Minimum conditionalities for greenfield refineries

CURRENTLY, Nigeria’s value proposition for investors in refining is import parity pricing, 60 per cent crude oil availability, ample regional demand, a deficit local product market especially for petrol and diesel.

However, foreign investors are unlikely to invest in refineries in Nigeria, if the government charges international spot prices for crude oil for domestic processing and consumption. They will consider it more profitable to procure the same volume of feedstock at the same price in New York or Rotterdam and operate their refineries in Europe or in the USA, where refining margins are higher, markets bigger, institutional environment more stable, and social overhead capital more developed.

Therefore, foreign investors and indeed domestic investors would require the right incentives (that is, a guaranteed profit margin) to enable them venture into the Nigerian refining market. The price of crude oil for domestic consumption should be discounted, a minimum of 60 days credit cycle for each cargo of crude oil, at least for the first five years of operations. Should we not rather subsidise local production of refined petroleum products, than subsidise its importation? This is the first condition.

Next let us consider the politics of refineries’ location. Most refining projects are likely to ‘come to grief’, unless the federal arm of government negotiates with the governors of state governments on where refineries could possibly be profitably located. The outcome of such negotiations should be based on ensuring that the relevant governors grant access to intending domestic refiners.

Most Governors, with the possible exception of those who are not interested in propagating their local political influence beyond their tenure, would be unwilling to support such projects unless they are an integral part of it. They do not want a ‘cash cow’ in their states breathing down politically on their necks! A 16, 000 barrel a day refinery can generate above $100m in a year, if it operates efficiently! With such cash flows, the refiners can control the politics of that very State, almost perpetually. Amakpe Refining Company, which is located in Akwa Ibom State had completed the fabrication of its modular refinery (by VENTECH, USA) as at 2012 but the state government ‘pulled the plug’ on the project. The fabricated modular refinery units are still incurring demurrage and gathering dust in the US. This is the second condition.

Refineries are constructed to process crude oil on a daily basis. Therefore, refiners must have 100 per cent guarantee of crude oil feedstock for at least 10 years. The supply of crude feedstock should commence as soon as the Department of Petroleum Resources (DPR) can certify mechanical completion of each new plant. This is the third condition!
Refineries are designed to operate continuously for two years, only to be switched off for say two months for routine maintenance. Thereafter, the refinery is operated for another two years non-stop, and that pattern continues. Refineries cannot be switched off ‘just like electric bulbs’. This has implications for product evacuation from the refinery storage tanks. Therefore, government has to guarantee 100% refined products off-take. Currently, the Pipelines & Products Marketing Company (PPMC) is the NNPC subsidiary in charge of evacuation of refined products through national pipelines and storage depots. This is the fourth condition.
Government has to provide guarantees of foreign loans for domestic companies wishing to set up refineries. Refining is a capital-intensive business. This is the fifth condition.

I would also suggest other minor incentives, e.g. that plants be granted tax exemption for at least three (3) years from date of commencement of operations; plants should be exempt from import and export duties and value-added tax (VAT) for at least five (5) years; plants should enjoy accelerated capital allowance of about 95%, and the percentage of assessable profit for the purpose of capital allowance recovery should be 70% at most.

• Prof Chijioke Nwaozuzu is Deputy-Director at Emerald Energy Institute, University of Port Harcourt.