Recent conversations around fuel subsidy removal have tended to ignore an even bigger national dialogue around the best business and financial model needed to develop Nigeria’s petroleum refining and distribution system three decades after it peaked and started falling.
Nigeria’s golden age of petroleum refining was between 1975 and 1985. But gross insufficient local refining capacity over the years has pushed the country into reliance on importation of refined petroleum products.
The need to make up for the difference between the landing cost per litre of imported refined petroleum products and the pump price gave birth to subsidies. Subsidies on petrol have gulped N1.8 trillion since 2015, with the difference between landing cost per litre and pump price of Premium Motor Spirit (PMS) standing at N40.
Operating capacity utilisation targets for Nigeria’s refineries were meant to meet international standards of 90 percent capacity utilisation, secure crude supply to 95 percent availability and reduce the time needed for turnaround maintenance (TAM). Other operational targets were to produce at optimal yields as defined by linear programming model and reduce the cost to $5 per barrel in line with international best practice.
However, following the abysmal consolidated capacity utilisation of less than 30 percent for the four refineries in 2018, the Nigerian National Petroleum Corporation (NNPC) embarked on a TAM starting with the Port-Harcourt Refining Company Limited in March last year. But uncertainty continues to surround the proposed rehabilitation of these refineries.
Many experts have said the Federal Government has a track record of failing at running businesses from the Nigerian Telecommunication Limited (NITEL) to the National Electric Power Authority (NEPA).
Nigeria’s refineries have extended their losses, recording an operating deficit of N133.9 billion from January 2018 to January 2019.
According to data compiled by BusinessDay from the NNPC within a 13-month period, the four refineries (two in Port-Harcourt, one in Warri and another in Kaduna) incurred a combined operating deficit of N133.9 billion.
The refineries maintained an operating deficit of N10.7 billion, N6.9 billion and N9.3 billion as at August, September and October 2018, respectively. This operating deficit got worse in November and December of 2018 and January 2019, recording N9.5 billion, N17.3 billion and N8.3 billion, respectively.
The operating deficits of the refineries have left stakeholders querying the rationale behind the decision of the state oil corporation to commence first phase of rehabilitation works on 210,000 barrels per day (bpd) Port Harcourt refinery which would be followed by Warri and Kaduna refineries in line with government’s effort to attain local sufficiency in refined petroleum products.
“The Federal Government and NNPC do not have the funds to turn around Nigeria’s dwindling refining fortunes and there are other issues that are legal and legislative in nature,” Maikanti Baru, NNPC’s group managing director, said at his induction as Fellow of the Nigerian Academy of Engineering on June 20 at the University of Lagos.
This has not always been so. The post-war Nigerian economy was growing in leaps and bounds and that drove high consumption of petroleum products, particularly PMS or petrol. Consequently, inadequate local facilities to produce, refine and distribute caused tremendous shortages across the length and breadth of the country. Nigeria’s good fortune was that it had square pegs in square holes at that time, people familiar with the matter have said.
Under the leadership of Shetima Ali Monguno, minister of mines and power, petroleum and energy 1972-75 and president of the Organisation of Petroleum Exporting Countries between 1972 and 1973, there were technocrats and executors who laid the foundation of what still stands today in terms of refining and distribution capabilities. Monguno operated from a little office on the Island in Lagos.
The refineries were created in sequence. First, there was the expansion of the 50,000bpd Port-Harcourt Refining Complex (PHRC) to 60,000 bpd. Then there was the construction of the Warri refinery, the Kaduna refinery and, subsequently, the new 210,000bpd Port-Harcourt refinery.
The beauty of it was that given the large expanse of Nigeria, trucking was not going to be the solution. The solution was creating a pipeline and depot system. This was to enable the movement of petroleum products from one refinery to end-users. It was quite a success. It saved the country tonnes of money that were going out as a transportation subsidy.
“The critical factors that underpinned the development were: the massive and perennial products shortage attendant to a rapidly growing post-war economy, great policies’ formulators, honest and competent executors and availability of finances to support large scale execution,” Afolabi Oladele, a former group executive director for the Downstream Operations in 1995 and a Fellow of the Nigerian Academy of Engineering, said.
Refineries built had operating targets that were largely meant to meet the initial teething problems of spare parts and chemicals availability as operations were subject to the bureaucracy of a government budgeting system that became necessary in a controlled market price regime, where cost recovery was not possible. This would become more aggravated in time as the financial capacity of the government became challenged.
“This has led to massive importation. And the policymakers are the ones we need to challenge, not those at the NNPC. This is not a blame game but in line with the advocacy role of the Nigerian Academy of Engineering. Ninety-five percent of the petroleum products we consume are imported and 5 percent comes from our local refineries,” Oladele said.
Using 2018 petrol imports of 19.8 billion litres, adjusted for the 5 percent coming from local refining, and using a petrol yield of 40 percent, Nigeria needs to process between 700,000 to 750,000 barrels of crude oil per day to satisfy local petrol consumption. This is one issue that has been lost in the euphoria of the Dangote refinery, Oladele said.
Dangote refinery’s nameplate capacity is 500,000 barrels a day but if you tweaked, you could get 600,000 to 650,000 bpd. This leaves a shortfall of over 100,000 bpd, leaving a role for modular refining, he said.
But BusinessDay checks show that of 39 licences issued for modular refineries since 2015, 17 licences to establish (LTE) have expired in the last four years, which represents 44 percent of the total. Fifteen licences are active and another seven out of the 39 can still break ground.
Oladele said the Niger Delta Exploration & Production plc (NDEP) Ogbele refinery is a model to look at in building a successful modular refinery.
On the pipeline and depot system, this is largely active in the places where products are not available to flow in the system and continuous vandalism where products can still be flowed through, he said.
The consequence is large-scale road movements, a reversion to the long-distance bridging of the pre-1980 days with attendant financial and human life costs.
The way forward is a fundamental policy change on market pricing to attract private capital, Oladele said.
“Private sector funding in a market environment that allows an adequate return on capital, a concept that is still foreign to our national debate, can drive economic prosperity,” he advised.
STEPHEN ONYEKWELU
