Since 2010, the management of petroleum products has undergone a significant shift, particularly in Asian and Middle Eastern countries with substantial hydrocarbon-proven resources or high petroleum product consumption. This change, which involves the domestication of crude refining for export and the displacement of imports, presents a missed opportunity for Nigeria to feature prominently in this game change.
Let us understand distinctly that crude oil is a derived demand. Alfred Marshall defined derived demand in economics as the demand for a factor of production or intermediate goods due to the demand for another intermediate or final good. Clearly put, the demand for a firm’s primary or raw production material depends on consumers’ demand for the final product produced by the firm out of that factor input. The demand for crude oil is a profound example of this economically publicised observation of production. No one needs crude oil, but the products of crude oil are also known as distillates, and the list of products from refining crude oil can be long.
Read also: Nigeria to become net exporter of petroleum by December, says Kyari
Domesticating crude oil refining involves meticulous planning and the selection of key distillates to meet an economy’s peculiar needs. Key distillates with positive indications of turbo-changing the desirable macroeconomic fundamentals of that economy, as in the case of Nigeria, are chiefly foreign exchange accretion, import displacement, inflation, and gross domestic product. The potential economic benefits of domesticating petroleum products in Nigeria are not just substantial but also promising, offering a hopeful outlook for the future and instilling a sense of positivity in all stakeholders.
Efforts to displace petroleum products by directing a portion of crude oil exports are undeniably huge. They require strong political will, a sound fiscal system, discipline, and deep domestic knowledge of petroleum economics, engineering, and law. But the gains that come almost immediately, such as increased foreign exchange accretion and import displacement, far outweigh the initial short-term sacrifices made. This reassures the audience about the potential of the strategy and the confidence we have in its success.
For example, an estimated Earnings per Barrel and Cash per Barrel of one barrel of forcados sold to a refinery in Rotterdam (February 17, 2024) shows that Nigeria would have gained an additional US$21 per barrel if refined in Nigeria compared with the price of forcados it sold on that date. This is after adjusting for operational expenses, depreciation, and amortisation as in Colombano and Colombano (2017) and using the Generally Accepted Accounting Practice (GAAP).
This economic template has driven Asian and Middle Eastern countries like the Kingdom of Saudi Arabia, India, and China for about a decade. The Kingdom of Saudi Arabia has long been scaling down its crude oil exports from twelve million barrels per day to about eight million barrels. It has recently increased its domestic refining to four million barrels per day. Today, it is a major crude petroleum product exporter after a satisfactory and sustainable domestic home supply. This success of KSA triggered imitations from countries around the world, including India.
In September 2023, the Indian government laid the foundation stone for Barmer Refinery, a public-sector refinery and petrochemical complex in the Pachpadra (now Balotra district) of Rajasthan, India. It is a joint venture between Hindustan Petroleum Corporation Limited and the Government of Rajasthan. The Barmer Refinery facility has twenty-nine process units, such as a 9 MMTPA crude distillation unit, a 4.8 MMTPA vacuum distillation unit, a 1.8 MMTPA naphtha hydrotreater unit, a diesel hydrotreater unit at 4.1 MMTPA, a delayed coker unit with a capacity 2.4 MMTPA, a vacuum gas oil hydrotreater with a capacity of 3.5 MMTPA, and a fluidized catalytic cracking unit of 2.9 MMTPA. The polypropylene units will use Lummus’ Novolen process reactors and Novolen high-performance catalysts. This is in addition to several refineries running, including the global giant refinery in Gujarat. India is gradually heading towards secure and sustainable self-sufficiency in petroleum product supplies.
Read also: Why Tinubu must resign as Petroleum minister, by Agbakoba
In Sri Lanka, the Hambantota Refinery (also called Greenfield Oil Refinery) is an oil refinery being developed in Mirijjawila, Hambantota, in the Southern Province of Sri Lanka. The 585-acre (237 ha) refinery development has been expanded from US$ 3.85 billion (Rs. 687 billion) (2019) to $4.5 billion in November last year, according to Reuters. Almost the entire output from the refinery will be exported, generating an estimated annual revenue of US$ 7 billion (Rs. 1.25 trillion) (2019). A portion has, however, been earmarked to satisfy local demands.
The DUQM refinery at the port town of Duqm in Central Eastern Oman is an integrated project of national significance under development inside the Special Economic Zone of Duqm (SEZAD). This is an additional project in the vast domestic refining capacity of Oman’s petroleum liquid supply, persuaded by the economic gains the country has been enjoying from petroleum domestication. Duqm is located 600 km south of Muscat, in a strategic position on the Arabian Sea, and in the last decade, it has attracted diversified economic activities due to its identification by the Omani government as a cornerstone for the economic and social development of the region. It came with three distinct sub-packages of the Duqm Refinery: the export terminal (sub-package A), the 80 km crude oil pipeline from Ras Markaz to Duqm (sub-package B), and the crude oil import facilities at Ras Markaz (sub-package C).
There are quite a lot of examples of countries with huge proven hydrocarbon deposits that have imbibed this new game-changing strategy and are benefiting immensely that time would not permit me to mention. The key lesson, however, for Nigeria is the Al-Zour refinery project. The Kuwaiti Al-Zour 615,000 barrels per day (bpd) refinery project, similar to Nigeria’s Dangote Refinery and more than the combined government’s 445 refineries, is worth devoting attention to. It is like Oman’s and is also based on the persuasive benefits of domestication of the refinery business, making Kuwait a global player. The first step in this huge success for Kuwait started with the establishment of Kuwait Integrated Petroleum Industry Company (KIPIC) on October 18th, 2016, as a subsidiary of Kuwait Petroleum Corporation. The $19 billion refinery facility was the first delivery of the subsidiary as construction on the refinery project started towards the end of 2017, a year after the establishment of KIPIC. It made fast-tracked progress with the shipment of prefabricated units to the site in June 2018 and was able to commission the world’s largest grass-roots refinery with 615,000 bpd capacity in December 2023. The refinery has high flexibility as it is designed to process various types of Kuwait crude, including Kuwait Heavy Crude (KHC) oil. It followed, religiously, a KPC’s upstream strategy to provide mainly clean fuel oil to the power plants. This strategic project utilises Kuwait Heavy Crude (KHC) and other types of crude to supply the power stations with clean fuels (less than 1 percent sulphur content). State-of-the-art technologies are utilised. An Electric Network for Monitoring and Control (ENMC) to achieve better management is in place. The plan also ensures a secure and stable, clean fuel supply to the power stations.
Lessons from Kuwait are, firstly, that the country established a factual and tested viable economic plan. It followed that plan purposefully, with full-blast political will running on 32 cylinders. The plan aptly captured systems to deal with poor management. A particular feedstock crude was targeted: heavy crude, which has less market value in the global market but holds vast potential for electricity and motor spirit. Critical economic sectors were identified, and a clear target for a secure and stable supply of domestic petroleum products was articulated: the electricity sector and transportation. Then, the subsidiary KIPIC was created, which at once set up a dedicated integrated energy company for key domestic industries—electricity and transportation—using its crude. This subsidiary immediately went into action by delivering a mega refinery with vast economic benefits not limited to foreign exchange earnings, import substitution of hitherto imported fuels, generating electricity, and utilising a crude variant with less international value. In Oman, Nigeria can learn from government involvement in providing critical infrastructure, such as the provision of roads and rail lines.
Nigeria seems to be far from any of these strategies, and there appears to be room to argue that we desperately need such an irreducible minimum to get us out of the current situation.
Dr Kanya Williams; Writes from the United Kingdom: [email protected], 07485715385
