A tale of two coins: replicating cement success in petroleum industry
18 years after a major policy rethink that revolutionised the cement industry, the decision seems like a masterstroke as Nigeria is now a major cement exporter unlike the petroleum sector still struggling to meet local demands, despite been around for more than four decades.
Unlike its relative stagnant oil and gas sector, Nigeria’s cement sector has metamorphosed from being import-dependent to a growing hub for cement export in Africa.
The need for this policy rethink as a result of the painful route Nigeria is currently going through, particularly as a result of demand slumped due to the coronavirus pandemic which has destabilized the global economy leading to a market glut in LNG and crude oil.
While investments in the country’s seventh LNG train has gone ahead reflecting Nigeria’s strong local capacity and the unique way Nigeria LNG Ltd is managed compared to other public assets; the same cannot be said for crude oil.
Some experts have said Nigeria might need to replicate success recorded with its cement industry in its moribund petroleum sector with crude oil still accounting for less than 10 percent of GDP despite contributing to more than 90percent of aggregate foreign exchange earnings for the country and 80percent of federal government revenue.
Luqman Agboola, head of research at Sofidam Capital says in the cement sector there is a clear policy that encourages healthy competition among players unlike the oil and gas sector still struggling with the PIB after 20 years.
“The government does not operate cement business or sell cement to retailers unlike the oil and gas sector where the government is both a regulator and operator which will always discourage opportunities,” Agboola said.
Agboola noted that investors have more certainty in the cement sector despite its own challenges, unlike the oil and gas sector where there is no clarity of what to expect or what next decision the government might take.
“There is potential for Nigeria’s oil in the upstream, mid and downstream sector. However, when you don’t have a competent regulator the sector will continue to shrink,” Agbooola said.
Immediate past president of Nigerian Association for Energy Economics (NAEE), Wumi Iledare said the domestication of the cement valu chain is the reason for its success compare to the import obsessed oil and gas sector.
“Each of the Downstream, Upstream and Midstream have more potentials than the cement sector, its a shame the government has continue to play politics with a sector that provides the main source of revenue,” Iledare said.
Some stakeholders have asked the government to create a level playing field for private investors and hands-off refineries or petrochemical plants while others have raised concern about the infrastructural challenges that have long bedevilled the downstream sector especially lack of refineries, pipelines, or storage capacity.
From Cement Aramda to Big opportunity
Once upon a time, Nigeria imported cement in millions of metric tons (MT). Lafarge was the only major cement maker in Nigeria and could not even satisfy one-third of the market. China, India, Brazil and several countries found Nigeria a big export market.
The market was so big that Nigeria treated the entire world to an unseemly spectacle of gridlock and waste that has since been enshrined in the folklore as the “cement armada.”
Despite having raw materials to produce, the cement armada was the culmination of the Yakubu Gowon administration’s ill-advised decision to import 16 million metric tons of cement to build a new army barracks and sundry other “development” projects without any consideration for local capacity.
The problem was not that cement had been imported for vital construction works, but that, in its hurry, the Gowon government had paid scant regard to building local cement industry or the handling capacity of the Lagos Ports.
Annual cement production between 1999 and 2002 was around 1.7 million MT, but demand was almost 8 million MT.
In 2002, Olusegun Obasanjo, then president of Nigeria, challenged the likes of Aliko Dangote, today’s Africa’s richest man, to move into the cement production business. Obasanjo came up with a policy that revolutionised the cement industry. The policy was simple: Unless you set up a local cement plant, you would not be allowed to import. Nigeria’s population was rapidly growing and it was becoming clear that cement demand would be rising.
Between 2006 and 2007, Dangote set up local plants while Lafarge expanded. The likes of Unicem and Cement Company of Northern Nigeria (CCNN) came on board later to chase market share. In December 2018, CCNN merged with BUA’s Kalambaina plant in Sokoto, North-West Nigeria.
From mere 7.5 or 8 million metric tons, demand has shot up four times since 2002. Local production of cement is over 47.8 million MT today, with Dangote pushing out 70 percent of the entire capacity.
Struggling tale of Petroleum & petrochemical sector
Unlike the cement industry which rose to the occasion and builds local capacity after about 30 years later, the same cannot be said of crude oil or petrochemical sector, despite being Africa’s biggest oil-producing country.
Over the last four decades, Nigeria has consistently struggled to build local capacity or keep its refineries functioning optimally.
Though Nigeria is the leading oil producer in Africa boasting of about 37.2 billion barrels of proven oil reserves, the country is sadly the only member of the Organization of Petroleum Exporting Countries (OPEC) that still imports refined fuel and petrochemical products.
While no less than N10.7 trillion spent on petrol subsidy between 2006 and 2019, the country eventually became the Poverty Capital of the World last year due to lower investment in Education, Health, and Defense and Agricultural and rural development that would have increased the economic growth or standard of living of its 0ver 200million people.
Unlike the cement industry, the government has continued to missed opportunities to develop the petroleum sector or exit the costly petrol subsidy programme that costs the country over a trillion naira every year.
In 2016, oil prices fell to less than $40 per barrel, combined with a lethal militancy campaign marked by the unprecedented destruction of oil and gas facilities, the economy slithered into a bruising recession whose repercussion are still felt nearly four years later. If Nigeria had announced an end to fuel subsidy programme, the pump of price of fuel would have seen only a marginal increase as crude oil has fallen.
In December 2018, oil prices again sank nearly 35 percent from four-year highs reached in October that year and were at their lowest levels in more than a year.
It was a clear indication that the agreement to cut 1.2million barrels per day (bpd) from global oil production by the Organisation of Petroleum Exporting Countries (OPEC) and non-members including Russia, was not going to lift prices leaving many oil producers scrambling. Nigeria did not also take that opportunity to exit the costly fuel subsidy programme. But the country’s petroleum sector administrators were not paying attention.
Seeing that the current outbreak of Coronavirus has drastically reduced global oil price and made funding of the 2020 market a difficult task, the federal government through NNPC, again announced an end to payment of subsidy.
Disease called Petrol Subsidy
Petrol subsidy is usually more of a political discussion and decision rather than business or economic justification.
The scheme has been criticized by economists, civil society organisations and other energy experts, who insist that the development is crippling Nigeria’s fragile economy, as it remains a conduit pipe for corruption and that it hinders the growth of the downstream sector of the petroleum industry.
To a lot of experts, Petrol subsidy is drainpipe through which corrupt Nigerians milk the country dry. They say it lacks transparency and accountability, as the payment had at some points been made without budgetary allocation thereby denying civil society organisations as well as the media the mechanism to monitor payments.
Despite running an election campaign for the removal of fuel subsidy, the Buhari-led government reintroduced subsidy as soon as it noticed the oil price rebound after an initial crash in 2015, a development which would have drastically increased the pump price.
Ailing Refineries and Petrochemical plant
Many believe that the regime of subsidy is responsible for the continuous neglect of the country’s four refineries and petrochemical plants, making the country to lose over $29.7 billion annually in revenue.
Despite producing nothing, Nigeria four refineries with an operating capacity of 445,000 barrels per daily (bpd) incurred an operational deficit of N12.48 billion in 12 months despite not producing any drop of petrol or kerosene in the last eight months.
Nigeria’s three petrochemical plants located in Eleme, Warri and Kaduna have become moribund after few years of operation.
A research conducted by the University of Benin, Nigeria, identified the reasons for collapse of the petrochemical plants to include irregular importation of feedstock, poor maintenance and lack of technical and managerial capacity.
However, despite the setbacks, most experts see inherent opportunities for Nigeria’s erstwhile dormant refining sector holds bright prospects for the future and a recognition of key drivers will accelerate the imminent refining revolution.
“Imports currently account for over 80percent of Nigeria’s refined product supply, creating a huge potential for local refining,” multinational professional services network with headquarters in London, PricewaterhouseCoopers (PwC) said.
Nigeria ranks as the 3rd highest importer of petroleum products in Africa, importing over 80percent of products consumed.
PwC noted that the West African market also holds significant potential as refineries in Ivory Coast, Gabon, and Senegal cannot meet current demand for refined products in the region, estimated at 39 billion litres.
“There is an opportunity for potential uptake by neighbouring countries if the market has Nigeria’s refined products readily available,” PwC said in a publication titled Nigeria’s Refining Revolution.