[size=14pt]How to make private refineries viable[/size]
By DANIEL ESSIET13/12/2011 01:34:00

• Mrs Alison-Madueke

The government intends to raise daily production and reserves by encouraging new operations of private refineries. The goal is to export refined oil with greater value-added and to stop importation of refined products. But there are challenges, DANIEL ESSIET reports

The current refining capac ity of the country is being augmented with imports largely from refineries in Venezuela, the Caribbean and Europe. For the past few years, the refineries have been reeling under financial and operational challenges that have made it extremely difficult for them to discharge their responsibilities to the satisfaction of Nigerians.

The challenges result in perennial shortage of petroleum products. To address this, the government granted licences to 18 private refineries . After more than four years, most of the refineries are yet to take off. They cite problems, such as funding to build basic infrastructure, administered fuel price, non-availability of appropriate technology, logistics among others.

Regulators’ perspective

The Group Managing Director, Nigeria National Petroleum Company (NNPC), Austin Oniwon, has said running private refineries in the country was not feasible. Oniwon, who spoke with reporters after he delivered a paper as the guest speaker at the pre-convocation ceremony of the Ahmadu Bello University, said the cost and loss implication in running a private refinery could be so enormous for a businessman to survive. The NNPC boss, therefore, urged those Nigerians calling for the establishment of private refinery before the removal of oil subsidy to have a rethink. He said it was only the government that could withstand the financial rigour and loss in venturing into refining of crude oil.

He assured that the company was making effort to explore and drill oil in the Chad and other basins in the country, expressing the optimism that with modern technology in place, the exercise would be fruitful in no distant time. While noting that only the government can bear the loss in the industry, Oniwon pointed out that nobody would want to buy crude oil at the international market and earn below the price for the product without profit.

Oniwon said: “One of the biggest barriers to any private businessman that is doing investment is if he cannot recover his cost and make profit. Business people survive from the profit they make. A situation whereby you control a price of petroleum products to a point that is below the cost of manufacturing the product, only the government can really invest in such sector because it is only government that bears the loss. Anybody you tell to go and pay for crude oil at international price and earn below the international price for the product he is going to bring, will not do it.

“That is why private refinery licences are stalled. But once we have the courage to deregulate the sector, you will be surprised. The upstream was deregulated. In fact, nobody ever regulated the upstream and you can see how many people are there. The telecoms was deregulated, you see how many people are paying there.
But watchers said the refining industry has dominated by the NAPE and don't share enough of it.

Experts’ perspective

Mining consultant, Prof. Zacheaus Opafunso, said oil shortages will not be eased if the industry lacks competition and all the core resources are highly monopolised in the hands of NNPC. Opafunso said liberalisation of the domestic crude oil market and competition from independent refineries will improve fuel supply. He said the government has a responsibility to promote and encourage sustainable oil and gas development and practices that benefit all Nigerians.

Elsewhere, he noted that private oil refineries have remained a vital component of oil industry and a significant driver for the economy. He cited Reliance Group, which is running of one of the world’s biggest refineries (one million b/d capacity) in India that accounts for one-third of the refining capacity in the country. The expert said private refineries are usually disposed to increasing production and refining capacities.

According to him, liberalising private petroleum refining in a market with sufficient demand and potential for growth mean well for the domestic downstream sector. He said what the nation needs is an independent federal agency that regulates several private refineries to promote safety and security, environmental protection and efficient infrastructure and markets in the public interest .

Opafunso said investors are wary of putting their money in a business where the price of products is still being determined by the government. The fear of the investors, according to him, is that with the industry yet to be fully deregulated, they might not be able to recoup their investments as quickly as possible, especially considering the fact that the business is capital intensive.

The investors are also wary of the safety of the refineries and their investments, which is why they are insisting that the host communities for the refineries, local and state governments must have shares in the refineries to be set up. The investors are also accusing the Federal Government of creating a hostile business environment in the country. Of grave concern to the foreign investors is the perceived penchant of government for changing the rules in the middle of the game. Consequently, the foreign investors have reportedly demanded guarantees from the government that their investments would be well-protected through stable policies and creation of an enabling environment for them to operate.

On funding required for energy investment, he said there will large-scale penetration of private players in the energy sector once they are guaranteed the enabling environment.

He said private investors are attracted by market-based returns, and the future policies will have to ensure fair returns to increase private sector investments. He called on the government provide a win-win arrangement that will enable private petroleum refineries to be run efficiently.

The President, Nigerian Association for Energy Economics (NAEE), an affiliate of the International Association for Energy Economics (IAEE), Prof Adeola Adenikinju, said the problems facing the refining sector has had negative impact on the crude-oil and refined-products market. He said no effort has been made to add refining capacity in line with the surging domestic demand for fuels. He said the government need to go ahead with its refining projects to meet its surging domestic demand for refined products and to reduce dependence on imports. Refinery and upgrade problems at times caused pro-rationing of fuel supply, which further tightens the situation and raise prices. For consumers in far North, supplies remained tight providing fundamental support for new refineries. Much of the rapid rise in fuel prices can be attributed to market response to tight supply .

The general outlook for fuel prices remains uncertain given poor supply across the country. In some areas of the country, petrol is sold for N180. Petrol prices increased in some states because of high costs of transportation. For watchers, the government needs to pay special attention to ongoing geopolitical threats to supply, at times producing significant price swings. Anticipated and actual capacity constraints on major pipelines contributed to the widening differential. New refiners are going to face new challenges with tightening global standards for fuel quality; increased taxation and regulation of carbon dioxide emissions; and competition from biofuels and natural gas liquids (NGLs) .

Refiners with large investments on technologies to give cleaner fuels are expected to gain greater global market share and good refinery margins. The major oil companies have a unique position when they own the oil for their refineries. They can sell their end products cheaper and also increase their market shares. The independent refineries without crude supplies with long-term and discounted contracts may well go out of business.

New refinery

Meanwhile, a private refinery owned by Niger Delta Petroleum Resources Ltd (NDPR), a subsidiary of Niger Delta Exploration and Production Plc, has begun operation in Rivers State. The firm has also been granted a Licence to Operate (LTO) by the Federal Government. Built at Ahaoda East Local Government Area of Rivers State, the refinery, which was completed in December 2010, has been undergoing test-runs, while the operating licence was being awaited.

Fabrication had started in January 2010 by Chemex Incorporated of Texas, California in the United States. The operating licence gives the NDPR full authority to operate its mini-diesel refinery, referred to as “Topping Plant” at the company’s Ogbele Oil Field in old Oil Mining Lease (OML) 54, located in the state. The NDPR’s operating licence, which was signed by the Minister of Petroleum, Mrs. Diezani Alison-Madueke, was the first of its kind to be granted to an independent, publicly-owned Nigerian company.

The Chief Executive Officer of Niger Delta Exploration and Production Plc, Dr. ‘Layi Adetona, said the refinery, which had an initial capacity of 1,000 barrels of crude per day, now produces 120,000 litres of diesel per day, using crude oil from the company's Ogbele Flow station.
Adetona said with the operating licence, the refinery, which was installed to initially promote self-sufficiency in the company's operations, would now contribute to Nigeria's energy production by selling surplus diesel to independent fuel marketers for local consumption.

“Several years ago, we had the problem of cost. We saw a situation where we were spending so much money to buy diesel for our operations and we thought there has to be a process whereby we can cut that cost by building a small refinery.

“Now, with the deregulation of the market, it suddenly became attractive that it is not just having capacity to produce what we can consume, but a little bit more. The plant that we have happens to satisfy that technical specification. So, we have not just achieved self-dependence. We also have excess capacity to commercialise the additional output that we have,” he said.

He stated that it was cheaper to refine petroleum products locally than to import from abroad, adding that the operating licence allows the company to operate the refinery and commercialise its products.

“We have 100 per cent full dependence on ourselves to supply diesel for all our operations and we still have excess capacity to sell the balance of what we produce. We produce about 120,000 litres of diesel daily and our daily consumption is less than one quarter of this figure. In effect, we can sell at least, three truck loads of diesel from our plant every day,” he added.

http://www.thenationonlineng.net/2011/index.php/business/energy/29600-how-to-make-private-refineries-viable.html

Can't GEJ be courageous and face real issues for once. Must they destroy this country.