The journey to self sufficiency in petroleum refining

Kachikwuu

By Lakinbofa Goodluck

The history of crude oil refining in Nigeria can be traced to 1965 when Shell built the 38,000 barrels per day (bpd) refinery. Later, the government acquired the refinery sited in Port-Harcourt from Shell Petroleum at an installed capacity of 60, 000bpd. Additionally, a new refinery with installed capacity of 150, 000 bpd was built by the Nigerian government, and with that the PHRC had a refining capacity of 210, 000 bpd. The government further built two other refineries in Kaduna and Warri with 110,000 bpd and 125,000 bpd respectively. Essentially, by 1988 Nigeria had four world class refineries with installed capacity of 445,000 bpd. The refineries were well-managed and efficient enough to meet local demands at the time. The government also developed a network of pipelines to link all the refineries and enable them serve the country appropriately.

However, the refineries began to experience deterioration in the mid-90s and became a regular aperturefor government expenditure in the name of Turn-Around-Maintenance (TAM). The deterioration in our refineries has been largely due to lack of maintenance and government inefficiency. Billions of naira has been expended on repairing the refineries yet nothing has changed since the days of Sani Abacha. As a result, a country that once could supplyits local needs has now become the 2nd highest importer of petroleum products in Africa importing about 80% of its consumption and only next to Tanzania in that regard. The Observatory of Economic Complexity of MIT(OEC) puts the estimate of Nigeria’s 2015 petroleum products import at $6billion; and sadly we even import petroleum products from countries like Cote D’Ivoire and Republic of Niger.The petroleum products mostly imported are Premium Motor Spirit (PMS) popularly called Petrol, Automotive Gas Oil (AGO) and Aviation fuel. So, we export crude oil and import refined products and in the process build other economies while we obliviously weaken ours.

The importation of petroleum products necessitated by the inefficient refineries has not only been a shame; it has also fuelled corruption. For many years, the government was subsidizing fuel importation to ensure that the citizenry buy the product at inexpensive price. Events have shown that the fuel subsidy regime is a policy that should never have been introduced in the first place. However, Nigerians got a comfyoption in obtaining free gift from the government and were not ready to let go of the free pie. Many were not aware that the government was practically enriching the pockets of a few at the expense of the future of the entire nation. The government should have ensured that the refineries worked or introduced policies that would facilitate local refining of crude oil. That did not happen, and to make up for their shortcomings, they introduced the subsidy regime. According to the World Bank, Nigeria spent $35billion on fuel subsidy between 2010 and 2014; by 2015 we were already spending 18% of government revenues on fuel subsidy. Now, the biggest oil refinery in India cost $30billion and the 650, 000bpd Dangote Refinery is costing less than $17billion.A simple analysis shows that the money spent on subsidy between 2010 and 2014 alone is enough to build 2 new refineries in Nigeria with installed capacity of 1.3million bpd. Sadly, that never happened. In fact initial attempt to remove the subsidy in 2012 was greeted with opposition predominantly powered by those who had political motives at the time. Many Nigerians who were protesting against the removal at the time did not even possessmarginal understanding of what they were protesting against, but they had to follow popular opinion. Today, subsidy has been removed and the story is different.

The complete deregulation of the downstream, which was inhibited by the subsidy regime, is finally becoming a possibility. With complete deregulation the industry becomes more attractive to willing and smart investors who can provide the needed buffer to meet local demand. In addition, the government will no longer be burdenedby subsidy payment to petroleum marketers who can easily decide to go on strike for the non-payment. It is now evident that the subsidy removal we resisted years ago is one solution to our fuel supply and consumption problem.

Beyond this immediate achievement, the Minister of State for Petroleum has presented himself as a man with clear vision for the petroleum industry, at least with respect to the downstream sector. He has set a target of 2019 for local refining sufficiency, which is very attainable with the right policies and political disposition. There are basically two types of refinery to aid this vision – modular and conventional. The Niger Delta region is known for housing a number of modular refineries, which have been operating illegally. The government had earlier approached the situation using force with rigorous attempt to destroy the modular refineries for their illegality. Somehow, the government eventuallysaw the need to formalise the refineries and invite the perpetrators to regularise their operations and pay tax to the government. The government is reported have awarded over 22 licences to different operators for the construction of modular refineries.

The biggest hope provider at the moment is the Dangote Refinery that is scheduled to come on board in 2019. The refinery, when completed, will have an installed capacity of 650, 000 barrel per day, more that the installed capacity of the four government owned refineries in the country. The refinery is also touted to be the biggest in Africa and one of the largest in the world. Being a project driven by private initiative and shielded from government bureaucracy, one can be assured that it will be truly ready by 2019. Its completion will definitely usher a new vista in the Nigerian downstream sector.

Additionally, according to the Department of Petroleum Resources, there are currently about 3 license holders in Nigeria who are making arrangements to build conventional refineries with varying capacity in the country. To further encourage willing investors, the government recently reduce the cost for obtaining a Licence to Establish from $1million to $150, 000 and also reduced approval period to 14days. By this singular move, the government has further shown commitment and opened up the market for willing investors. Young entrepreneurs can now take advantage of this opportunity by forming mutually beneficial partnerships. The foregoing shows that we are gradually walking into a new era in local refining in Nigeria.

Nevertheless, taking a cue from other sectors of the economy that have been completely deregulated, it is evident that the ease of entrance into a sector is not enough to grow the industry. For refineries to be effective and profitable in Nigeria, the government needs to ensure that the Niger Delta crisis is completely nipped in the bud by addressing the demands of the agitators. Without sufficient crude oil production many of the refineries may not be able to perform optimally. In like manner, there should be institutional framework to ensure that the new policy direction is not reversed by subsequent administrations. Before the Jonathan administration embraced the idea of deregulating the downstream sector, his predecessor had reversed the sale of the government owned refineries by the Obasanjo administration, which has now turned out to be a setback.

In the same vein, there is no point wasting hard-earned funds on repairing and maintaining the four government-owned refineries that have defied every possible attempt to revitalise them. Except for few exceptions, it is evident that government run commercial entities in Nigeria have been largely mismanaged and underperformed. When the private refineries come on board and are able to supply local demands what exactly will happen to the existing government owned refineries? Chances are that they either go completely moribund or we are forced to sell them off at a very insignificant price. This assumption is predicated on the circumstances we find ourselves as a nation. Until our attitude towards government investment changes, it will be difficult to have a government owned commercial enterprise that can adequately compete with a privately run counterpart.

The Minister has indicated the government’s interest in repairing the refineries, and in this regard, the government will need another $1.2bilion. If for political reasons the government is indignant to selling off the refineries, there are other PPP options available for consideration. Whatever the case may be, the earlier we take the refineries away from government bureaucracy the better for us as a nation. It will be a total disaster to commit $1.2billion to repairing these refineries only for us to sell them at half the price five years from now.

Ultimately, we can look into the future with expectations that someday and in no distant time, we will wake up to headlines that “Nigeria is now a net exporter of petroleum products”. Inasmuch as it sounds good, it is not a destination. The most important virtue is how we are able to sustain that feat and build on it, which requires that we put the right framework in place now in preparation for the future we see. It is important to build infrastructure that will support the vision. We need more rails for the transportation of products from the refineries or terminals to other destinations. Enough has been said about our roads; we need the government to take action. Please, let this not be another dashed hope.



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