The Problem With Private Refining In Nigeria

Nigeria is a blessed country and even now in the second decade of the twenty first century, and fifty four years after Independence, very few people will dispute this fact. With an estimated 80 trillion cubic feet of crude oil deposit still sitting below our grounds, our romance with the black gold is far from over. Even our crude, the Bonny Light for instance is sought after all over the world because of its high API (low specific gravity) which makes it easier to drill. Also the very low Sulphur content makes it easier and cheaper to refine because it hardly corrodes the refinery equipment and the impact of its by-products are generally environment friendly. But one question remains on the lips anyone who takes a prima facie look at the state of our petroleum industry; "why can't Nigeria refine her own crude?" This question has been asked for decades and the fact that our four refineries have remained on a perpetually chronic turn around maintenance confuses analysts even the more. The 2 Portharcourt refineries, the Kaduna and Warri refineries all have a combined output capacity of 445,000barrels per day (bpd) but according to experts, they are barely able to meet up less than 35% of their production ability. One may then be forced to ask, what exactly is the problem? Looking at it technically it would be tricky trying to figure out a diagnosis, but from a lay man's point of view I can easily point out three problems, which of course had bedeviled (and is still bedevilling) Nigerian government institutions. They are;
1. Corruption
2. Gross Inefficiency, and
3. Bureaucratic bottlenecks/red-tapism
These three demons, have possessed virtually all government establishments in Nigeria and successive regimes have tried to exorcise them with little or no results. By the dawn of the fourth republic, it became clear that privately owned refineries were needed to augment local refining of crude since the nationally owned refineries had become all but reliable.

Perhaps having this at the back of his mind, the Olusegun Obasanjo administration in 2002 granted licenses to 28 oil companies and other private investors to commence refining crude oil in the country. The companies awarded licenses included Akwa Ibom Refinery and Petrochemicals, Tonwei Refinery, Badagry Petroleum Refinery, Clean Water Refinery, Ilaje Refinery and Petrochemicals, Niger Delta Refinery and Petrochemicals, NSP Refinery and Oil services, Ode Ade Refinery and Orient Petroleum Resources Ltd. Others were Owena Oil and Gas, Rivgas Petroleum and Energy, Sapele Petroleum, Southland Assosiates, Southwest Refineries and Petrochemical Company, Starex Petroleum Refinery Ltd, The Chasewood Consortium, Total Support Refineries and Union Petroleum. But several years down the line, none of the licensees had commenced production, that was up till the time of the Jonathan administration.
In 2011, one of the private refineries, the Niger Delta Refineries and Petrochemicals (NDRP) which is owned by the Niger Delta Petroleum Resources (NDPR) announced that it had begun production in Rivers state. Built at Ahaoda East LGA, the refinery was completed in December 2010 and began undergoing test-runs in January 2011. It started with an initial capacity of 1,000 bpd of crude oil and used crude oil from NDPR's Ogbele flow station. However their production capacity of about 120,000 litres of diesel daily was just a drop in the ocean compared to Nigeria's daily consumption. What they churned out was roughly just 3 tanker trucks daily. However the company's Chief Executive Officer, Dr Layi Adetona said they were planning to expand in the future if situation improved.
Another private refinery that made attempts at production was the Anambra state based, Orient Petroleum Ltd. In 2013 the company concluded purchases and production of essential parts needed for the refinery to take off. By the end of 2013, they had begun refining, although this writer does not have at the moment, the actual quantity in barrels they are producing daily. Presently, the company is also occupied with exploration of crude oil and gas and it seems not much urgency is placed on refining for now.

Because of the seemingly lack of interest shown by the private refineries, the Department of Petroleum Resources (DPR) withdrew the licenses of 21 out of the 28 oil companies. The DPR cited the inability of the licensees to show any seriousness with their projects as one of their reasons for the withdrawal. They also accused the companies of being more concerned with the crude oil which the government promised to provide them as seed for takeoff, and planning to sell off the crude rather than use them for what they were meant; refining. However the companies have complained of several start off problems and hic ups and also unfavorable government policies. A critical look will therefore reveal the problems militating against private refineries in Nigeria.

Cost and Profitability
One of the biggest barriers to any private businessman that is investing anywhere in the world is the inability to recover his cost and make profit. Just like oil prospecting and drilling, refining is also an expensive venture. The initial costs of just setting up for instance a 100,000bpd refinery can run into billions of Dollars. This is in part because most of the equipment needed have to be sourced from outside the country. In Nigeria, apart from very wealthy investors, only the government can withstand the financial rigour and loss in venturing into refining of crude oil. The implication is that the players in the industry are limited to federal and state governments, and multinational companies like Shell, Chevron, Total e.t.c. A solution to this problem will be to encourage small scale refineries across the country. During the civil war that ravaged the country between June 1967 and January 1970, the short-lived sovereign nation of Biafra was able to produce fuel for their cars, trucks, airplanes, cooking e.t.c by making use of large clusters of these cottage refineries. Any wonder then how they were able to keep the machinery of state running for almost 3 years? It is however sad to note that the Federal Military Government discarded this idea in favour of larger, more complicated refineries controlled only by the state.

Over-regulation By Government
This perhaps apart from cost is the greatest challenge hindering private refineries in Nigeria. Imaging buying crude oil at the international price and then factoring in costs of refining, having to be forced by Government to sell it at a cheaper price. Indeed any investor for that matter will be wary of putting his money in a business where the price of the products is still being determined by the government. . This is one of the main reason why private refinery licenses were stalled. As long as the F.G through the Petroleum Pricing and Regulatory Authority (PPPRA) continues fixing prices of petroleum products, refineries will continue being out of business. As a matter of fact, the upstream is the only sector not affected by regulation, unlike the midstream and downstream. Nobody ever regulated the upstream, and as a result, we can see the number of players there; the oil majors (Shell BP, Mobil, Chevron, Total, AGIP), the indigenous companies (Seplat, Oando, Conoil, Monipulo and so on).
There is no gainsaying then, the fact that a total deregulation of the mid- and down-stream sectors will encourage local refining to a great extent. When the F.G deregulated the Telecoms sector and scrapped NITEL, the sector was transformed for the better as multinationals like MTN, GLO, Airtel now drive the sector. The petroleum sector's growth will remain stunted because the industry lacks competition and all the core-operations (drilling, prospecting, refining, marketing, pricing e.t.c) are monopolised by the NNPC. The fear of private refinery investors is that they may not be able to recoup their investments as quickly as possible with the industry yet to be fully deregulated, and I agree with them. Government should break the stranglehold of the NNPC and unbundle the corporation into smaller more manageable bodies. For instance it will not be a bad idea having a separate independent federal agency regulating and guiding private refineries in Nigeria just as we have the NCC with telecommunications.

Enabling environment
We are all witnesses to the frequent spate of attacks on government oil installations across the country especially in the Niger Delta region by vandals and hostile communities. The security of the refineries and other investments is another core factor considered by private refinery investors before setting up shop. In some cases we have seen some indigenous oil company owners accuse the F.G of creating a hostile business environment in the country especially for oil business. The oil spills by NNPC subsidiary NDPR and the oil majors like Shell B.P , and their non-challant attitude towards cleaning up the polluted environments have pitted them severally against their host communities. The spiralling effect has led to widespread vandalisation of oil pipelines with the attackers claiming that their source of livelihood (farming, fishing) had been decimated by the companies with little or no compensation. This attitude has to stop if government is willing to encourage local refineries. The host communities must always be carried along by any investor. Perhaps we may wish to draw a lesson from Orient Petroleum. he company paid a N65m to its 2 host communities of Nsugbe and Umuleri as compensation for their crops destroyed in the process of setting up the refinery. It also reached agreements with the 2 communities for some sort of profit sharing from proceeds of sales of refined products. This is addition to other social amenities like provision of electricity, construction of roads and water supply. When the host community is happy, the investor's installation will by all means remain safe.

Conclusion - Is there light at the end of the tunnel? You may want to ask. Well, there is if you ask me. Despite the enormous challenges, some investors are still putting money into refineries in Nigeria. A typical example is Africa's richest man and billionaire businessman, Aliko Dangote. His company, Dangote industries has almost completed a $9bn refinery and petrochemical/fertilizer complex in Lagos. Infact it is expected to begin test-running in 2016! But one delightful thing about the Dangote refinery is that its initial refining capacity of about 400,000bpd is almost the output of our nation's four refineries put together. If Dangote succeeds, others like Orient and NDRP will be encouraged to also increase capacity. In India, a non-crude oil exporting country, Reliance Group, an oil company runs one of the world's biggest private refineries there. Its refining output is 1millionbpd, and it accounts for one-third of the refining capacity in the country. If Dangote and others join hands, who says we cannot reach or even exceed 1 million bpd local production? That will practically turn Nigeria from a net importer to net exporter of refined petroleum products. The Jonathan administration did it with Cement, as in 2014 we produced more that 22 million metric tonnes of cement, automatically making us a net exporter of the product. This was achieved because of the total deregulation of that sector.

My advise therefore to the incoming Buhari administration is to pursue the passage of the Petroleum Industry Bill that will see to the unbundling of the NNPC. That will be the first step towards deregulating the petroleum sector. He must also take courage and see to the eventual removal of oil subsidy as that is one of the biggest drainpipes in our economy. He must also encourage modular refineries. President Jonathan began this move by approving establishment of modular refineries last year. Modular refineries cost much less, have shorter project cycle and can concentrate on one product at a time. This good initiative and others must be sustained by the incoming administration, if we are to say a final goodbye to the endless queues in our fuel stations.

(Ndibe Nonso is a Pharmacist and Public Affairs Analyst)


(Source - http://www.ndibe.org/2015/05/the-problem-with-private-refineries-in.html)

Paste it here for evrybody to read

wordcat:
Paste it here for evrybody to read

Done. The full article is there now.

A lot of information in this article are flawed. The OP needs to do more research or get more facts from DPR and Private owners for a more robust analysis.

Nice but,,,,,,,,,,,,,,,

Our govt is good on policies that will favour the few and westerners but,,,,,,,,,,,,,,

I pray that Buhari will heed to your advice but,,,,,,,,,,,,,

I doubt.

Huffington:
Done. The full article is there now.