Being “kobo” wise but “naira” foolish with our refineries

In July 2007, Bluestar oil, partly owned by Aliko Dangote’s Dangote Oil (with 55%), Zenon Oil (25%) owned by Femi Otedola; and Transcop (5%), majorly owned by Tony Elumelu; and the Rivers State government also holding a 15 percent stake, announced that they are pulling out of a deal to buy two of Nigeria’s refineries.

 

Bluestar oil had in May of 2007 paid N71.8 billion, which was an equivalent of US$561 million for a 51 percent stake in the Port Harcourt refinery. The same consortium had also gone ahead to pay another $200 million for the Kaduna Refinery and Petrochemical Company (KRPC) with a pledge to turn both refineries around.

 

However, the deal to buy both refineries had been done at the tail end of the President Olusegun Obasanjo’s administration and as soon as President Yar’Adua came to power, there were protest from organised labour about the sale of the refineries. They claimed that the sales had not been transparent and that the refineries were under priced. Organised labour said the refineries were worth as much as US$5 billion despite the fact that they have hardly ever operated at more than 25 percent of their installed capacity for more than a decade before they were sold.

 

It is important to note that late President Yar’Adua was on the verge of cancelling the sale when the Bluestar consortium decided to withdraw from the deal and requested that the US$750 million paid for both refineries be returned to them which the government gladly did.

 

Labour, at the time of the reversal, had claimed that they could make the refineries operate at full capacity within 12 months if given support. It is already 10 years and Nigeria’s refineries are basically where they were 10 years ago. The May 2017 monthly report of the Nigerian National Petroleum Corporation (NNPC) puts the combined capacity utilization of Nigeria’s three refineries at 23.09 percent, which was down from 24.59 percent achieved in April. The NNPC report shows that the highest capacity utilization that the three refineries have achieved in the last 12 months has been 36.73 percent while it has operated at a capacity utilization of as low as 6.74 percent in July 2016. The low capacity utilization means that the country has continued to import most of its refined products needs like it did 10 years ago. Figures from the National Bureau of Statistics (NBS) show that in 2016, the country imported 18.8 billion litres of petroleum products at an estimated cost of N2.01 trillion while petroleum products import bill consumed 34 percent of foreign exchange utilised in 2016.

 

Ironically, while Nigeria’s refineries are still struggling 10 years after their sale was aborted, Aliko Dangote, one of those who were forced to pull out of buying the refineries in 2007 is now on the verge of owning Africa’s largest refinery with a capacity that is bigger than the country’s existing three refineries. The Dangote refinery, which he says, will come on stream in 2019, will have a capacity to refine 650,000 barrels of crude oil per day and has the potential of meeting all of the country’s local refining needs. So far, his investment in the refinery has been close to US$20 billion and the petrochemical complex he is putting up has become a pilgrimage destination for government officials, who are basically begging him to ensure that his refinery is completed within schedule. With significant drop in oil revenues, the country is now struggling to use its dwindling foreign exchange earnings to support fuel imports.

 

Sadly, the significant investment that Dangote is making into building his own private refinery could have gone into expanding both the Port Harcourt and Kaduna refineries, if the government had not been quick to reverse their sale in 2007, the government would have even benefitted more, because, it would have owned 49 percent of the stakes in the refineries, which could have been sold at a later date for a significant profit because of their increased productivity and value. This is besides the billions of dollars that could have been saved in importing petroleum products.

 

In reversing the sale of the refineries in 2007, the government only succeeded in prolonging the pain of the country. Since then several millions of dollars have been spent on turnaround maintenance that has failed to turn around the three refineries. Some estimates have it that about US$1.74 billion has been spent on different turnaround maintenance efforts by different governments in the last two decades. As Group Managing Director of NNPC, Minister of the Petroleum Resources, Ibe Kachikwu in September 2015 launched 90-day turnaround maintenance to return the refineries to full capacity production but almost two years after, nothing has really changed in terms of capacity utilization in the refineries.

 

Interestingly, despite it being obvious that the government has shown no capacity to make the country’s refineries work, it has also shown no willingness to let go of the refineries 10 years after it reversed the initial sale. Kachikwu disclosed last week of plans to repair the refineries before a sale will be considered again. He has previously estimated that the country will need between US$700 million to US$1 billion to effect the repairs. This sounds like a rehash of old refinery tales all over again. There is no guarantee that after a billion dollars is spent on the refineries, buyers will be willing to pay up to a billion dollar or more for them especially considering that the Dangote refinery, which is a more modern refinery, with a higher operating capacity and better efficiencies will be in operation by the time whatever repairs are completed. Once more, as the government has always done, it is being “kobo” wise, and “naira” foolish with the issue of the refineries.

 

If the three refineries were listed on the Nigerian Stock Exchange (NSE), they would be penny stocks by now, most likely not worth more than their par value considering how long they have been making losses. If they were privately owned entities, their capital would have been completely eroded by now and would be worth more dead than alive. Basically, the government is better off just handing over the refineries to anyone in the private sector that is interested in taking it over without asking for a kobo because the refineries are not really worth anything on paper.

 

It would be in the interest of the government to structure a deal that gives it some long-term equity stake after the refineries have been turned around. The government has a short window to get this sort of deal done on the refinery before the Dangote refinery comes on stream. Without doing so now, it may find itself stuck with three refineries that are practically not sellable and not productive.

 

Anthony Osae-Brown