While the Nigerian National Petroleum Company has agreed terms with Afreximbank for a loan of $1 billion to rehabilitate the Port Harcourt refineries, the pipelines that would feed crude to the refinery are at the mercy of vandals – a development that could create fresh challenges for rehabilitated refineries.
The Federal Executive Council had in March last year approved the plan by the Ministry of Petroleum Resources to rehabilitate the Port Harcourt Refinery at the cost of $1.5 billion.
Timipre Sylva, minister of state for petroleum resources, said in February this year that by the end of the year, all the refineries would be operating at reasonable capacity.
“I cannot tell you what capacity it will be operating by the time we leave but they will all be at least partially functional and we expect that since governance is a continuum, the next government will take up from wherever we stop and get it to the finishing line,” he said.
However, the minister’s optimism has not been adjusted for sabotage on crude oil pipelines that will serve in the refineries.
A recent report by analysts at Wood Mackenzie revealed in granular detail the extent of sabotage on crude oil pipelines resulting in an estimated loss of 200,000 barrels per day (bpd), which is twice Ghana’s average daily oil production.
Theft and vandalism hit Shell’s Bonny pipeline system the hardest, leading to the declaration of force majeure at the Bonny terminal in March 2022 due to a drop in crude output.
The Bonny oil pipeline system, the largest pipeline network in the Niger Delta that transports oil, water, and associated gas from the eastern and central delta to the Bonny oil and gas terminal, was so badly affected that producers began to shun it.
Its terminal, situated on Bonny Island, 48 kilometres southeast of Port Harcourt, is the biggest in Africa with a capacity to process and export 1.25 million bpd, but today it struggles to meet a quarter of its capacity.
Heirs Oil & Gas averaged losses of 66 percent from OML 17 in 2021, peaking at 97 percent in December. The Nembe Creek Trunkline (operated by Aiteo) reported a downtime of up to 40 percent.
Similarly, Eni’s Brass oil pipeline in the northern Niger Delta was heavily impacted, with local security contractors scrambling to deal with an unprecedented number of incidents.
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Due to pipeline sabotage, Eni declared force majeure at the Brass River oil terminal in March 2022, though the sabotage is concentrated at the Obiafu-Obrikom and Ebocha facilities.
“Pipeline users upstream of these points will face losses of up to 50 percent,” Wood Mackenzie analysts said.
The rampant crude theft in the Niger Delta is limiting Nigeria’s ability to meet its OPEC+ quota as average production has hovered around 1.3 million bpd when it should be pumping up to 1.72 million bpd.
Analysts say unless sabotage of crude pipelines is stopped, splurging $1.5 billion in fixing the refineries would do little to advance Nigeria’s desire to refine the petrol it uses.
“This is why the government needs to do more to stem the tide of bunkering and other related issues such as oil theft,” says Ayodele Oni, energy lawyer and partner at Bloomfield law firm.
The government has stepped up deployment of soldiers to troubled spots and has passed a Petroleum Industry Act that obligates oil companies to contribute 3 percent of their profits to a host community fund to foster development in the Niger Delta.
Both measures have done little to dent the problem as operators now report industrial-scale theft of crude oil sent into pipelines.
Some local operators are adapting, exploring options that will significantly raise their cost of production and the eventual cost of the feedstock for the refineries if they become operational.
Some are moving crude oil in smaller vessels known as barges. which tacks on an extra $15 to $20 per barrel cost.
Analysts at Wood Mackenzie noted that barging becomes cost-effective when losses exceed 20 percent, provided that oil prices are high enough to cover the additional cost. But logistics can limit barging volumes to a maximum of 20,000 bpd.
Heirs Oil & Gas will start trucking and barging crude in 2022 and it also plans to build its own export pipeline to avoid the Trans-Niger trunk line.
Other solutions employed by local operators include increased pipeline inspections using drones, installation of steel cages and closed-circuit television at wellheads and manifolds, and water separation at the export terminal so that lower-value wet crude flows down the pipeline.
Nigeria’s refineries have a combined refining capacity of 445,000 bpd, located in Warri, Port Harcourt and Kaduna. It is unclear how much capacity would be restored after the rehabilitation. In addition to the $1.5 billion earmarked to be spent on the Port Harcourt Refinery repair, $897.6 million will go to the repair of Warri refinery and $586.9 million on the Kaduna refinery repair.
The net effect of these solutions is that Nigeria’s cost of production, already some of the highest in the world, will worsen. Refineries may require subsidies to buy the crude cheaper.
Crude oil is sold at international benchmark prices (Brent for Nigeria), if all the refineries come on stream, Nigeria supplies all the crude they require, it can expect to see savings on shipping, which analysts say may come down to less than 20 percent of the current value of petrol without subsidy.
Hence, without efficient production, even that value can be lost to thieves and sabotage.
