28 August 2011

Nigeria: Oil Importation - Old Problem, New Solutions


Nigeria is the world's sixth largest producer of oil, yet she depends on imported refined products because her refineries have failed to operate at peak capacity. In this report, GEORGE OKOJIE examines the problems and moves by different interest groups to address the situation.

Whenever Nigerians are confronted with the problems of high prices and shortage of petroleum products, they remember that the source of their problem is the absence of a refinery in the country,working at its optimal level, one which will be able to convert crude oil into finished petroleum products and raw materials for other industries.

Before the refineries were incapacitated with operational problems, Nigeria had four of them, all of which were owned by the Federal Government and managed by the Nigerian National Petroleum Corporation Company, (NNPC ), and they were situated in Kaduna, Warri and Port Harcourt .

Though the country exports more than 2 million barrels per day (bpd), the four refineries had a combined capacity of 445,000 bpd. They have never reached full production capacity, because of corruption, sabotage and poor maintenance.

As is the case with government-owned enterprises in the country, the refineries all have very poor maintenance history, making them unreliable for uninterrupted domestic production of petroleum products, even at the very best of times.

With the state of the four refineries, massive fuel importation has become unavoidable, because the nation's refineries can only produce less than 30 per cent of what is required to meet the local demand of petroleum products.

Even under the present democratic dispensation, ever since the late Umaru Yar' Adua's administration cancelled the last-minute sale of Kaduna and Port Harcourt refineries to the Blue Stars consortium by Olusegun Obasanjo's administration, a deal supported by the World Bank, the refineries have only succeeded in gulping more money and producing very little in return.

Though the NNPC had failed to manage the refineries properly, reports suggest that the Federal Government still prefers the state-owned and managed approach to the issue of refinery ownership to private sector ownership.

the minister of petroleum resources, Diezani Alison-Madueke, indicated clearly, the how the government plans to get over the challenges. She said the government would soon embark on turn around maintenance (TAM) of the nation's refineries as a viable option of resolving the problem of petroleum products' scarcity in the country

She said discussions had also been held between the government and its partner, a consortium of Chinese companies, over the refineries.

"We are going to commence an intensive turn around maintenance in all our refineries, so as to produce more products, in order to meet up with our daily consumptions.

"We are planning, in the next two to three years from now, to scale down importation of products into the country."

LEADERSHIP SUNDAY learnt that the Chinese State Engineering and Construction Company (CECC) has, in collaboration with the Nigerian National Petroleum Corporation (NNPC) had begun intensive preliminary designs for Greenfield refinery projects in Lagos, Kogi and Bayelsa states.

The minister confirmed the plan when she said feasibility study of the proposed fields was ongoing.She said once the survey is completed, the Chinese company will commence operation.

Allison-Madueke promised that in three months time, the ministry would commence total turn around maintenance (TAM) of the country's refineries.

Frantic efforts made by the minister to get more refineries built also suggested that government was unamused that the country still struggled with inadequate refining capacity, fuel import bills and the economically strangulating amount paid by government as subsidy.

According to her, when the discussion of the greenfield refineries with the Chinese consortium is sealed building and operation will commence.

In pursuit of the agenda, the NNPC had, before now, led a team of Chinese investors and engineers from the China State Engineering Construction Corporation to appraise the physical environment of the proposed locations of the Lagos and Kogi states refineries and kick-start preliminary project design activities.

To make headway, most experts are of the opinion that, given the situation of the country, attention should be directed at building mini-refineries, as is done in other climes, rather than spend time building white elephant refineries all over the place.

a petroleum analyst based in the United States of America, Mobolaji Aluko, said the cost of erecting a new refinery was pretty large.

"Based on my best estimates from so many sources, I could guess it is between $1,000 and $5,000 per barrel per stream day capacity, depending on the capacity of the refinery. The lower the capacity the lower the unit bpd cost.

"For example, a 20,000 bpd capacity refinery may cost $20m, while a 100,000 bpd capacity refinery might cost $500m. Realistically, the investment cost of new refineries and the emergency situation that we are in suggest that we, in Nigeria, should get into the low end of the capacity business (that is mini-refineries) of the order of between 5,000 and 60,000 bpd.

"That is between 5 and 60 bpd, but it is only good for quick modular building and easy operational costs, rather than the high end of it (100,00 - 200,000 bpd or 100 - 200 tpd). That is still roughly $5 - $60m - or at $1/N125, that is N0.625 - N7.5b. This does not include operating costs."

Querying the sum of money spent on Turn Around Maintenance of the refineries, considering results in the past, he said, "In fact, spending the purported $700m on TAM on new refineries could have given us quite a number of them. Maybe not 10, but at least 5 in four years.

"Personally, I think that 30 - 60,000 bpd refineries in each geo-political zone that does not have one right now (that is South-west, North-east, North-central and South-east) would go a long way to ameliorate our situation. Government should not build them, but should do everything possible to quickly encourage private players to do so without specifying fuel prices for them - that is liberalisation and deregulation".

It is not as if the government is not reasoning in this direction of allowing the private sector to be a major player in the sector. The government had, before now, awarded 18 private refinery licences after opening up the country's downstream sector to private investment.

Former President Olusegun Obasanjo performed the foundation-laying ceremony of the $1.5b Tonwei Refinery (in October 2002) in a ceremony marking the start of the construction of Nigeria's first private refinery.

Companies that got the preliminary approval were Akwa Ibom Refining and Petrochemicals, Badagry Petroleum Refinery, Clean Waters Refinery, Ilaje Refinery and Petrochemicals, Niger Delta Refinery and Petrochemicals, and NSP Refineries and Oil Services, Ode-Aye Refinery, Orient Petroleum Resources, Owena Oil and Gas, Rivgas Petroleum and Energy, Sapele Petroleum, Southland Associates, Southwest Refineries and Petrochemicals, Starex Petroleum Refinery, The Chasewood Consortium, Tonwei Refinery, Total Support Refineries and Union Atlantic Petroleum.

As the country and its citizenry battle with the twin problems of scarcity and high price of petroleum products, the issue has gone beyond the mere issuance of licences to build refineries. More so, no one has been commissioned many years after the licenses were issued.

The group managing director, Oando Plc., Mr. Wale Tinubu, told LEADERSHIP SUNDAY that the dearth of refineries in the country could be traced to the unwillingness of the Federal Government of Nigeria to discontinue the regulation of the downstream sector of the oil and gas industry.

The chairman, Major Oil Marketers Association of Nigeria(MOMAN) said that continued provision of subsidy by the Federal Government is hindering private sector participation in the building of refineries.

Tinubu revealed that in 2011 alone, about N8bn has been expended on subsidising petroleum products, an amount he said is huge enough to construct, at least, two refineries.

He went further to state that the current kerosene scarcity is a direct fallout of government's refusal to completely hands off total regulation of the downstream sector of the economy.

"We will never have refinery development in Nigeria until the Federal Government completely liberalises the oil sector of the economy. Last year, about N4bn was spent on fuel subsidy. This year, the figure has jumped to N8bn. Subsidy will continue to rise as the nation's population keeps rising," he predicted.

With the issue of pump price becoming a highly political one successive governments in the country fear to discuss, some state governments appear to be rising up to the challenge of building a refinery in the country.

The Lagos state commissioner for commerce, Mrs. Shola Oworu, told LEADERSHIP SUNDAY that the state government had concluded plans with the Federal Government to build a refinery in the Lekki Free Trade Zone

Oworu said the Federal government, through the Nigerian National Petroleum Corporation(NNPC), is to establish an industrial park complex which would comprise of a refinery and a petro-chemical plant within the zone.

She said about 1500 hectares of land had been allocated for the project and a memoradum of understanding had been signed with the NNPC,and added that the refinery would be known as "Greenfield Refinery".

In readiness to partner with the NNPC in the building of a refinery in his state ,the governor of Kogi State, Ibrahim Idris, recently presented a Certificate of Occupancy for 450 hectares stretch of land across the bank of the River Niger in Itobe village, Ofu local government area of the state, as a proposed site for the refinery to the NNPC group managing director, Austen Oniwon.

To ensure hitch-free construction of the refinery, the GMD urged the Kogi State government to participate in the development of the project as a co-investor, and assured that besides financial returns, the refinery would create job opportunities for up to 3,000 construction workers and an estimated 2,000 workers to run the industrial complex.

In Imo state, the state government also set up an implementation committee for the Imo refinery, to address the issue of dearth of refineries in the country, with a view to finding a lasting solution.

According to the chairman of the implementation committee for the Imo Refinery project, Anthony Chukwueke, the NNPC had already signed an agreement in principle supporting the 100,000 bpd refinery in the south-eastern part of the country.

"We now need the government to honour the agreements, because it contains some incentives we want to put in place for investors, and when we have obtained this, we will be in the position to invite investors to participate," he said.

He also said the plan was to ramp- up production of petroleum products in Imo to 200,000 or 250,000 bpd, with first refined oil likely to be achieved by 2016, and added that land for the proposed refinery had already been identified.

Again, as a fallout of the UK prime minister, David Cameron's visit to Nigeria recently, the Federal Government and United Kingdom are said to have commenced discussions on the establishment of crude oil refineries and cocoa processing plants in the country as part of efforts aimed at deepening trade relationship between the two countries.

"Having noticed that two of our major exports to the United Kingdom are crude oil and cocoa, and as a fallout of the UK Prime Minister's comment on the need for Africa to have free trade, I suggested the need for the UK government to encourage UK companies refining crude petroleum and processing cocoa companies here in Nigeria and export the rest to Africa,"said minister of trade and investment, Olusegun Aganga.

While various efforts are being made to salvage the situation which makes Nigeria the only oil producing nation in the world that relies on imported finished petroleum products, Nigerians are praying for such efforts not to end up like previous attempts. A commentator said, "We have had beautiful plans in the past to address the problems in the petroleum sector, but they all failed, because of massive corruption. That problem should be tackled first".

Nigeria cannot afford to fail this time.

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