Nigerians are enraged over government’s plan to spend $1.5 billion (about N570bn) on the repair of one of its derelict and unprofitable refineries.
The government’s long history of wasteful spending on turnaround maintenance on its struggling refineries triggers a feeling of bitterness in the hearts of many whenever the government says it wants to pump more money into them.
They question why the government is throwing money it does not have into a venture that is entrenched in a culture of waste and has gulped far too much public funds with nothing to show for it. Its inflated payrolls also contribute to the non-competitive cost of fuels produced.
Many are in awe of how a cash-strapped government that has been knocking at the door of the World Bank for a $1.5 billion loan since last year is able to turn around and spend a similar amount on merely repair works on one dying refinery, an effort history suggests will be futile.
To put the planned repair into context, the government wants to spend $1.5 billion on a refinery that has never operated above its 200,000bpd capacity, whereas Shell sold a more efficient and profitable refinery with a capacity of 157,000bpd in California for $1.2 billion last year.
The complex nature of running refineries is why experts have called on the government to privatise them rather than seek to hold control and continue splashing cash on them.
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“Refineries are one of the most complex facilities to run, they are capital, technology and management intensive operations, yet low margin,” Olagoke Balogun, former processor operator at Chevron with 13 years experience in the refining business, tweeted on Thursday.
Balogun noted, “Aside from corruption, the Nigerian state is grossly incompetent to run such complex operations even if they wanted to.”
It is not the first time the government is carrying out rehabilitation works on its cash-guzzling yet unprofitable refineries.
Over the past 12 years, Nigeria tried and failed four times to crank up its aging crude-processing plants.
The West African country of about 200 million people still imports more than 90 percent of products like petrol, diesel and kerosene, swapping crude oil for refined petrol, kerosene and aviation fuel.
Despite the repeated failure to breathe life into the refineries, the state-run energy company, NNPC, is giving it another shot, ignoring global examples on how to run a successful refinery.
Globally, most refineries are privately owned and run on razor-thin low margins in order to realise the highest returns. Refinery managers seek to pay the lowest price for crude oil, maximise the yield of the higher value products, control operating costs and receive the highest price for its refined products on a sustained basis.
Nigeria’s refineries, which have overtime struggled to operate at 10 percent capacity utilisation, are however unable to operate on these four basic principles. They currently pay international prices for crude oil, are unable to control operating costs, and cannot maximise the yield on the high-value product (petrol) because they receive the lowest prices for it.
“It is a precise science. The Nigerian government will never ever be able to run a refinery,” Balogun added.
From Jamnagar Refinery in India to Baton Rouge Refinery in the US, BusinessDay analysis of the 10 biggest refineries in the world shows they are all privately owned and have consistently increased refining capacity, an indication that their operations have been profitable.
The refineries have also consistently acquired and deployed new technologies with each refinery operating at an optimal capacity of 80 percent to 90 percent.
“Irrespective of the billions of dollars pumped into Nigeria’s refineries, if the government still manages it, we would keep going in circles,” Joe Nwakwue, chairman, Society of Petroleum Engineers (SPE), told BusinessDay.
Although NNPC’s group managing director, Mele Kyari, saying the plan is to borrow for rehabilitation and thereafter reduce the NNPC’s stake, along the line of the Nigeria Liquefied Natural Gas (NLNG) joint venture format. However, going by precedents some stakeholders believe this plan will never materialise.
“History is filled with evidence of the Federal Government’s inability to manage commercial entities and failed promises about the refineries,” Ronke Onadeko, principal consultant, DRNL Consult Limited and member expert advisory panel, Nigeria Natural Resource Charter (NNRC), told BusinessDay.
Atiku Abubakar, a former vice president, also criticised the plan. “We must bear in mind that the Shell Martinez Refinery is more profitable than the Port Harcourt Refinery,” Abubakar tweeted on Thursday.
He said, “We cannot as a nation expects to make economic progress if we continue to fund inefficiency.”
Nigeria’s debt stock has tripled in less than five years due to lower revenues. The government’s debt service cost hit a record 99 percent in 2020, which means for every N100 the country earned, N99 was used to pay creditors.
The country’s precarious fiscal position should mean projects like this rehabilitation should find no place at all, according to one economist who did not want to be named.
The South Korean blueprint
While Africa’s biggest oil producer struggles to make its refineries more efficient, South Korea without oil reserves has built and maintained three of the world’s biggest refineries.
Nigeria’s first refinery, that is, the old Port Harcourt refinery was built in 1965, a year after South Korea’s Ulsan Refinery came into operation. Operations at the Ulsan refinery started in 1964. Like the old Port Harcourt refinery, the first crude oil unit had a capacity of 35,000bpd and delivered by Texas headquartered Fluor engineering construction company in 16 months.
56 years later, the Ulsan Refinery has grown into the second-largest oil refinery in the world with a capacity of 840,000bpd. It is owned by SK Energy, a subsidiary of the SK Group, South Korea’s fourth-largest conglomerate.
While South Korea refining success reflects improved economic growth, Nigeria’s refineries woeful performance remained.
Data from NNPC showed Nigeria’s refineries posted trading deficits of N82.09 billion, N77.84 billion, N32.84 billion, N131.64 billion and N149.23 billion in 2015, 2016, 2017, 2018 and 2019, respectively, while in the first half of 2020, they posted trading deficits of N58.736 billion.
Bismarck Rewane, an economist/CEO of Financial Derivatives Company, believes that a deregulated price regime is more important than any move to fix decrepit refineries.
“Until the deregulation is done whereby the pricing is not fixed by the government but by the markets, I do not think that people will invest in the downstream,” he stated.
Nigeria’s vice president, Yemi Osinbajo, also openly admitted that problems associated with the refineries would persist if the Federal Government continues to own and run them.
According to Osinbajo, if the refinery is left in the hands of the government, it will continue to experience the same problem it is experiencing now.
“It should be the business of the private sector, which is why we are trying to focus on assisting the private sector to develop modular refineries,” Osinbajo said at a virtual meeting organised for the All Progressives Congress bloggers and social media influencers at the APC National Secretariat in Abuja last year.
Nigeria is also expecting a private combined refining capacity of over 623,000bpd day to be completed before the end of 2021.
They include the over 600,000bpd capacity from Dangote Refinery; 10,000bpd from Niger Delta Petroleum Resources Refinery (NDPR); 7,000bpd from OPAC Refinery; 5,000bpd from Waltersmith Refining and Petrochemical Company Limited, and 1,000bpd from Edo Refinery.
