Nigeria’s Quest for Fuel Sufficiency, Refineries’ Revamp

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By JEROME ONOJA & AMOS IKE

T he Minister of State for Petroleum Resources, Chief Timipre Sylva and the Nigerian National Petroleum Corporation (NNPC) had set a target of 2023 for the revamp of the country’s refineries and to end the importation of premium motor spirit (PMS), also known as petrol. The commitment of the government to this target had been called to question in the not-toodistant past. This article explores Nigeria’s journey through fuel shortages and the refinery quagmire, along with the various attempts of the government and private sector to remedy the situation.

The Federal Government of Nigeria’s quest to end fuel importation by 2023 might yet be achievable, going by the drive of the country to fully rehabilitate the country’s refineries and support private investors in their efforts to set up crude oil refining facilities anywhere in the country. Ensuring that the country’s refineries return to full capacity, supported by private refineries, remained the only avenue through which Nigeria can achieve its goal of becoming a net exporter of petroleum products across the globe. The near absence of functional refineries in Nigeria dates back to early 2000, when the country’s refining capacity began dwindling, and fell to less than 10 per cent of the facilities’ installed capacity. With the collapse of the refineries, Nigeria, which used to export petroleum products to neighbouring countries, later became a net exporter of the commodity, with the attendant loss of foreign exchange earnings and other illicit activities linked to unbridled fuel import.

For almost two decades, Nigerians suffered fuel shortages, with massive fuel queues emerging especially at critical periods, such as during the Yuletide season and other festive periods. The fuel shortages, which became perennial, consistently disrupted the Nigerian economy, spiked the country’s inflation rate and worsened the living standards of the people. It gradually became a regular occurrence that at Christmas, those who travel to country sides for celebration, a common ritual, were forced to pay exorbitant fees. It was either a case of PMS shortage, hoarding, illegal export or panic

buying. At other times, it was a combination of all the factors. With the collapse of the refineries, kerosene also known as paraffin, became scarce. Meanwhile, this has always been an important household fuel since the mid-19th century, not just for Nigerians but developing nations in general. Where the commodity was available it was sold at a dear price. This forced the vast majority into seeking alternatives in solid fuels, biomass and coal, for cooking and other household needs. The cause of the kerosene scarcity was later attributed to systemic dysfunction arising from years of mismanagement of the oil sector.

In their Policy Brief, titled, ‘Kerosene Subsidy Reform and the Burden of Supply,’ Victoria Ohaeri and Temitope Adeyinka of Spaces for Change (S4C), a civil society organisation, lamented that years after the changes in kerosene subsidy policy, kerosene supply challenges remained as prices soared across major cities in Nigeria. They said, “to stem the protracted shortages of household kerosene, the Petroleum Products Pricing Regulatory Agency (PPPRA) removed the subsidy on kerosene in January 2016, and deregulated the kerosene market, pushing up the price from N50 to N83 ($0.23). “While the N83 per pump price applied only to Nigerian National Petroleum Corporation’s (NNPC’s) retail outlets, the capacity of independent marketers to import fuel and sell at the official rate was hampered by the lingering foreign exchange (forex) scarcity situation in Nigeria. “Forex scarcity challenges have persisted despite the Central Bank of Nigeria’s, CBN, deregulation of the forex market to bridge the widening gap between the official and parallel market rates, and wipe out the arbitrage.

“The difficulty product marketers face in sourcing forex requirements from parallel or autonomous market sources has provided NNPC’s subsidiary, the Pipelines and Products Marketing Company (PPMC) with a monopoly on kerosene imports, forcing marketers to either suspend or abandon importation.

“Consequently, months after the changes in kerosene subsidy policy, kerosene supply challenges remained, as prices soared across major cities in Nigeria. Power imbalances that traditionally exist on the basis of gender have strong implications on women’s capacities to access energy products like kerosene which is predominantly used by the poor and low-income earners for their domestic energy needs. “Kerosene subsidy reform can therefore, have positive effects if it leads to improved energy supply systems, increasing energy access to the poor and the vulnerable, especially women living in far-off communities that lack electricity and energy-efficient services.” In addition, to kerosene scarcity, petroleum products smuggling, pipeline vandalisation, crude oil and products theft hit an all-time high in Nigeria, and served as a major drain on the country’s resources. All these became pronounced with the advent of illegal refineries, which provided a veritable avenue for dubious elements to cash in on the situation at hand.

Okonjo-Iweala

Nigeria’s former finance minister, Dr. Ngozi Okonjo-Iweala, in 2012 brought the attention of the international community to the large scale crude oil theft in Nigeria, when she disclosed that Nigeria was losing about 400,000 barrels of crude oil per day, translating to over $1 billion monthly. The Nigerian Security and Civil Defence Corps, NSCDC, had stated that between 2003 and 2005, over 2,258 cases of oil pipeline vandalism were recorded; while Shell Petroleum Development Company, SPDC, disclosed that since

2012, it has removed more than 160 illegal theft points from its facilities. In addition, the Nigerian Navy in 2013, stated that Nigeria was losing $20 billion annually to crude oil theft, estimated at 55,210 barrels of oil lost per day, while the Nigeria Natural Resource Charter, NNRC, noted that N3.8 trillion was lost to crude oil theft, sabotage and pipeline vandalism in 2016 alone. On its own part, energy data firm, Oil Price Reports, stated that between 2011 and 2014, Nigeria lost over $25 billion to crude oil theft, while the United States Institute of Peace, had in 2009, declared that $100 billion was lost from illegal oil bunkering between 2003 and 2008. From the NNPC reports, between May 2018 and May 2019, the country lost N188.8 billion to crude oil and petroleum products theft. Specifically, the report noted that in the 13-month period, N4.557 billion worth of crude oil was lost; petroleum products losses stood at N27.49 billion; while pipeline repairs and management costs gulped N156.76 billion.

The NNPC further stated that between May 2018 to May 2019, 2,014 vandalised points were recorded on its vast pipeline network across the country. The NNPC lamented that products theft and vandalism had continued to destroy value and put it at disadvantaged competitive position. Furthermore, the collapse of the refineries opened a window of opportunity for unscrupulous individuals to defraud the country, using the fuel subsidy racket. Following cries by Nigerians, the Senate, in 2011, instituted a probe of the country’s subsidy expenditure, where it found the NNPC guilty of making double withdrawals and accountable to the country. The joint committee later published the names of beneficiaries of the fuel subsidy scheme operated by government agencies. An ad-hoc committee of the House of Representatives also probed the fuel subsidy regime in 2012, and it was discovered that the subsidy administration was heavily compromised, while it also exposed massive fraud in the oil sector.

kyari

The committee further revealed that $6.8 billion was unaccounted for, while it prescribed sanctions to individuals in the government, companies, and organisations involved for various offences including negligence and fraud.

It also recommended that the Ministry of Petroleum Resources be split into two to ensure effective supervision of the industry. The report of the 2012 investigative committee on the subsidy by the House of Assembly was taken up by anti-graft agencies, which led to investigations of the indicted parties, some of whom have been convicted by the courts while other cases are still pending.

The EFCC had indicated that the convictions attracted sentences ranging from eight to 10 years in prison. The court also ordered that more than N789.6 million that had been fraudulently collected as subsidy claims be refunded to the Federal Government. Furthermore, to cushion the endless fuel shortages, the Nigerian National Petroleum Corporation, NNPC, entered into various arrangements to bridge the fuel supply gap in the country, such as crude oil for products swap and the Offshore Processing Arrangement (OPA), which were later jettisoned for the Direct-Sale-Direct-Purchase (DSDP) arrangement. Announcing the transition to the DSDP in 2015, the NNPC stated that replacement of the OPA with the more efficient DSDP was aimed at enshrining transparency and eliminating the activities of middlemen in the crude oil exchange for product matrix. According to NNPC, the DirectSale-Direct-Purchase alternative allows for the direct sale of crude oil by NNPC as well as direct purchase of petroleum products from credible international refineries.

The NNPC further explained that it came to this informed position after the evaluation exercise of pre-qualified bidders revealed that most of the 44 companies earlier shortlisted for the next stage of the tender process only had affiliations to refineries abroad a situation which introduces toll on the value chain. It added that if allowed to subsist, the development would in turn constitute a significant value loss to the federation by way of accruals.

The claim of the government had always been that PMS was mainly consumed by the rich in the society, however, recent statistics had proven that more and more Nigerian masses are now using power generators, especially the small-sized ones, popularly called “I better pass my neighbour.” This had increased the number of people using petrol and whose lives are impacted negatively by the nonfunctional refineries. Specifically, in 2017, the then Speaker of the House of Representatives,

that Nigerians spent $5 billion annually on power generators,

promised that the House would support the Executive to find a permanent solution to the power problem in the country. In 2016, the United Nations Statistics Division, in a report on Genset.

Simbi Wabote

Import/Export Trade, revealed that manufacturers of generators, including General Electric, Cummins, FG .Wilsons; Siemens, and other major power firms, brought into Nigeria, different brands of generators worth $51.055 million, about N10 billion in 2014/2015, about N10 billion, adding that the figure is projected to hit $450 million by 2020. In addition, in a report on Nigeria’s electricity situation, Bloomberg stated that business owners and individuals in Nigeria spend about $12 billion fueling power generators every year. “To keep out the darkness, households own and operate an estimated 22 million small gasoline power generators, whose combined generating capacity is eight times higher than on-grid supply. Businesses and individuals spend about $12 billion a year, twice the country’s annual infrastructure budget, fueling these generators,” the report stated. However, despite the tale of woes, efforts are ongoing to address Nigeria’s refining challenges, as a number of refinery projects are currently ongoing, while work is expected to commence in some in the next few months. Specifically, it’s no longer news that Dangote Group is setting up a 650,000 barrels per day refineries, which is stated to be 75 per cent complete; while a number of refineries are also scheduled to come on stream in the next couple of months, like the 5,000 Waltersmith modular refinery and the 12,000 barrels per day Azikel modular refinery, both enjoying financial support from the Nigerian Content Development Monitoring Board (NCDMB).

Aliko Dangote

Already, the modular refinery of Niger Delta Petroleum Resources (NDPR) is currently producing and there are plans to increase the capacity of the refinery to 11,000 barrels per day.

In addition to these, the Federal Government had announced plans to rehabilitate all the country’s refineries. The country’s refineries are the Port Harcourt, Warri and Kaduna refineries. The NNPC had set a deadline of 2023 to end fuel importation, stating that it is planning a model where original builders of the refineries would be engaged to undertake the revamp and management of the refineries. The revamp of the refineries and emergence of new modular and conventional refineries, would make a positive impact in helping the country conserve its foreign reserves, generate employment and buoy the economy by boosting the industrial sector and increasing the contribution of the Micro, Small and Medium scale Enterprises (MSME) to the country’s Gross Domestic Product, GDP.

In addition, boosting Nigeria’s refining capacity would help the country bypass OPEC’s quota and output restrictions, as well as help the country absorb the expected increase in its crude oil output scheduled to come from major oil and gas projects, such as the Egina field, planned oil bid rounds and inland basin oil finds. Nigeria’s target to produce three million barrels of crude oil per day would also provide the much-needed feedstock for the refineries, while the refineries would help absorb most of the mined crude.

The emergence of these refineries would make Nigeria the refining hub in West Africa and a major supplier of petroleum products across the region.

Huub Stokman

In his presentation at the just concluded Nigerian International Petroleum Summit (NIPS) in Abuja, Chief Executive Officer of OVH Energy, Huub Stokman, stated that a free market was critical to driving Nigeria’s downstream sector development. He said, “On refinery, you can’t have a conversation around the downstream industry without the refining. I think that the enhanced refining capacity which is imminent both with the traditional and the modular refineries will change the paradigm from an import country to a self-sufficient country, and that’s a key catalyst for the rest of the industry. “There are some benefits of these refineries as a catalyst. Product quality in my view will improve which will aid the environment and also reduce consumption.” In her own submission, chief operating officer of MicCom Cables, who is also a keen follower of developments in the oil sector, Bukola Adubi disclosed that, for Nigeria to tackle its refining challenges, it must undertake the deregulation of the downstream petroleum sector and

also reverse the neglect of the sector. She argued that the inability of the country to make its refineries function at full capacity had raised serious questions as to whether the country was truly committed to investing in refineries. She said, “The crux of this challenge is the volume of investment in the nation’s refining capacity. We are leaving out the real problem; we are not investing in refineries in Nigeria and we need to address that issue. With what Nigerian Content Development and Monitoring Board (NCDMB) is doing in its alliance with private entities, we are seeing a lot of traction. Already, we know there will be huge in-country value addition when these modular refineries get commissioned. Equally exciting is the news of Waltersmith extending the production capacity beyond 5,000bopd in the next phase. Let’s not lose sight of the fact that Dangote’s refinery will be functioning in the free trade zone. Technically, that’s outside Nigeria. On the contrary, these modular refineries are 100 per cent in Nigeria. We need more. We also need to see our dead refineries come back to life. No investment should be a waste.

Bukola Adubi

“As the quest for increase in production volume by NNPC continues with ne projects, even new oil finds, it’s only rational to expect a surge in investment for refineries that will mop up the excess and even dig into OPEC’s allocation for the country. “Multiplier effect of having refineries scattered around the country are numerous. Just for starters, this will create jobs for us, create value and opportunities for technology to transfer”. Also speaking, Director/Chief Executive Officer, Department of Petroleum Resources (DPR), Sarki Auwalu, acknowledged that refining is key to government’s goal of making energy affordable. He said, “Government wants to create the enabling environment for investors to come into the downstream sector.”

Explaining the fate of the refineries, Minister of State for Petroleum Resources, Chief Timipre Sylva, stated that the country’s refineries had performed below their capacity over the years because the assets were not run as business to yield requisite returns and add value to Nigeria’s economy. He said, “We ran them as a government. If a seal starts to leak in Port Harcourt refinery, the approval process to get that seal fixed is a long and tortuous bureaucratic process. By the time you go through that whole process and go back to fix that seal, maybe another two have started leaking as well. “You don’t run a refinery like that. You must run it as a business. Unfortunately, we have not run our refineries as a business. Some states will say bring all the money that we get from oil sales into the federation account and share.

Sarki Auwalu

That is not how you run a business. “The Federal Government has to put in some cash as our contribution; the IOCs have to put down some cash before they invest. But some people insist we must share the money. If you run a company like that, you will run it aground.

Timipre Sylva

But if you run it as a business, it means this is our business, this is our bread and butter; we cannot allow the oil industry to die.

Let us get the profit, let us share the profit and let’s ensure that this money will be reinvested to improve the oil sector.” In addition, in its report titled, ‘Nigeria’s Refining Revolution’, PriceWaterHouse Cooper s (PWC), however, stated that the economic viability of a refinery is dependent on the interaction of three elements, type of crude oil used, the complexity of the refining equipment (refinery configuration) and the desired type and quality of products produced. According to the global consulting firm, a key requirement for refining profitability is finding the sweet spot between cost of inputs and price of outputs

in a highly volatile environment influenced by global, regional, and local supply and demand fluctuations. It said, “Refineries have minimal influence over the price of input and outputs and, therefore, must ensure operational efficiency to improve profitability and gain competitive edge. This entails reducing operating costs such as labour, maintenance, energy (electricity and natural gas) etc. to the barest minimum.

“Efficiency is achieved through o p e r a t i o n a l e xc e l l e n c e , innovation, maintenance & upgrades and optimisation to produce more output from fewer inputs. “Although refineries share certain similarities, each refining asset is a unique and complex industrial facility, with some flexibility in the crude it can process and the mix of product yields it can refine. “Factors such as refinery configuration and complexity directly impact refinery end products while location and transportation infrastructure impact energy, labour and compliance costs.” PWC further stated that, “Investors are constantly faced with tough decisions on refinery setup options which will yield the highest returns

“Our analysis reveals that the modular refinery, an offthe shelf solution, is a cost effective supply option for investors especially when diesel is the lightest yield.

The relatively low capital cost, flexibility and short payback period make it distinctly attractive. “For the independent producer, participating in a modular refining project improves cashflow, ensures crude oil production is sufficiently optimised and delivers value beyond the traditional oil production business model. “For downstream marketers seeking to hedge against foreign exchange exposure, domesticate fuel supply and build local capacity, the modular refinery is a winning strategy.” From the foregoing, it is observed that Nigeria’s quest to end fuel import and become a net exporter of petroleum products can only be achieved through the revamp of the country’s refineries and the building of new ones, just like it has begun.

Again, the country’s goal to become a refining hub in Africa is achievable, and with the right policies and enabling environment, investors would be encouraged to stake their funds in increasing the country’s refining capacity.

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