Refineries: Endless TAM as money guzzling scheme
In June this year, when the Nigerian National Petroleum Corporation (NNPC) released the March edition of its monthly operational data, the nation’s four refineries were performing at 5.55 per cent of their combined nameplate capacity of 445,000 barrels per daily (bpd).
A breakdown of the March monthly oil and gas report showed that the refineries, which are located in Port Harcourt, Kaduna, and Warri, have continued to record deficit, with losses for the period under review rising to N16.03b.The Kaduna Refinery specifically recorded a deficit of N5.09b; Port Harcourt, N5.37b; and Warri, N5.56b in March, against a combined revenue projection of N7.7b during the month.
Indeed, under the President Muhammadu Buhari-led administration, the refineries have in the past four years recorded loses of N231b. To further accentuate the depth of the loss-making entities, the operating deficit recorded by the nation’s refineries stood at N34.57b, from June to December 2015; N8.64bn in 2016 (data for January to August only); N47.19b in 2017, and N132.51b in 2018.
Just recently, the United Nations Conference on Trade and Development (UNCTAD) confirmed that Nigeria’s downstream oil sector had receded in the last 20 years, especially in refining utilisation. In a report entitled “Commodity Dependence: A Twenty-Year Perspective,” the UN agency insisted that while refining capacity changed a little in the country, the utilisation rate fell woefully.
The realities become shameful, considering that Nigeria is a country with a current debt profile of N24.387t. Subsidy for imported petrol has hit an alarming N10t between 2006 and 2018 alone. This is higher than the proposed 2020 budget.
It is interesting to recall that this situation is coming at a time when the number of poor Nigerians has risen to 91 million, while unemployment figure settles at 20.9 million.Of all the ministers of petroleum resources and group managing directors of NNPC, none has delivered on their promises to overhaul the refineries, which have all become a drain pipe for taxpayers’ money. That notwithstanding, each time a new helmsman takes charge at the ministry or the NNPC, there are always promises to overhaul the four underperforming refineries, despite the failure of previous turn around maintenance (TAM) activities.
While speaking at a valedictory session for the former Group Managing Director of NNPC, Dr. Maikanti Baru, the new Group Managing Director (GMD), Mele Kyari on July 8, 2019 said he would fix the four refineries before the end of May 2023.
However, stakeholders in the oil and gas sector have not only taken this promise with a pinch of salt, they have also in diverse tones dripping with discontent and disappointment expressed disgust over the Federal Government’s postponement of the country’s plan to be self-sufficient in petroleum from 2019 to 2020.
The immediate past Minister of State for Petroleum, Ibe Kachikwu in 2017 vowed that Nigeria would become self-sufficient in refined petroleum products by 2019, promising to resign if the targets were not met. He failed to deliver on his promise.While the poor performance lingers, there is a daily allocation of crude of about 445, 000 barrel to these facilities.
Historical Perspective Of The Refineries
The Port Harcourt Refining Company (PHRC) is made up of two refineries located at Alesa-Eleme, Rivers State. The old refinery has a refining nameplate capacity of 60,000 barrels per day and was commissioned in 1965, while the new plant with name plate capacity of 150, 000 barrels per day was commissioned in 1989. The Kaduna Refinery and Petrochemical Company (KRPC) is located in Kaduna and the Warri Refinery and Petrochemical Company (WRPC) is sited in Warri, Delta State. A comprehensive network of pipelines and depots strategically located throughout Nigeria links these refineries.
Therefore, the current combined installed capacity of PHRC is 210, 000 bpsd. The plant utilises Bonny Light Crude Oil to produce Liquefied Petroleum Gas (LPG), PMS, DPK, AGO, Low Pour Fuel Oil (LPFO) and High Pour Fuel Oil (HPFO).The Warri refinery located in Ekpan was established in 1978 with a refining nameplate capacity of 100, 000 barrels per stream day plant, and was debottlenecked to 125, 000 barrels per stream day in 1987.
The refinery was installed as a complex conversion plant capable of producing LPG, PMS, DPK, AGO, and fuel oil from a blend of Escravos and Ughelli crude oils. The WRPC has a petrochemical plant complex that produces polyproylene, and carbon black from the propylene-rich feedstock and decants oil from the Fluid Catalytic Cracking Unit (FCCU).
The Kaduna refinery has a nameplate refining capacity of 110, 000 barrels per day. It possesses a fuel plant commissioned in 1983, and the 30, 000 MT per year petrochemical plant in 1988. The refining plant has two distillation units that utilise Escravos and Ughelli crude oils for fuels production and imported heavy crude oil for lube base oil, asphalt and waxes. Products obtained from KRPC include, LPG, PMS, House Hold Kerosene (HHK), ATK, AGO, and fuel oil. The petrochemical plant produces Linear Alkyl Benzene (LAB).
TAM As Conduit For Siphoning Funds
IN the face of very poor performance and large overheads, Nigeria has reportedly spent on TAM for the refineries almost beyond the cost of constructing the assets. While the NNPC has repeatedly said the costs are not readily available, the nation has reportedly staked about $6.065b on the rehabilitation of the four refineries between 1993 and 2016.
Reportedly, during the Ernest Shonekan-led Interim National Government, and the Abdulsalami Abubakar-led transitional administration, the NNPC spent about $308m on the repair of the refineries, that is from 1993 to 1998.From 1999 to 2007, about $1.67b was spent on the refineries, apart from the $39.7m said to have been set aside by the Abubakar-led administration in the 1999 transition budget prepared for the then incoming Obasanjo-led administration.
But in January this year, the immediate past GMD of NNPC, Baru made a shocking revelation, when he said that the country’s refineries have not undergone any TAM for an aggregate of 42 years. The implication is that funds allegedly approved for the maintenance of the refineries may have ended up in private pockets.
According to him, in a new move the WRPC, had its Distribution Control System (DCS) successfully upgraded; PHRC had major interventions in Fluid Catalytic Cracking Unit (FCCU), and Power Plant Unit (PPU), fixed, while KRPC was undergoing major repairs of its FCCU, Catalytic Reforming Unit, CRU, and Crude Distillation Unit 2, CDU2.
The Ministry of Petroleum Resources had in 2017 requested for $1.8b for the TAM of the refineries, but the National Assembly rejected the funding request because previous maintenance did not increase efficiency of the asset. Kachikwu, Baru, the former Finance Minister, Kemi Adeosun, Central Bank of Nigeria (CBN) Governor, Godwin Emefiele, and representatives of the refineries’ original builders were summoned before an ad-hoc committee of the Senate at some point during the 8th National Assembly over spending on the moribund assets.
The Baru-led administration had resorted to private financiers to turn the assets around. At many occasions, both Kachikwu and Baru promised to announce the would-be-investors but they never kept their words until they left office.
The state of obsolescence and decay of the refineries must be very severe for over $1.8b to be required to revamp and modernise them, the Executive Director of the Institute for Oil, Gas, Energy, Environment and Suitability (OGEES), Prof. Damilola Olawuyi noted in a manner that appeared to support Baru’s claim that the assets were not maintained despite allocation of huge funds over the years.
“Consequently, we have had several failed promises and announcements on these TAM programmes and activities, which never ultimately materialised. For example, we had a former minister who promised to achieve the much expected revamping of the four refineries by 2017, which never materialised,” Olawuyi said.
In March this year, the NNPC announced the commencement of rehabilitation of the 210, 000 barrels per day (bpd) capacity Port Harcourt Refinery. Being undertaken by a Milan-based Maire Tecnimont S.p.A, in collaboration with its Nigerian affiliate, Tecnimont Nigeria, the NNPC failed to disclose the financial implication of the rehabilitation works. But The Guardian learnt the corporation had gone ahead to finance the project in the absence of private investors.
Considering that the cost of maintaining the bureaucracy far outweighs the gains that would have accrued to the masses, stakeholders like Akpan Ekpo, a professor of Economics and Public Policy, at the Department of Economics, University of Uyo, believes that the poor performance of the refineries remains an indictment on past administrations, as well as past managements of the NNPC.
Ekpo said: “The state of the refineries is very worrisome particularly for a country that exports crude oil and imports refined products. The Turn Around Maintenance (TAM) has been going on for years, yet there are no positive results. One then begins to wonder whether the much talked about TAM actually took place, or it was used as a pipe for siphoning money from government’s treasury. That the refineries are producing and/or performing grossly below installed capacity is an indictment on every past and present government in the country, as well as past and present managements of the NNPC. I hope the experts are aware of the new technology in this area. In the 1980s, the refineries were doing well, and we were even exporting refined products. So what happened?”
Professor of Petroleum Economics and Policy Research, Wunmi Iledare, noted that the multiplier effects of the parlous state of the nation’s refineries to the aggregate economy in terms of employment, household income and Gross Domestic Product (GDP) is significantly higher in a functioning and booming downstream sector.
He equally expressed concerns over crude allocation saying: “Transferring payment for crude is not optimal. The swapping of products, from a pure optimisation point of view is not a rational economic justification for perpetual allocation of crude. Perhaps, minimisation of the likelihood of social unrest can be a valid argument for swapping the allocation for crude and the continuous under-recovery at the pump.”
How Continuous Decay Hurts Nigeria
AVAILABLE data indicates that the Warri and Kaduna refineries were built at about $1.4m. Warri cost N357m and Kaduna was N377m. That is roughly $1m and $1.3m now. Subsidy payment was introduced around 1986, and the aim was to alleviate poverty. Now, with over 32 years of subsidy regime, it is difficult for the country to name a single poor person whose life has been made better by the scheme.
With over N10t staked on subsidy between 2006 and 2018 alone, according to Budgit, Nigeria would have funded its yearly budget almost twice. If the funds were expended on road and power infrastructure, the challenges of the sectors would have ended and economic activities, as well as standard of living would have radically improved.
From 1999 to 2016, Nigeria has reportedly spent about N1.4t ($8.5b) on road construction or maintenance, even though with very little to show for it. The figure is only about 10 per cent of what the country has been subsidising fuel as a result of refinery challenges.
While the education sector is in decline, with the country accounting for the highest number of about 23, 000 lecturers that leave the continent every year, the figure on subsidy is three times higher than the N3.90t allocated to the education sector in the past 10 years (2009-2018) from a total budget of N55.19t.
It is also interesting to know that Nigerian government set aside N305b ($1m) for fuel subsidy in the 2019 budget. Apart from power, works and housing that received N408. 03b, the figure voted for subsidy is higher than every other capital project allocations including health and education.
The downstream sector of the petroleum industry has been reported to create $2, 500 value from one barrel of crude in comparison to only $25 dollars value added per barrel. While the situation remains, Nigeria would continue to depend on import. Indeed, employment that would have been created by functioning refineries would be denied, while industries that depend on the sector, especially petrochemical and others continue to struggle.
With over 80 per cent of the country’s foreign exchange earnings coming from crude oil, a professor of economics, Segun Ajibola, who is a former president of the Chartered Institute of Bankers of Nigeria, noted that much of the country’s foreign exchange earnings would continue being frittered away through the importation of refined oil products. To him, the continued poor state of the refineries despite huge expenditure on TAM reflects a major dislocation in the country’s planning system.
Challenges Facing The Refineries
STAKEHOLDERS in sector, including the NNPC have listed the bureaucratic nature of the NNPC as one of the major challenges facing the effective functioning of these assets since approvals are sometimes required to fix problems as simple as replacing a nut.
The Kaduna refinery, for instance, faces a location dilemma as pipelines, which take feed stocks up there are usually vandalised. This, perhaps prompted the Head, Energy Research, Ecobank, Dolapo Oni to state: “That refinery will constantly have problems because of its distance from any crude oil field. The refinery depends on pipeline from the Niger Delta laid up to the North. It is also equipped with only one-month storage capacity. The implication is that even if crude oil flow stops for only three weeks, the refinery is out of supply. Those are the disadvantages we have to battle with.”
Iledare on his part said the refineries also have mundane factors like corruption, tribalism, poor funding among others to grapple with, stressing that transparency and accountability remained foundational challenges that must be tackled.
“I think the whole pricing policy frameworks needs to be changed if we want the downstream petroleum sector to be virile and efficient. I am appalled at the continuous poor performance of the refineries and the drain on the lean fiscal resources of the government. The poor performance has become endemic and in my view, it has come to a time for the government to take a decisive position on the refineries. Under the current pricing regime for gasoline and the ownership structure of the refineries, they cannot be profitable,” Director, Centre for Petroleum, Energy Economics and Law (CPEEL), University of Ibadan, Prof. Adeola Adenikinju said.
As worrisome as the current leakages are, it is necessary to note that the Federal Government has continued to borrow to finance its yearly budgets.
It would be recalled that the nation’s excess crude account has also been depleted. So, should the price of oil decline, the nation could slip into another economic recession because of the level of depletion of the country’s Excess Crude Account (ECA).
As of last month, the Office of the Accountant General of the Federation (OAGF) said the balance stood at $274.407m.
In December last year, the ECA fell from $2.319b the previous month to $631m, dropping to $144m as of June this year. The ECA saves the difference between the estimated price and the actual price of crude, and as at last Wednesday, it had slumped from a previous balance of $497m reported at the beginning of the year.
Experts Urge Best Practices
OGEES Executive Director, Prof. Olawuyi maintains that it is important to develop a workable model that would attract investors, stressing that government alone, with all its responsibilities in other key sectors, may not realistically be able to meet the financial requirements of putting the refineries in perfect working conditions.
“This is why a clear public private partnership plan, especially with foreign investors and technical experts will be a more realistic and long-term option for addressing these problems in a sustainable manner. Without this, it may be the same situation of committing some money to TAM without having the financial and technical wherewithal to see it through. This is not only a monumental waste of resources; it is a knee-jerk solution that may not produce significant long-term result.
“The key problem is that any announcement made without a robust and realistic financial plan and commitments in place, is either a mere political promise, or at best, wishful thinking. What are the plans in place in terms of meeting the capital commitments required for the TAM of these refineries? Who are the financiers? Who are the technical partners? And what is the long-term opportunity for public-private partnerships (PPP) to keep the refineries functioning in optimal capacity for years to come?” He questioned.
Should government insist on a TAM? Prof. Ajibola cautioned that the process of carrying out the plan must be overhauled, especially with competent handlers through a transparent selection process. He equally wants the contract to contain clauses that would correct observed anomalies in the performances of the handlers, and protect the country’s interest.
Also on this score, Iledare said that the passage of the Petroleum Industry Bill (PIB), transparency and accountability remained critical to addressing inherent challenges. “The refineries need to be upgraded with new technology and not just about TAM. Capital infusion is needed, but the government may not have such funds. This is why there is the call to sell shares and not NNPC’s assets… There is nothing stopping the corporation from stepping up to the plate like its counterparts worldwide,” he said.
According to him, the NNPC must not be pressured to sell its refineries, adding that it remains a business decision because the refineries are part of the assets at NNPC’s disposal and disposing of them as scraps does not constitute a good economic decision.
Prof Ekpo is of the view that it is necessary to commercialise the refineries, but not to privatise them, adding that if they must be privatized, then the process must be transparent and undertaken through a public offer, with a caveat as to how many shares an individual could buy.
“Let me note that the country has bitter experiences with privatised government companies. None ever became viable after privatisation,” Ekpo said, adding that the National Assembly must use its oversight functions, through its committees and the full house to halt the waste surrounding TAM. “There is need for a comprehensive review of money spent on TAM and the outcomes. There should be sanctions for those found wanting in the process.”