• Friday, February 23, 2024
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Hurdles before world’s largest single-train refinery

Hurdles before world’s largest single-train refinery

Nigeria’s oil production in April fell to less than 1 million barrels per day, indicating that feedstock could pose a challenge to the Dangote Refinery. Without a licence to operate yet acquired due to outstanding technical work, the refinery may not be an elixir to petrol shortages in the short-term.

The commission is shaping out to be symbolic, considering that ongoing technical work has not progressed to the point of introducing raw hydrocarbon into the plan, let alone distributing the refined products. Upon projection completion, the refinery would apply for a licence to operate.

When completed, the refinery, with a capacity to process 650,000 barrels per day (bpd), could find itself scrounging for feedstock. The bulk of the crude for the refinery operations is expected to come from Nigeria, given that the Nigerian National Petroleum Company Limited (NNPC) holds a 20 percent stake in the company on behalf of the federation, but the declining crude output would present a challenge.

BusinessDay’s analysis of data from the Organization of Petroleum Exporting Countries on Nigeria’s oil production since 1999 showed that output has declined by 42 percent and has hovered around 1.5 million bpd under President Muhammadu Buhari.

“The greatest challenge that led to the drop in production in this administration has been oil theft,” Ndubuisi Okereke, senior lecturer, Department of Petroleum Engineering at Afe Babalola University, told BusinessDay.

While the NNPC has hired private contractors, and Nigeria has directed security agencies to step up the fight against oil thieves, the challenge persists and this could make it harder for operators to return to abandoned fields.

International oil companies have abandoned onshore and shallow-water fields from where the bulk of Nigeria’s oil is produced due to challenges dealing with host communities, crude oil theft, and the state oil firm’s inability to pay its own share of crude oil production.

Deepwater fields have emerged as the most attractive concessions but with the failure of the Petroleum Industry Act (PIA) to address some of their fiscal and regulatory concerns, analysts fear investments would be few and far between.

“Despite the passage of the PIA, confusion remains regarding the management and governance of the oil sector. Multiple entities are acting as fiscal agents, with the commission collecting upstream petroleum revenues, and the Federal Inland Revenue Service continuing to collect downstream revenues,” analysts at the World Bank said in a new report.

They noted that the PIA does not explicitly eliminate in-kind payments and leaves the discretion to the Nigerian Upstream Petroleum Regulatory Commission. In contrast to internationally accepted best practice, the PIA excludes all ministers and vests in the commission from the exclusive authority to decide how fiscal payments are to be made or when and how to conduct licensing rounds.

An analysis of the spending plans of oil majors in 2023 showed that Nigeria does not rank high in its priorities, with billion-dollar projects ignored in Nigeria for other countries.

This situation has crimped Nigeria’s share of crude oil allocation, and the Dangote Refinery may have to source crude from the international market if it must meet its refining capacity.

Sited inside a free trade zone, the refinery is positioned to sell products across Africa, and African countries including Ghana are already courting the refinery to boost their supply of refined products.

Due to the enormous concessions granted by the Federal Government including favourable exchange rates, and ease of port access for its machinery and parts, the Nigerian government would expect that the country would be its primary market.

The challenge for the refinery would be how to sell the products below market price as the Federal Government intends to keep the petrol subsidy till at least June.

Read also: Aliko Dangote, grey hairs and the small matter of building the world’s largest refinery

Some analysts say the government may continue the swap arrangement where the country’s crude is exchanged for refined products – replacing refineries in Europe with the Dangote Refinery.

Continuing subsidy payments will provide an incentive to marketers to smuggle petrol outside the country to profit from the arbitrage opportunity created.

Apart from these challenges, the movement of freight across Nigeria is hampered by poor road networks, and truckers have to deal with policemen and other security personnel who extort them.

The integrated refinery and petrochemical complex in the Lekki Free Zone near Lagos will produce Euro-V quality petrol and diesel, as well as jet fuel and polypropylene, and will likely generate 4,000 direct and 145,000 indirect jobs.

It is expected to double Nigeria’s refining capacity and help in meeting the increasing demand for refined petroleum products while providing cost and foreign exchange savings. It is estimated to have an annual refining capacity of 10.4 million tonnes of petrol.