7 December 2011

Nigeria: Why Can't the Country Refine its Oil?

Subsidy for petroleum products or not is no solutions to the numerous challenges in the downstream oil sector of the Nigerian economy.

There is a consensus that refining crude oil locally is the only answer to the problems and once there is enough refined oil in-house, nobody will talk about fuel scarcity or those bogus amounts spent in subsidy.

But the questions are, why can't we refine our oil? What are problems? And who are behind the failure? Only answers to these questions will be a good way to address the problems.

However the right people to give the answers are not ready to provide them, because they are part of the real cartels that benefit from the long commotion in the downstream.

Let start the argument this way! Nigeria as a country with ambition to be among the top 20 economies by the year 2020 (which is just eight years away), must understand that the yardstick for measuring development is not by flooding the market with imported products, but by adding value to the locally sources raw materials.

Oil or Crude oil at the moment is the largest commodity Nigeria produce. It accounts for 80 percent of its revenue. The first point to measure development is from this sector.

For instance, how far is the country in terms of adding value to this commodity, how many jobs can be generated from it and how many families benefit from it. These are the yardsticks.

If by now Nigeria can't refine up to 20 percent of total daily crude production and can't supply the home market with up to 50 percent of daily consumption, then there is serious problem with the vision 20-20-20 target.

The advantage of refining oil locally is enormous. With less than a million barrel of crude oil refine internally, Nigeria will have enough PMS, AGO, LPFO, DPK and many more. Each of this type of product is in high demand and very relevant to the development of the economy.

For instance the textile and other heavy duty industries such as cement factories folded up because of lack of Low Pour Fuel Oil (LPFO) which they use to turn their turbines, the product is now very expensive because it is scarce. And because of that Nigeria, is now cloth by China and India while over 80 percent of items in homes and offices are imported because industries can't function.

No electricity, no LPFO.

The country are export jobs from the growing population of China and India and recruiting Militants, Boko Harams and Almajiris everyday because they have no work to do. The textiles and agricultural sectors are enough to engage the youths on a useful venture.

The price of diesel needed to operate the tractors is among the highest in the world. For AGO or Diesel, the transporters are charging high fares to bridge products from the coastal areas to the hinterland which reflect on the prices of goods and services on daily basis.

Many households cannot afford to use DPK or Kerosene, because we don't have it here, as a result they resorted to cut down trees which constitutes environmental hazards. Once they country refine its crude oil, these problems will be solved.

If government have provide infrastructure in the system such as stable electricity, rail transportation, and cheap gas for cooking, as recommended by the Mantu Panel in 2005, that is six years ago, most of the challenges will have gone.

Many OPEC countries are planning towards 100 percent refining their oil locally, but not so in Nigeria. Many licences to build refineries were issued over 10 years ago but we people see around are illegal refineries glowing in the Niger Delta.

The government have signed about a year ago agreements to build refineries with Chinese, but the agreements are still at the feasibility studies stage.

The three refineries in Kaduna, Warri and Port Harcourt have merely become museums because for many years they are performing below 60 percent capacities despite the resources pumped in them.

It is like the NNPC refineries have scared away investors from the refining business. If the problems of refineries of such magnitude can't be traced for many years that alone is enough reason for investors to be scared.

The argument by government that private firms would not want to invest in a regulated regime doesn't hold water, because it's the responsibility of government to create enabling environment and good policies that will be attractive, not necessary deregulating.

The fear by the investors is not the regulation of fuel price but how serious government is in addressing issues of pipeline vandalism, security challenges, constant supply of crude oil to the refineries, guaranteeing quick return on investment and good financial regulations that will enable them to sources loans and payback without high interest from the banks.

All these are some of the key issues government need to address in order to pave ways for efficient downstream sector.

Now that Nigeria's close neighbours like Niger Republic and Ghana have join the league of oil refining business, it is good to strategically focus on bring solutions that can attract investors to the downstream sector.

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