• Friday, March 29, 2024
businessday logo

BusinessDay

Nigeria’s refineries lost N26bn last year, enough to build a modular refinery

modular refineries

With a loss of about 15 percent from its operations, fallen capacity despite high overhead costs, if a private business was managed the way Nigeria’s refineries are, law enforcement agencies would have a valid reason to lock up the managers and throw away the key.

But alas, the refineries are a national asset, a business, Africa’s biggest oil producer entrusted its state-owned firm, the Nigerian National Petroleum Corporation (NNPC) to run, and according to its own records, they are not profitably managed.

The NNPC lost over N26 billion between June 2018 and June 2019, according to its own data, a pattern of loss replicated over the past five years, which estimates show is enough to build a modular refinery each year.

BusinessDay analysis shows that if NNPC had spent what it loses running these refineries on building modular refineries, it could have constructed at least five new refineries in the past seven years that would have cut by half Nigeria’s petroleum products importation estimated at over N1.2trillion annually.

Consolidated record for Nigeria’s four refineries in Warri, Port Harcourt and Kaduna reported in NNPC’s monthly operations and financial report for June shows that they are performing at about five percent capacity.

The NNPC is spending more transporting crude oil from well heads in the Niger Delta to the refineries and transporting refined products around the country than what it makes from selling the products.

In real terms, NNPC said the refineries refined products worth over N182.1 billion but spent N186 billion on what it calls ‘associated crude’ and freight charges from the well head to the refineries and billed the federation N151.7 billion as operating expenses.

The NNPC further reported a deficit of N26.08 billion which BusinessDay checks show is lower than what Integrated Energy is spending on building 20,000 barrels per day (bpd) modular refinery in Lagos state.

“The figures appear quite strange,” says Ayodele Oni, energy lawyer and partner at Bloomfield law firm in a phone interview with BusinessDay. “I don’t understand the freight charges since the crude is moved from the well head to refineries unless they are saying it is being imported.”

Ndu Nghamadu, NNPC’s spokesman did not reply a request for clarification.

Every year, the NNPC requests bids from local and international oil companies to its share of 455,000 bpd allocated it from joint venture arrangements with exploration companies. These companies bring back refined products which meets over 90 percent of Nigeria’s consumption. They do not ship part of their crude allocation to Nigeria’s refineries hence it does not attract a shipping cost.

NNPC rather pays a freight cost when it transports the refined products through the Petroleum Products Marketing Company (PPMC), to depots and retail outlets around the country.

However, spending more money moving the products around the country than it costs to produce them is not sustainable business practice.

The smooth operations of the refineries have also been hampered by incessant attacks on the pipeline infrastructure used to transport crude to the facilities.

“In June 2019, a total of 106 pipeline points were vandalized which represents an abysmal increase of 77 percent from the 60 points vandalized in May 2019,” the NNPC said its monthly report.

NNPC said the refineries performance contributed significantly to its overall trading deficit of N3.92billion.

Since January, the corporation said it has been adopting a Merchant Plant Refineries Business Model which takes cognizance of the Products Worth and Crude Costs.

The combined value of output by the three refineries (at Import Parity Price) for the month of June 2019 amounted to ₦2.01billion while the associated Crude plus freight costs and operational expenses were ₦6.34billion and ₦13.10billion respectively.

Prior to 2017, it had been operating 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 which was PPMC on behalf of the Corporation.

Chuks Nwani, an energy lawyer says Nigeria has to rethink its engagement with crude oil. “We have so much depended on selling crude that we forget that we can make more money if these products are refined and sold to Africa market.

“There are so many idle refineries all over the world and if they are guaranteed tolling arrangement with appropriate guarantees in place, they will relocate and assemble these refineries in Nigeria within a space of 8 months.

“NNPC will supply crude to them; they will refine locally and send back to NNPC to sell to the market. NNPC will pay them for the cost of processing only. It guarantees market for our product and create employment for Nigerians.”

Mele Kyari, the NNPC boss has said the corporation will crude-for-products swap arrangement till 2023, even as it keeps an eye on Dangote refinery coming online in 2021.