Lawmakers in Nigeria’s upper legislative chambers, the Senate, on May 30 passed a motion halting the Port Harcourt refinery concession over concerns of lack of transparency in the award of the project to Italian energy giant ENI and their Nigerian partner Oando.
A motion brought by Mohammed Sabo, APC-Jigawa, faulted the concession agreement because it purportedly did not follow due process. Sabo said there was no open and competitive bidding and it did not get the endorsement of the Bureau of Public Privatisation (BPE) and the National Council on Privatisation.
Below are five ways the action would hurt the sector further.
Dampens investors’ confidence in the sector
For the past two years, Nigeria has been making concerted efforts to attract more investments for the energy sector. Last year, Ibe Kachukwu, minister of state for petroleum resources embarked on road shows in India and China to attract billions of dollars’ worth of investments.
Reforms have been initiated in the sector to win more investments. There is a lull in militancy due to intense engagements with agitators and the Senate itself passed a governance bill for the sector on May 25 after nearly a decade.
These concerted efforts finally bore fruit in the form of a $15 billion investment package that includes building a 150,000 barrel per day refinery and power plant and the Senate brings up a motion to halt the investment due to a purported lack of transparency.
“This sends a very bad signal to investors”, Chijioke Mama, energy analyst and founder of EnergyDatar, an energy advisory firm told BusinessDay, “Nigeria continues to lower the bankability of its infrastructural projects by entrenching policy and decision flip flops.”
Increases investment risks in the sector
Every investor seeks comfort and knowledge that the rules will be maintained throughout the life-span of a project. This can only be guaranteed in an environment where investments are protected as higher perception of risks raises the stake.
The cost of production of a barrel of oil in Nigeria is higher than many OPEC member countries because the risk of production in Nigeria is higher due to militancy, policy uncertainty and lack of regard for the sanctity of contracts. This action by the Senate worsens this perception and will affect future investments decisions in Nigeria’s energy sector.
Threatens Nigeria’s ambition to stop importation of refined products
Ibe Kachikwu and Maikanti Baru, group managing director of the NNPC, have stated at different forums the goal of reducing petroleum importation by 60 percent in 2018 and making Nigeria a net exporter of petroleum products by 2019.
These are not just lofty ambitions; the NNPC is taking steps to actualise this objective. Fuel imports into Nigeria reduced by 6.3 percent to 40.9m litres in January as the corporation raised combined installed capacity utilization of the country’s refineries located in Port Harcourt, Warri and Kaduna increased by 29 percent. The corporation was hoping to build on these gains before this action.
Perhaps Nigeria could still be a net exporter of refined products by 2019, only the bet may be on Dangote refinery with the move to stop the concession of the Port Harcourt refinery.
May jeopardise future efforts at privatising refineries
Prior to the recent efforts to revamp the refineries within the last six months, Nigeria’s derelict refineries have produced below 10 percent capacity in the past 21 months. This is after vast sums of money have been wasted in fruitless turn around maintenance activities.
Experts have urged the government to sell off the refineries because they are becoming a drain on the national purse. The combined installed capacity of Port Harcourt refinery is 210,000 bpsd while Kaduna refinery and Warri refinery are 110,000 bpsd and 125,000 bpsd respectively but they currently produce less than 30 percent of their capacities.
Between the year 2000 and 2007 several efforts were made by the administration of former President Olusegun Obasanjo to privatise the refineries but they were unsuccessful. Often times, the bidders have insufficient technical or financial competence hence the deal couldn’t go through.
This is a key reason why Kachikwu explained that the process this time was to invite only competent persons.
Makes concessionary arrangements in the sector unattractive
After a futile attempts at collocating refineries with prospective investors in April last year, the NNPC developed a Tolling Plant Model where the refinery does not take title to the crude, but rather charges a tolling/processing fee to the owner of the crude (PPMC) on behalf of the Corporation. Both measures didn’t yield desired results, hence the recourse to concessionary arrangement.
According to the Infrastructure Concession Commission (Establishment) Act 2005 “the Federal Government of Nigeria or any of its Ministries may enter into any concession or development contract in accordance with the provision of the Act.”
The ICRC is a legal vehicle under which government ministries can invite public tenders to concession national assets. Section 5 of the Act provides that there is no need for public invitation if there is only one qualified bid.
Perhaps the senators are not paying attention, investors are not falling over themselves to bid for Nigeria’s derelict refineries and impeding a process where an investor has actually shown interest does not give confidence about future concessionary arrangements in the sector.
ISAAC ANYAOGU
