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Waiting for Kachikwu’s letter of resignation

Waiting for Kachikwu’s letter of resignation

Ibe Kachikwu, Nigeria’s minister of state for petroleum resources had on 22 May 2017 in an interview with the BBC World Service said he would resign if Nigeria continued to import refined petroleum products by 2019 but Nigeria’s refineries have remained moribund.

Asked when Nigeria was going to be self-sufficient in terms of refining petroleum, Kachikwu said “2019 is the target time. I target 2019. If I don’t achieve it, I will walk. I put the date and I will achieve it” he had said.

However, as at January 2018, the Portharcourt Refining Company (PHRC) performed at 20 percent, Kaduna Refining and Petrochemicals Company Limited used 4.7 percent of its capacity and Warri Refining and Petrochemicals Company Limited came in at 0.00 percent. In August only the Warri refinery recorded some activity at 10.70 percent, Kaduna and Porthacourt reported 0.00 percent performance, according to the Nigerian National Petroleum Corporation (NNPC) latest Monthly Oil and Gas report for August. This has been attributed to work going on at various sites.

The refineries lost a total of N68.12bn in the first six months of this year, making a profit of N928.81m in April, for the first time in 10 months, according to the data from the NNPC.

READ ALSO: Kachikwu agrees with World Bank over removal of fuel subsidy

“The refineries are plagued by lack of proper maintenance and security issues for over a decade and this has resulted in gross underperformance. Besides the non-availability of crude, the refineries have not undergone a Turn Around Maintenance (TAM) in recent times as the last was done in 2013. To have them working at 90 percent by the end of 2019 is quite impossible” Ayodele Oni, energy partner at Lagos-based Bloomfield said in note to BusinessDay. “The Nigerian National Petroleum Corporation (NNPC) had declared that it would upgrade and expand refineries in 2016. The refineries are still grossly underperforming till date.”

The NNPC has four major refineries, two in Port Harcourt, Rivers State, which combine to form the Port Harcourt Refining Company (PHRC) with a combined installed capacity of 210,000 barrels per stream day (bpsd); the Kaduna Refining and Petrochemical Company Limited (KRPC) with an installed capacity of 110,000 bpsd; and the Warri Refining and Petrochemical Company Limited (WRPC) with an installed capacity of 125,000 bpsd. All the refineries have a combined installed capacity of 445,000 barrels per day.

For 2017, the Warri refinery functioned highest in January, utilising 42.6 per cent of its capacity. The Port-Harcourt refinery, for the year, functioned at its peak in December, utilising 41.7 per cent.

The Kaduna refinery had the worst performance in terms of capacity utilisation in 2017. It functioned most in February utilising just 34.4 per cent of its capacity.

When state owned Kaduna Refinery and Petrochemical Company Limited shut down operations in February due to the non-availability of crude oil four million litres of petrol, 2.5 million litres of automotive gas oil, and 1.6 million litres of kerosene, which the refinery produced daily were lost.

“Kchikwu’s claim is clearly not feasible, for anyone who has visited the site of these refineries. Work is ongoing but to get the refineries working, this will involve civil and mechanical engineering work, fabrications, installation and protection equipment, these things take time. It is easy to visualise how much of a tough call it is. Besides, Kachikwu is not the one financing these projects, so it is difficult to see how he has arrived at this timeline of end of 2019” a source who spoke on condition of anonymity said on phone.

During the three months ending June, Nigeria imported 4.79 billion litres of premium motor spirit (PMS), 1.11 billion litres of automotive gas oil (AGO), 43.79 million litres of household kerosene (HHK)and 200.39 million litres of aviation turbine kerosene (ATK), according data obtained from the National Bureau of Statistics.

Refining in Nigeria began as decade after oil was discovered in the oil-rich Niger Delta region in the 1950s. Initially starting in 1965 with a refining capacity of 38, 000 barrels per day, Nigeria’s refining capacity has grown over the years is considered the fourth largest in Africa. The nameplate capacity of 445, 000 bpd is housed by four refineries strategically located in various states around the country: Rivers, Delta and Kaduna.

The economic viability of a refinery is dependent on the interaction of three elements: type of crude oil used the complexity of the refining equipment (refinery configuration) and the desired type and quality of products produced.

Different types of crude oil yield a different mix of products depending on the crude oil’s natural qualities. Crude oil types are typically differentiated by their density (light/sweet and heavy).

Heavy crude tends to produce a larger yield of lower-value products (fuel oils) and also requires significant investment in the refining process. On the other hand, light, sweet produces large yield of higher-value products (transportation fuels) and requires less investment in the refining process. Nigeria currently produces light, sweet crude.

“Some conditions are necessary to get the refineries working again. Access to funds is critical because Nigeria does not have the money to revamp those refineries. Deregulation of the downstream sector is critical too because no private investor will put down for as long as the sector remains as it is” said Henry Ademola, team leader, Facility for Oil Sector Transformation (FOSTER), a project under the Oxford Policy Management, an international development consulting firm.

One of the biggest challenges which local refineries will be faced with is guaranteed supply of feedstock. This can be attributed to several reasons, namely inadequate infrastructure, insecurity, unstable production amongst others.

A key requirement for refining profitability is finding the sweet spot between cost of inputs and price of outputs in a highly volatile environment influenced by global, regional, and local supply and demand fluctuations. Refineries have minimal influence over the price of input and outputs and, therefore, must ensure operational efficiency to improve profitability and gain competitive edge.