outlawed vehicles that are not fit for European roads and that of other developed countries, the weak regulation of fuel standards has remained a concern for the environment, public health, etc.

In 2020, the SDN’s research sampled official petrol imports and found average sulphur levels more than seven times the legal limit, average diesel samples more than 43 times the limit, and a few with excessive levels of other toxins.

The Dangote Refinery is expected to produce a variety of light and medium grades of crude in accordance with Euro V specifications.
Sulphur in petroleum fuels results in vehicle exhaust emissions that hurt the health and the environment.
Be that as it may, Nigeria has continued to remain a home for fuels with very high sulphur contents (dirty fuels), and the presumed ban on such products happens not to be having any effect.

NNPCL’s 20% Share In Dangote Refinery And 300,000bpd Supply Agreement
IN August 2021, the NNPCL announced the acquisition of a 20 per cent stake in Dangote’s Refinery for $2.76 billion, as the Group Managing Director of NNPCL), Mele Kyari told the House of Representatives that the move would give the refinery an obligation to buy crude from Ni77geria.

“He (Dangote) has the right to buy oil from anywhere. So you can’t force him to buy. We structured our equity participation that this refinery must buy at least 300,000 crude from us. This guu uarantees your market,” Kyari said.
“Today, every country is struggling to secure a market for their crude oil. This refinery does not owe us any responsibility if we don’t have this arrangement. That is why we tied our participation to the fact that this refinery must buy from us.
“This refinery is a very complex refinery, complex in our industry because it can crack any crude. So, it can buy any cheap crude from anywhere7, and bring it into this country and leave you to your crude,” Kyari said.

In the wake of the commission of the refinery, most civil society organisations, especially in the extractive sector have spoken more around the transparency of the crude supply, as well as the 20 per cent stake.

The Nigerian Extractive Industry Transparency Initiative (NEITI) is expected to fully comply with the principles of the Extractive Industries Transparency Initiative (EITI), of which Nigeria is a signatory.

“As a major player in the oil and gas industry, NEITI will soon commence engagements with the Dangote Refinery on the specific issues around the 20 per cent equity interest that the NNPC has taken in the Refinery on behalf of the Federation,” the head of NEITI, Orji Ogbonnaya Orji said.

The Centre for Transparency Advocacy (CTA), on its part, stated that it is imperative that the incoming government takes proactive steps to ensure the project’s execution with utmost transparency, and that it does not lead to a monopoly in the sector.

The centre equally stressed that doing so would guarantee that the benefits of the facility are shared equitably among the Nigerian people, urging the incoming administration to prioritise ideal principles in all dealings on the project, especially in the implementation of transparent bidding processes, clear guidelines and robust oversight mechanisms to prevent any misappropriation of resources and favouritism.

Monopoly, Price, and Subsidy 
Since independence, the NNPCL has dominated the downstream segment of the petroleum industry. While its four refineries are now dormant, the NNPCL has also been the sole importer of petroleum products.

In other countries, the downstream segment adds meaning to the economy and enables the oil and gas industry to contribute to Gross Domestic Product, but the state of the downstream industry in Nigeria has been topsy-turvy due to a lack of level playing field for market participants.

While Dangote’s entrance broke this monopoly, most stakeholders have expressed fears that the development only means replacing government monopoly with private sector monopoly.

Before the passage of the Petroleum Industry Act, operators in the petroleum segment had raised concerns as they believed that Section 317 Sub-section Eight of the PIA was influenced by Dangote.
In Section 317 (8) of the PIA, the importation of fuel has been restricted. The section recognises importation licences, which can only be obtained by companies with “active local refining licences.”
Although there are over 68 refinery licenses as noted earlier, some stakeholders believe that it could monopolise the downstream and the midstream sectors of the petroleum industry.

A public analyst, Zayyad Muhammad, said: “With this colossal refinery, Dangote has the advantage in the midstream and downstream sectors of the oil and oil gas industry, and anyone coming in will need the next 10 years to catch up. The bigger, the more advantageous, it seems.”
Across African countries, especially the West Africa bloc, Nigeria offers the cheapest fuel due to subsidy. The average cost of PMS in Chad, Cameroun, Benin, and Ghana, where much of subsidised Nigerian fuel is smuggled (which is also used as a reference by anti-subsidy advocates) is $1.078 per litre. If Nigerian marketers sell below that threshold, there could be a market disincentive.

If the marketers get FX from the subsidised Investors’ and Exporters’ (I&E) FX window, which is not likely for liquidity and other hiccups, a sub-regionally competitive PMS price could peg the pump price at about N500 per litre. But when benchmarked against the parallel market, PMS will sell within the N780 and N800 band if imported into the country.

Nigeria’s subsidy regime on the other hand has been a serious challenge and a disincentive for investment in the oil sector. With the new government, Nigeria is expected to remove subsidies in the coming month.
With weak enforcement of consumer regulations, most stakeholders have expressed fears that the pricing of fuel may maintain an upward rise just like the price of cement.

Product, Crude supplies, and Dilemmas for Europe
While Europe is relying on Nigeria for crude export after banning exports from Russia, its previous reliance on African countries would face a yearly reduction.

Nigeria currently sends about 547.5 million barrels of crude into the international market yearly, with an agreement to supply 300, 000 barrels per day to the Dangote Refinery, adding to its regional supplies, the oil market would automatically face a shortfall of 109.5 million barrels yearly. With obligations to supply about 445,000 barrels per day, initially meant for the refineries to contractors on the Direct Sale Direct Purchase (DSDP) deal, the development could push Europe to rely more on the Middle East and Asia to meet its supply, while the global market could have close to 700,000bpd shortfall from Nigeria.

In 2022, the West African bloc was supplying about additional 200,000 barrels per day to Europe to augment the loss from Russia.
On the product side, while the West Africa region imported about one million barrels per day of petroleum products last year, with 60 per cent of all products coming from Europe, at full capacity, Dangote Refinery alone would have reduced the import by over 65 per cent if most West African countries turn to the refinery for supply.

NNPCL Refinery may become obsolete 
Although Nigeria is currently working to overhaul its refineries at a cost of about $3 billion, some analysts believe that the refineries could become useless and may also be difficult to sell.

Energy expert, Ademola Adigun, said while the Dangote Refinery remained positive for the economy and an elixir for the midstream and downstream segments of the industry, “there is still a need for clarity in some areas. How ready is the refinery to supply the product? The effect of the subsidy on petrol and logistics as well as linkages to the market and so on.”

Adigun added that the existing refineries could be rendered “a little more obsolete” as finding new buyers would be difficult.

Africa’s storage, distribution infrastructure, and emerging refineries 
Fom falling tankers that spill fuel and spark fire disasters to dismal port infrastructure and storage facilities, Nigeria and other African countries may have a long way to go in addressing the storage and distribution challenges on the continent.
The ARDA and stakeholders in the energy industry have said that the dismal state of storage and distribution infrastructure across Africa spells doom amid growing demand and population explosion.

Calling for a coordinated infrastructure for the supply and distribution of crude oil and petroleum products, ARDA said over 48 of the 54 countries in Africa lack pipeline networks to transport crude oil and fuels.

Speaking at a 2023 ARDA Work Group Workshop Series on Storage and Distribution, ARDA’s
Executive Secretary, Anibor Kragha said the continent must invest in regional, pan-African oil and product pipelines.

According to him, six countries in Africa have crude oil pipelines while eight have product pipelines and six countries have both.

Speaking further at the event titled “Making Storage & Distribution Supply Chain More Reliable to Ensure Energy Security and Optimise Costs,” Kragha said coordinated storage and distribution investments would be required in Africa to deliver Energy Transition Plans

The executive secretary urged countries like Nigeria and others to ensure that their storage investments are guided by refining outlook, existing capacity, and supply routes.

Kragha also called for the expansion of ports in Africa to reduce congestion and shipping costs, adding that the limitations in port infrastructure increase congestion and increase fuel costs

According to him, a minimum port draft of 14 meters can save $15 per metric ton of imported product.

While tankers would deface road networks in Nigeria as NNPC’s product pipelines are dormant, how Dangote would cope with the export of the 40 per cent output of his refinery remained an issue despite the African Continental Free Trade Area (AfCFTA).

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