Modular Refineries could offer 500% return on investment-PwC  

Setting up a diesel-oriented modular refinery in Nigeria could fetch investors five times their initial investment within two years and guarantee an operating profit margin of about 15 percent, global consulting firm, Price Waterhouse Coopers (PwC) told a room of investors and stakeholders in the oil and gas sector, Thursday, working on the assumption of a $54 oil price.

Africa’s second largest crude producer consumes over 17 billion litres of petrol annually, three billion litres of diesel and 2.5 billion litres of Kerosene, according to the Department of Petroleum Resources (DPR). Over 80 percent of this demand is imported.

 Nigeria has struggled to keep its poorly maintained four refineries- which have a combined capacity of 445,000 barrels daily- functioning optimally. The country’s per capita refining capacity is low, even by African standards, at 0.002 barrels daily, compared with 0.06 in Libya and 0.01 in South-Africa.

While the 650,000 capacity Dangote refinery, owned by Africa’s richest man and industrialist-Aliko Dangote- and set to come on stream in 2018, has the capacity to meet total demand in the country, PWC points opportunities in investing in modular refineries, which are less granular than the conventional refineries like Dangote’s.

“Modular refineries are available in capacities ranging from 1,000 to 30,000 barrels per day and are off-the-shelf solutions and a cost effective supply option for investors, especially when diesel is the lightest product yield,” said Olumide Adeosun, an associate director and industry driver for Energy and Power, PWC.

“It is distinctively attractive because of the relatively low capital cost involved, minimal space requirements, and flexibility to meet demand, short payback and easy installation.”

At optimal utilisation, the Dangote refinery is capable of meeting the country’s demand, however a major headwind to achieving a fully optimised run is availability of crude stock, PWC observed.

 At full capacity, the refinery will require about 19 (1 million barrels) cargoes of crude monthly, around half of Algeria (Africa’s third largest producer)’s crude production.

“For the initial years of operation, this may be a significant challenge,” said Pedro Omontuemhen and Darrell Magraw, Oil and Gas leaders at PWC.

“Therefore, the current supply gap within the country and region creates an opportunity not just for conventional refineries like Dangote’s but also for modular refineries which will be set up primarily to meet domestic demand.”

While a larger market exists for conventional refineries that produce all types of refined products, investors have traditionally avoided the space due to government regulation- which caps retail petrol price at N145 per litre.

Diesel on the other hand is fully deregulated and more attractive for investors. The average price paid for diesel by Nigeria’s 40 million households decreased 6 percent m/m to N234.5 per litre in March, from N249.3 in February, according to the National Bureau of Statistics.

Layi Fatona, CEO of Niger Delta Exploration and Production Plc, a diesel-modular refinery, boasts of recouping his initial investment on his 1,000 daily production capacity refinery within two years and plans to grow capacity this year.

“My refinery has worked 98 percent of the time for the last five years and we have customers rushing to buy our diesel because it helps them leapfrog constraints associated with getting supplies from the Warri or Port-Harcourt refineries,” Fatona said.

Securing required finance is usually an impediment for Nigerian investors but Tariye Gbadegesin, head of heavy industries and Telecoms at the Africa Finance Corporation said the corporation got approval for investing in modular refineries last year.

“AFC is currently undergoing a series of studies on the modular refinery given that it is still a relatively unfamiliar segment in Nigeria,” Gbadegesin said. She was however uneasy over incessant militant attacks in the Niger-Delta which makes it difficult to have a bankable investment.

 Militancy in the Niger-Delta has brought a huge drain on government revenue.  at the height of the attacks, Nigeria’s production fell to 1.2 million barrels daily, running at a 1 million barrel deficit compared to its budget predication of 2.2 million barrels.

Attacks have however cooled on the back of peace talks between the militants and government officials. Production is said to have picked to 1.6 million barrels.

Gabriel Ogbeche, CEO of Rainoil Limited says “Going into modular refinery is a way of solving the security challenges for the downstream players.”

“We must however continue to engage with government to deregulate the petroleum downstream sector fully to make it attractive for private investment, so that everybody isn’t rushing to invest in diesel refineries only.”

Investors can also set their sights on the West African market, according to PWC’s Adeosun, as there is an opportunity for potential uptake by neighbouring countries if the market has Nigeria’s refined products readily available.

Current demand for refined products in the West-Africa is estimated at 39 billion litres and refineries such as SIR in Ivory Coast, SOGARA in Gabon and SAR in Senegal can only meet 20 percent of this demand, as 80 percent is imported.

Nigeria accounts for 7 percent of Africa’s refined products consumption.

In 2015, it consumed 24 billion litres and products consumed include PMS, Automotive Gas Oil (AGO), Dual Purpose Kerosene (DPK) and Aviation Turbine Kerosene (ATK).

LOLADE AKINMURELE