Nigeria: Fresh Hope Beckons On Nigeria's Ailing Refineries

24 September 2019

The Nigerian National Petroleum Corporation has set a 2022 date for its three refineries in Kaduna, Warri and Port Harcourt to come back fully to operation, writes Chineme Okafor.

The Nigerian National Petroleum Corporation (NNPC) has said that repair works on its three refineries located in Port Harcourt, Warri and Kaduna, which have remained decrepit for years would begin in January of 2020, raising hopes Nigeria could yet again locally refine most of the petroleum products it needs to run her domestic economy.

The corporation has repeatedly made promises of repairing the refineries which efficiency have significantly dropped and often constituted a huge loss-making centre in its financial books.

However, it has never fulfilled any of these promises.

This has also ensured that Nigeria imports most of the petroleum products it uses, an unpleasant development that once pushed the immediate Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, to disclose he would resign his ministerial portfolio by May 2019 if Nigeria continued to import petrol.

Refineries' conditions

In terms of capacity utilisation, in August 2015, when Kachikwu first made a public declaration that the refineries would be repaired and their production levels revived, the NNPC in its monthly operations report had stated that their capacity were collectively on 24.08 per cent utilisation level.

They also recorded huge financial deficits in their operations with N1,940.12 billion recorded in January; N5,768.40 billion in February; N2, 893.56 billion in March; N6,234.59 billion in April; N5,596.15 billion in May; N5,899.34 billion in June; N3,211.34 billion in July; N139.12 million in August; N8,841.63 billion September; N1,445.06 billion in October; N7,211.38 in November; and then N7,824.40 in December.

By January 2016, the NNPC announced that the Port Harcourt and Kaduna refineries had been shut down because of breaches on their crude supply lines. It had also explained the supply interruptions were huge setbacks to its plan to get the refineries fully working, adding that it would subsequently start a comprehensive recovery of their capacities.

Their capacity utilisation in 2017 was further reported by the corporation to be 17.56 per cent in 2017 before they dropped to 8.02 per cent in 2018.

For 2017, the NNPC report showed that all through the year, the Warri refinery managed a 9.56 per cent capacity utilisation record; Port Harcourt made efforts with 24.14 per cent; while Kaduna recorded 14.10 per cent.

They also did not do so well financially, and recorded profits only in January - N3, 356.14 billion; March - N3,399.07; April - N1,577.79 billion; May - N2,678.88 billion; and June - N3,343.19 billion, and then posted deficits of N522.82 million in February; N8,517.78 billion in July; N4,636.29 billion in August; N3,518.60 billion September; N7,762.25 billion in October; N11,144.81 billion in November; and N11,095.28 billion in December.

In 2018, when the refineries' utilisation dropped to 8.02 per cent, they equally posted deficits of N13,586.11 billion in January; N8,055.05 billion in February; and N11,889.51 billion in March, before making a one-off profit of N6,321.63 billion in April, and then resumed its losses in May with a huge N20,081.80 billion deficits.

Similarly, in June, they posted a deficit of N14,510.02 billion; N10,449.19 billion in July; N10,793.03 billion in August; N6,972.98 billion in September; N9,326.32 billion in October; N9,585.04 billion in November; before ending the year with another remarkable deficit of N17,317.03 billion in December.

Even as the year 2019 turned in, the refineries according to NNPC's records equally started the year with a loss of N8, 362.02 billion, to underpin their inefficiency levels.

Cost of dilapidated refineries

Due to the failures of the refineries, Nigeria through the NNPC resorted to importation of petroleum products with which it runs its domestic economy.

This development as explained by industry operators meant the country relies solely on imported petroleum products to run on. It, in fact, also subsidises petrol thus spending billions to keep the pump price at a fixed price.

For instance, in 2018, the NNPC indicated that it imported 21,100,118,126.30 (21 billion) litres of petrol which translated to 57.8 million litres daily, into the country. In 2017, it said it was 14,430,373,377.03 (14 billion) litres; in 2016, it was 9,264,855,130.33 litres; while it was 6,179,719,852.27 litres in 2015.

And, because they were all imported, it thus implied that the country outsources or exports jobs in its midstream oil industry to other countries from where it buys its refined petroleum products.

Apart from the job losses, the government's subsidising of petrol consumption also meant that the country's scarce financial resources which should fund the provision of socially beneficial and optimal infrastructure like roads, hospitals and schools are less and often cut down in the national budget.

This equally leaves the country struggling year-on-year with fixing her widening public infrastructure gap.

Furthermore, on what the country losses to the decrepit refineries, a report of the World Bank, had indicated that Nigeria spent N731 billion subsiding petrol consumption.

The report had also stated that most of the volume of petrol Nigeria spent money subsidising in 2018 were inflated as daily consumption rose to 54 million litres per day (ml/d) from 40ml/d in 2017, ostensibly due partly to out-smuggling.

It specifically stated that with regards to the country's revenue from oil that: "The oil revenues continue to underperform both relative to the budget targets and their realistic potential due to the unbudgeted fuel subsidy (Nigerian National Petroleum Corporation (NNPC) 'cost under-recovery'), which amounted to N731 billion in 2018, among other discretionary deductions, and the dollar-naira conversion using an exchange rate lower than that prevailing in the convertible IEFX window.

"The NNPC financial reports indicate that about $2 billion (equivalent to 0.6 per cent GDP) were deducted from the gross oil revenue prior to the transfer to the federation account for the unbudgeted fuel subsidy (cost under-recovery).

"The calculations for the fuel subsidy are based on heavily inflated fuel consumption estimates, with the fiscally severely constrained Nigerian government effectively subsidising neighbouring countries' petrol consumption as some of the fuel is informally re-exported through the porous borders," the World Bank report had explained

Immediate past repair attempts

The NNPC had also recently made efforts to repair the refineries and attempted to get private investors to fund the repair on terms that would have been beneficial to both parties, but the arrangement collapsed eventually when both could not agree on terms.

The model which would have had investors come in to finance the repairs under mutually agreed business terms failed after negotiations reportedly broke down between the corporation and the investors who were initially interested.

It was reported that within the proposed model, the preferred investors would have brought in funds to repairs, run the facility for a period of time after which they would have recouped their investment.

After the breakdown of negotiations, the NNPC then announced it would now use its own money and debt financing from the financial markets to fix the refineries, starting with Port Harcourt, followed by the Warri and Kaduna.

It explained that the new strategy would involve the original builders as well as in phases. According to the corporation, at the end of the first phase, the Port Harcourt refinery would have attained a 60 per cent capacity utilisation level before shooting up to a minimum of 90 per cent upon the completion of the repair work.

It equally announced that Italian oil firm, Eni/NAOC was engaged as the technical advisor for the exercise and disclosed the first phase would run for six months within which detailed integrity check and equipment inspection of the refinery would take place before JGC of Japan which built it and Tecnimont would be invited to undertake the repair on an Engineering Procurement Construction (EPC) basis.

New date for refineries' to come back

However, in a recent statement from the corporation, its Group Managing Director, Malam Mele Kyari, reportedly said that the refineries would again be able to refine crude oil at optimum capacity by 2022.

Signed by its Group General Manager, Public Affairs, Mr. Ndu Ughamadu, the statement quoted Mele Kyari, to have disclosed the latest promise of restoring the full refining capacities of the refineries during a facilities tour of the Port-Harcourt Refining and Petrochemical Company (PHRC).

Mele Kyari explained that that full rehabilitation of the plants would commence in January of 2020, and that he was committed to ensuring the refineries deliver real-time value and address the petroleum needs of Nigerians.

According to him: "We will stick to time; we will deliver this project by 2022. We will commence actual rehabilitation work in January. We will do everything possible between October and December to close out all necessary conditions for us to deliver on that project.

"I believe that with the support that we have from the shareholders - government of this country, the entire staff of this company and the contractors, I believe it is doable and we will deliver the project."

Tasking the contractors on the need to consider their reputation in the repair work, Mele Kyari, said: "It's no longer about business now, but a reputational issue. For the original builders of the refinery, Tecnimont, Eni/NAOC and NNPC, let us be conscious of the fact that our reputation is at stake as far as this project is concerned.

"The NNPC leadership has promised this country that our refineries will work, therefore, we must work not to disappoint over 200 million Nigerian stakeholders."

He equally noted that the repair would include indigenous workers in the corporation's bid to help build local capacities and save cost in the process.

The statement similarly noted that the Tecnimont Project Manager, Mr. La Mattina Carmelo, in his presentation on the progress of work on the first phase of the repair work, informed that the inspection aspect of the project had progressed to 91 per cent while final report and Engineering Procurement Construction (EPC) proposal was on 75 per cent.

Carmelo, noted that his company would deliver the first phase of the rehabilitation within three weeks from now and assured there were no challenges to a timely delivery of the task.

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