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South Korea’s oil refining success shows how Nigeria squandered golden opportunity

Two weeks after the release of the 2017 and 2018 audited accounts of the PortHarcourt, Warri and Kaduna refineries, all owned and operated by the Nigerian National Petroleum Company (NNPC), the losses is symptomatic of a gross pattern of mismanagement, corruption, and state waste. Established in 1965, 1978 and 1983 respectively, the combined audited accounts of the three refineries show a loss of N406 billion in 2018 and 2017.

In contrast to Nigeria as the largest oil-producing nation in Africa with 37 billion barrels reserves, South Korea boasts of little oil reserves but maintains three of the world’s biggest refineries

The situation in Nigeria has become even more worrisome after the Nigerian National Petroleum Corporation published its first-ever audited report, which showed that Nigeria’s four refineries gulped a combined loss of N154.54 billion in 2018 compared to N252 billion in 2017.

A year before Nigeria’s first refinery, that is, the old Port Harcourt refinery was built in 1965, the South Korea’s Ulsan Refinery came into operation. While the PortHarcourt refinery, just like its Warri and Kaduna refineries are making losses, underpinned by corruption and waste, the Ulsan refinery, starting with a similar 35,000 barrels per day capacity, has grown to be the third largest refinery in the world. It now has a capacity of 840,000 bpd.

Located in Ulsan Metropolitan City in South Korea, the refinery is owned by SK Energy, a subsidiary of the SK Group, South Korea’s fourth-largest conglomerate or chaebol, but was constructed as part of the country’s first five year national plan. Today, the refinery produces liquefied petroleum gas (LPG), gasoline, diesel, jet fuel and asphalt. Over the years, it gradually expanded to reach a refining capacity of 810,000bpd in 1996, after a heavy oil desulphurisation plant and decomposition plant were launched at the complex in 1997 and a second residue fluid catalytic cracking (RFCC) plant was launched in 2008.

By February 2018, SK Innovation Co. Ltd. subsidiary SK Energy Co. Ltd. had completed construction of a new vacuum residue desulphurisation (VRDS) unit for production of low-sulfur fuel oil (LSFO) at its 840,000-b/d Ulsan refining complex. Construction of the $83 billion VRDS unit, which began in January 2018, reached mechanical completion about three months ahead of schedule, SK Energy said in a February 2018 release via the SK Group of companies’ official media blog, according to a Reuters’ report.

Equipped with the capacity to produce 40,000-bpd of light and LSFO using a feedstock of depressurised residue oil from the refinery’s vacuum distillation unit, the VRDS plant was scheduled to begin commercial production in March following a trial-run period in February SK Energy said. Once fully operational, SK Energy said it expects the new VRDS unit to increase its operating profits by 200-300 billion won ($1.6 billion – $2.4 billion) annually.

Nigerians may be forgiven to think this nature of progress is fiction. Not only is it not, but in contrast to Nigeria as the largest oil-producing nation in Africa with 37 billion barrels reserves, South Korea boasts of little oil reserves but maintains three of the world’s biggest refineries.
Despite boasting of being Africa’s biggest oil-producing country, Nigeria is fast losing its competitiveness to other countries like South Korea with lower oil productions but simpler oil and gas legislation and a better business environment.

For example, with modest regulations, Oman, a Persian Gulf producer with 1 million bpd of oil production, is integrating two of its government-owned companies to create one large refining and a trading firm called Duqm Refinery.

More than 25 percent of the Duqm Refinery project has been completed while a test run of the facility is expected towards the end of 2021.

According to state oil company Oman Oil, once finalised, the $6 billion project is expected to deliver 230,000bpd, while diesel, jet fuel naphta, and LPG will be the primary products.

While Nigeria’s four refineries gulped a combined loss of N154.54 billion in 2018 compared to N252 billion in 2017, Oman’s Duqm Refinery is attracting private investment as financing is provided by 29 reputed financial institutions from 13 countries; insurance and guarantees are provided by three major export credit agencies.

An international oil and energy market expert and economist, Stephen George, chief economist – Americas, KBC, in a paper titled, “The NOC-on-Effect: How National Oil Companies are Changing the Face of the Industry,” showed how NOC are increasingly flexing their commercial muscles in refined oil product markets by attracting private investment.

To them, while Nigeria is unable to turn around its refineries, the next few years would see new capacity start-ups in Kuwait, Oman, Saudi Arabia and other Middle Eastern and Asian countries.

Lessons from South Korea and Oman
The success stories from South Korea and Oman hold many lessons for Nigeria’s economic managers who are currently battling to raise revenue due to the effect of the coronavirus pandemic. South Korea’s three big refineries are all privately owned and operated. They have consistently increased refining capacity, an indication that their operations have been profitable. The refineries have consistently acquired and deployed new technologies. Each refinery operates at an optimal capacity of between 80 percent to 90 percent.

Despite being an economy that relies mainly on proceeds from crude oil exports, successive governments in Nigeria have been unsuccessful in putting in place adequate structure that will ensure policy stability, attract foreign investors and continuity in the economy.

According to a report by National Refineries Special Task Force Report set up in 2012 by former President Goodluck Jonathan, Nigerian refineries produced enough petroleum products to satisfy national demand and exported the excess during the early 1990s.

However, Nigeria’s golden age of crude oil refining was not sustained. People with a deep understanding of the sector have said that the series of so-called turnaround maintenances (TAM) in the last 21 years have been shams and never done properly.

The only one that was done properly was the one at the Port Harcourt refinery in 1991, after one and half years of operation by the original contractor who brought in Saipem as a sub-contractor. The Task Force found that all the refineries, Warri, Port Harcourt and Kaduna, had failed to meet the normal international benchmarking standards; namely 80 – 90 percent capacity utilisation and 90 percent on-stream time efficiency for continuous operation.

This placed the Nigerian refineries at the worst rating in Africa, with only 18 percent average annual capacity utilisation in the period 2006 – 2009, according to Refineries Survey in the Oil & Gas Journal. Most refineries that operate all their major units continuously (90% of the time) for 24 months, at an average 80 – 90 percent of their design capacity, and producing all the designed products on specification, are considered to be operating normally by international standards.

The most pivotal of the root causes of refineries bankruptcy in Nigeria according to the Task Force is that the current ownership structure and business model which have failed to adequately provide for the safe and efficient performance of the refineries.

How to move Nigeria’s refining forward

Most stakeholders have suggested that changes be made to the ownership structure and business model of the refineries, to turn them around.

To this end, some have recommended that the Federal Government should relinquish control of the operation and management of the four Nigerian refineries by divesting a majority of its 100 percent equity to competent, resourceful and experienced refining private partner(s) in accordance with the Public (Privatisation and Commercialisation) Enterprises Act of 1991.

Other stakeholders have noted that fixing the refineries can best be described as the goose in the Nigerian economy. If it is well nurtured and fruitful, the spin-offs can lead to a transformation of the economy.

Unfortunately, despite this key role that the sector is expected to play, it has over the years failed to meet the yearnings of many ordinary Nigerians in terms of engendering the pivotal economic transformation and development of the country.

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