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Refineries: Contemplating the modular option

By Roseline Okere
30 July 2017   |   4:16 am
Despite having refining capacity that exceeds demand, Nigeria ranks as the third highest importer of petroleum products in Africa, importing over 80 per cent of products it consumes.

Modular refineries has been identified as a sound short-term measure for dealing with fuel shortages, while also limiting the colossal environmental damage from illegal refineries, industry experts believe that this is neither a community development alternative, nor a sustainable option for addressing widespread youth unemployment.

Despite having refining capacity that exceeds demand, Nigeria ranks as the third highest importer of petroleum products in Africa, importing over 80 per cent of products it consumes.In other words, the country has been consistently struggling to keep its refineries functioning optimally, but with little success.

The two refineries in Port Harcourt, Rivers State, the Kaduna and Warri refineries, have a combined output capacity of 445,000 barrels per day (bpd), but barely able to meet less than 35 per cent of their installed capacity.

Burdened by the need to increase refining capacity and eliminate crude oil theft in the Niger Delta, acting President, Prof. Yemi Osinbajo, during his visit to the Niger Delta, promised that the issue of illegal refining of stolen crude in the region would be creatively tackled with the introduction of modular refinery.

He also promised to work with operators of illegal refineries, by engaging youths from the region in legal, profitable business of refining petroleum products.“Our approach to that is that we must engage those (illegal refiners) by establishing modular refineries so that they can participate in legal refineries. We have recognised that young men must be properly engaged,” Osinbajo said.

Without a doubt, the establishment of modular refineries would reduce the huge capital flight occasioned by fuel importation, while also meeting local demand and possible export.Already, the Department of Petroleum Resources (DPR) has issued new guidelines for the establishment of hydrocarbon processing plants, as well as, a “supplementary guidelines for the design, construction and operation of modular refinery plants in the country.

According to the DPR, the guidelines shall cover all refinery establishments, adding that the establishment of modular refinery plants shall be with designed capacity not more than 30, 000 bpd.To ensure that the plans materialise, The Guardian understands that the government has set aside about 56 licenses for modular refineries in the Niger Delta, a move, it believes would bring to an end, illegal refining activities and youths agitation in the region.

Already, the Nigerian National Petroleum Corporation (NNPC) has commenced moves to attract 20 companies to make substantial investments worth $20 billion, in order to meet the Federal Government’s target of increasing refining capacity, which includes the promotion of modular refineries.Despite the Federal Government’s involvement in making sure that these modular refineries come on stream, there are fears in some quarter that the initiative could only be mirage.

Can Modular Refineries Curb Pipeline Vandalism?
Much as the establishment of modular refineries has been identified as a sound short-term measure for dealing with fuel shortages, while also limiting the colossal environmental damage from illegal refineries, industry experts believe that this is neither a community development alternative, nor a sustainable option for addressing widespread youth unemployment.

Ifeanyi Izeze, an oil and gas analyst is strongly of the view that the establishment of modular refineries cannot stop pipeline vandalism and widespread oil theft in the Niger Delta, neither can it address the core agitation of Niger Delta youths.

However, Izeze said the idea of building modular refineries across the region, as originally conceived by the NNPC, and the Ministry of Petroleum Resources was sound reasoning, very practicable, and demonstratively a true paradigm shift for good.That notwithstanding, he lamented that the project has since been hijacked and distorted beyond recognition.

“The way we are going about the initiative is simply dancing around the real problem and seeking to create a new crop of billionaires, without addressing the infrastructure development issues at the core of the Niger Delta agitation.

“How can these self-acclaimed leaders turn everything into cheap politics by saying things they are not competent to speak on? Since when has building a modular refinery become synonymous with infrastructure development? So what is all this noise about putting toy refineries in a few locations across the Niger Delta as the panacea for the correction of the region’s development imbalance? Is modular refinery a development or service infrastructure? He questioned.

Izeze continued: “How is the building of modular refineries in each state going to stop illegal refining, pipeline tampering, and crude oil theft in the region? What has the building of modular refineries got to do with rehabilitating former militants, most of whom are pure illiterates?”

He pointed out that whosoever thinks that few modular refineries in the Niger Delta would make oil-bearing communities and indigenes become fanatical about a fresh sense of ownership; deep sense of commitment and responsibility for protecting all the Nigerian oil assets in their environment, hence eradicating the ugly era of pipeline vandalisation and oil spills and saving the Nigerian government the current daily loss of huge sums of money, should actually think twice.

Rescuing Nation From Petrol Import Palaver
In the midst of excruciating resource constraints, dire infrastructure challenges and development funding requirements, the country last year spent about N3.4 trillion importing petroleum products. This year, the figure is expected to rise to over N4 trillion. But Osinbajo while shedding light on the Federal Government’s resort to modular refinery said the idea was motivated by the need for Nigerians to exploit the abundant oil and gas resources.

He added that a lot of the interest along modular refineries came from the need to provide an alternative to illegal refineries, which has caused environmental damage in the Niger Delta.“This is aside of the fact that the crude is stolen, and even in the process of stealing the crude, a lot of environmental damage is done. So, there is a very serious reason, an environmental reason, and also a reason of law and order to ensure that we regulate the production and processing of oil,” he stated.

He added that a second and more important reason is the fact that the raw material for the modular refineries is available, challenging the innovative and creative ingenuity of Nigerians to harness it.“Government cannot just go and set up refineries. If government sets up refineries and give them to people to run, it won’t work, and we have good examples in all the refineries that we have seen.

“If you look at all the refineries that we have today, the reason why they are not working is because they are government run, government cannot do business. Government’s business is to create the enabling environment for people to do business. At best government will put some investments into it. Government should not be in the business of setting up refineries all over the place,” the acting president stated.

In tune with the Federal Government’s position on modular refineries is Professor of Chemical Engineering at the University of Port Harcourt, Godwin Igwe, said the fact that the Federal Government has the motivation and desire to legalise illegal refineries was a commendable development.He added that the current free fall of the price of crude could be turned into gold for the country if it builds modular refineries in most states across the country.

According to him, oil communities can be transformed simply by forming oil community cooperatives and making them key stakeholders in the ownership and operations of these modular refineries.“Also, communities and indigenes will have an alternative sustainable source of income as this will foster a fresh sense of ownership, deep sense of commitment and responsibility for protecting all Nigerian oil assets in their environment, hence eradicating the ugly era of pipeline vandalisation and oil spills, and saving the government the current daily loss of huge sums of money,” he added.

For energy expert, Kayode Adeoye, given the stratified nature of the country’s population in terms of ethnic tensions, it might be advisable for regional refining to be considered where indigenous modular plants are operated and overseen by indigenes of the region for their own economic benefit.“In this case, if they blow it up, then they are really hurting themselves as opposed to seeing the facility as a symbol of government or multinational domination.“Small-scale modular plants will yield more economic benefits and return on investments than their large-scale counterparts, and with proper government incentive, imports will be reduced to zero and export of refined crude oil to neighboring countries will be promoted, the naira will be further strengthened, the problem of fuel scarcity, which the country experiences will be finally rested.”

Funding Challenges
FUNDING challenge has been identified as a major hurdle that investors may encounter, as the oil and gas sector remains one of the biggest debtors to Nigerian banks.
Head, Ecobank Energy Research, Dolapo Oni, is of the view that investors would likely encounter funding and other challenges as far as modular refineries are concerned.

According to him, Nigerian banks have already provided the maximum 20 per cent loans to operators in the energy industry, as stipulated by the Central Bank of Nigeria.
Oni noted that many beneficiaries of the loans have not been able to pay back, a development that always leads to litigations once the banks move to recover their funds.

Consequently, he called on investors to look beyond loans for funding modular refineries. “In the light of the current state of affairs, it would be advisable for investors to think of creative ways and means of raising funds to implement their projects, including modular refineries.”

“Specifically, they should think of equity participation and other options, apparently because apart from many projects call for medium and long term funding, which many banks are not ready to consider at this time,” he added.

Crude Supply Challenge
ALTHOUGH, under the arrangement, government intends to supply crude oil to the local refineries at reasonably concessional prices as an incentive to stop the current illegal breaking of pipelines and stealing of crude oil, there is the tendency that these refineries may encounter crude supply challenges, according to PricewaterhouseCoopers.

In a document titled: “Nigeria’s Refinery Revaluation” prepared by PricewaterhouseCoopers, its Nigeria’s Associate Director, Olumide Adeosun, said one of the biggest challenges, which local refineries will be faced with is guaranteed supply of feedstock. This, he said, can be attributed to several reasons including inadequate infrastructure, insecurity, unstable production.

According to him, in a the document he co-authored with PWC Senior Associate, Ayodele Oluleye, the 650,000 bpd Dangote refinery, a crucial development within the sector, is expected to come on stream by 2019. “At optimal utilisation, the refinery is capable of meeting the country’s demand, however a major headwind to achieving a fully optimised run, is availability of crude feedstock.

“At full capacity, the refinery will require about 19 (1 million barrel) cargoes of crude monthly, approximately half of Algeria’s (third largest producer in Africa) production. For the initial years of operation, this may be a significant challenge.“Therefore, the current supply gap within the country and region creates an opportunity not just for conventional refineries such as the Dangote Refinery, but also for modular refineries, which will be set up primarily to meet domestic demand.

“Another critical assumption is that the modular refineries yield will be limited to fuel oils and diesel as the lightest hydrocarbon produced. In Nigeria, local refineries will be required to explore varied options to ensure constant access to feedstock required to keep refining output at optimal levels. Feedstock can be sourced from various locations. However, each location will have its corresponding cost implications. Distance from source and type of feedstock are two key considerations because they impact refining economics.

“Refiners would be required to look beyond heavy reliance on the government for feedstock. Leveraging strategic partnerships with upstream oil and gas (onshore) producers, and setting up close to crude sources are likely considerations to guarantee steady supply of crude. Sourcing for crude in international markets would be a likely option for conventional refineries, which have sizeable crude requirements. On the other hand, modular refineries are likely to explore co-location within existing refineries and onshore marginal fields.”

But for the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, government is considering a situation where modular refineries would be located only in areas where its products would be easily evacuated, and where getting feedstock to them would not be cumbersome.According to him, the Federal Government is commissioning a broad study that would lead to the development of an intelligent plan for the construction of modular refineries in the region.

He said, “It is important to clear a misconception, especially as it has to do with modular refineries. Setting up smaller modular refineries in so many places in the Niger Delta would worsen gas flares in the region and also bring about environmental challenges.

“It is critical to develop an integrated approach and plan to modular refineries construction in the Niger Delta, ensure that they are properly optimised and are not scattered everywhere,” he said.“If the refineries were scattered everywhere they would not provide significant economic benefits to the country,” Kachikwu added.