$300m financing gap dims FG’s proposed growth in refining capacity

The inability of  modular refinery licensees to raise the required $300 million financing to take-off, may dim the prospects of  increasing the nation’s refining capacity, BusinessDay findings show.

This is because the financiers are demanding stiffer conditionalities.

Industry sources say that the licensees would require about $300 million each to put the projects in place but have run into a stone wall.

A source close to the investors  says financiers are hesitant because none of the licensees can come up with the required collateral to back up the loans .

The action of the banks is said to be as a result of an increasingly difficult operating environment and higher exposure of some of the banks to the oil and gas sector which is threatening the loan portfolio.

Babajide Soyede  a  former  general manager of the  Warri Refinery, said modular  refineries are not very economical because  the value of the  refined product   is   far less   than the value of the crude  oil  refined.

Soyede further wondered  how the promoters would get other ancillaries, even if they got the money to build  the refineries.

Such  ancillaries, he said, included building power plants, doing Environmental Impact Assessment (EIA), and how they would get  crude  oil to the plant. All these, he said, translate to several millions  of dollars.

About18 investors were granted license for refineries during the era of former President Olusegun Obasanjo, but the licenses were cancelled after more  than  five years, as non  of the investors  built a refinery.

The four national refineries, with a  joint capacity to refine 445,000 barrels of crude oil per day, have been comatose for several years. The failure of the refineries has made  government depend on importation of petroleum products. To sustain this,  government has spent trillions of naira on subsidy of Premium Motor Spirit ,or petrol.

Worried by the situation, the Federal Government has again given 23 companies license to establish (LTE) Modular Refineries, as part of it’s efforts to get crude oil refined locally in-country, so as to reduce dependence on imported  petroleum products and cut cost ,such that the pump price falls.

Two firms that have carried out extensive studies on the nation’s refineries in recent times have  also warned government against venturing into that area because  engaging such refineries would amount to huge economic waste.

According to the report of the firms, petroleum markets in the country favour consumption of light and middle distillates which are not produced by modular refineries.

“In general, petroleum markets in Nigeria favour consumption of light and middle distillates. Modular refineries which process local crude oil, leave these markets with large amounts of fuel oil for which there is no effective market.

“There is high production of fuel oil with modular refineries, which is value destroying. This is because a barrel of fuel oil is worth less than a barrel of crude oil. On the other hand, the limited capacity utilisation of the modular refineries also means that they are not able to produce enough petrol to satisfy local demand”.

The firms, Solomon and Associates, an energy benchmarking organisation, and AON, a risk management firm,  said in addition, the use of fuel oil to fire furnaces in local industries is declining rapidly, as it is being replaced by natural gas, which is cleaner  and abundant nation-wide.

“Apart from the fact that their net operating margins are very low and sometimes negative, there must be a veritable and secure outlet for fuel oil produced by these categories of refineries, if they are to compete profitably and remain in operation”.

Olusola Bello