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Perennial losses as culture for Nigerian Refineries

For a country whose total debt profile has risen to N24.387t, where subsidy for imported petrol stood at N10t between 2006 and 2018, and where the number of poor Nigerians stands at 91 million, while unemployment figure settles at 20.9 million, the Federal Government is only rubbing salt in the wound if yearly losses of over N132.5b from its four refineries are allowed to continue. Guardian analyses the challenges of the refineries and the way forward:

Everywhere in the world, particularly in oil producing countries, the business of refining crude oil is an elixir for improved economic performance, provision of jobs for a large number of people, reduction of capital flight and the building of a new set of industries, especially petrochemicals. But in the case of Nigeria, Africa’s largest oil producer, refineries are more of a drainpipe and a means through which few individuals enrich themselves, at the detriment of the masses.

While the slogan of the Nigerian National Petroleum Corporation (NNPC), operator of the nation’s refineries is “We touch your life in many possible ways,” the operations of the refineries located in Port Harcourt, Warri and Kaduna have affected the country in so many negative ways.

To be more specific, while analysis from NNPC financial records show that the corporation recorded losses in the region of N551.46b from January 2015 to December 2018, refineries top the reasons why loses were not abating.

Indeed, the country’s refineries made a total loss of N132.5b in 2018 alone. That is a 39 per cent increase from the N95.09b losses it incurred in 2017.

While the refineries remained dormant, BudgIT, a public finance-focused non-governmental organisation state that the Federal Government spent about N10tn on the payment of subsidy on imported fuel between 2006 and 2018. These developments put immense pressure on the country’s foreign exchange, national reserves, standard of living, infrastructural development, as well as lead to unemployment, and import of by-products of petroleum etc.

This year alone, a princely sum of N1.149, 385t is estimated to go into the payment of subsidy on petrol imported. With the provision of a mere $1b (for what), which is about N305b in the 2019 budget year, the country has been projected to run into a massive budget deficit if nothing is done about the development.

The breakdown shows that at the prevailing $2.54 per gallon of fuel in the United States, which translates to N774.7 at the official exchange rate of N305 to $1, a litre of petrol in the country costs N193.68 on the average. Going by the last pricing template released in 2018, by the Petroleum Products Pricing Regulatory Agency (PPPRA), additional cost elements of N14.3 per litre is required to cover retailers’ margin, bridging fund, dealers’ cost and transporters’ pay.

Similarly, with daily crude oil allocation to these refineries, the nation’s education, health, security, agricultural sectors are collapsing, while the country remains the world’s poverty capital. Apart from importing more than 80 per cent of needed petroleum products, the multiplier effects of this development forces the country to import common products like toothpick.

Indeed, Nigeria is reportedly one of the largest consumer of refined products in Africa after Egypt, South Africa, Algeria and Morocco. With the development, the country accounts for over seven per cent of Africa’s refined products consumption.

In 2015 alone, the refined products consumption was estimated to be about 24 billion litres and products consumed include, Premium Motor Spirit (PMS), Automotive Gas Oil (AGO), Dual Purpose Kerosene (DPK) and Aviation Turbine Kerosene (ATK). To the detriment of national earnings, these products are majorly imported from the United States, North Western Europe and other sources.

As the development in Nigeria has been a serious debate, there is a paradigm shift for other National Oil Companies (NOC) across the world.

An international oil and energy market expert and economist, Stephen George, Chief Economist – Americas, KBC, in a paper tilted, “The NOC-on-Effect: How National Oil Companies are Changing the face of the Industry,” showed how NOC are increasingly flexing their commercial muscles in refined oil product markets.

To them, while Nigeria is unable to turn around its refineries, the next few years would see new capacity start-ups in Kuwait, Oman, Saudi Arabia and other Middle Eastern and Asian countries.

This is coming at a time, when the Middle East moves to even greater product surpluses. The expectations were that differences in inter-regional margins will narrow, and Asian and European competition will intensify.

“On the back of their recent project start-ups, both Saudi’s Aramco and Abu Dhabi’ National Oil Company (ADNOC) are demonstrating new commercial acumen, with Aramco now streamlining its businesses and opening itself for scrutiny ahead of a planned Initial Public offering (IPO).

Similarly, parts of ADNOC are being privatised and the company is seeking a strategic partner for a new asset-backed trading initiative in the wake of a new commercial approach.

Oman’s oil company is reportedly seeking advice on its own IPO and planning the construction of a new 230,000 bpd JV oil refinery in the special economic zone at Duqm on the Arabian Sea coast—far from existing demand centres,” the experts disclosed.

Most stakeholders, including, Ghana National Petroleum Professorial Chair in Oil and Gas Economics at University Of Cape Coast, Institute for Oil and Gas Studies, Ghana, Wumi Iledare; former President of the Nigerian Association of Petroleum Explorationists (NAPE), Abiodun Adesanya; former Director General of the West African Institute for Financial and Economic Management (WAIFEM), and Professor of Economics and Public Policy, University of Uyo, Akpan Ekpo; an oil and gas services provider, who manages, Mudiame International Limited, Sunny Eromosele; Chief Executive Officer, OVH Energy Marketing, Huub Stillman; Director General, Infrastructure Concession Regulatory Commission (ICRC), Chidi Izuwah; Director, Centre for Petroleum, Energy Economics and Law (CPEEL), University of Ibadan, Prof. Adeola Adenikinju; Chairman/CEO of International Energy Services (IES) Ltd, Dr. Diran Fawibe, and PricewaterhouseCoopers’s Associate Director, Energy, Utilities & Resources, Habeeb Jaiyeola expressed worry over the state of the refineries and recommended ways of revamping the comatose assets.

The Refineries
BASED on historical perspective published by the Department of Petroleum Resources (DPR) and the NNPC, Nigeria has four refineries. Two are located in Port Harcourt (PHRC), and one each in Kaduna (KRPC) and Warri (WRPC).

The refineries have a combined installed capacity of 445,000 bpd. A comprehensive network of pipelines and depots strategically located throughout Nigeria links these refineries.

The PHRC is made up of two refineries located at Alesa-Eleme, Rivers State. The old refinery has a refining nameplate capacity of 60,000 barrels per day and was commissioned in 1965, while the new plant with name plate capacity of 150, 000 barrels per day was commissioned in 1989. 

Therefore, the current combined installed capacity of PHRC is 210, 000 bpsd. The plant utilises Bonny Light Crude Oil to produce Liquefied Petroleum Gas (LPG), PMS, DPK, AGO, Low Pour Fuel Oil (LPFO) and High Pour Fuel Oil (HPFO).

The Warri Refinery was established in 1978 with a refining nameplate capacity of 100, 000 barrels per stream day plant, and was debottlenecked to 125, 000 barrels per stream day in 1987.

The refinery is located at Ekpan, Warri, Delta State, and it is operated by the Warri Refining and Petrochemicals Company (WRPC) Limited.

The refinery was installed as a complex conversion plant capable of producing LPG, PMS, DPK, AGO, and Fuel Oil from a blend of Escravos and Ughelli crude oils.’ The WRPC has a petrochemical plant complex that produces polyproylene, and carbon black from the propylene-rich feedstock and decant oil from the Fluid Catalytic Cracking Unit (FCCU).

The Kaduna Refinery has a nameplate refining capacity of 110, 000 barrels per day, and is located in Kaduna, Kaduna State. The plant is run by the Kaduna Refining and Petrochemicals (KRPC) Limited. The KRPC possesses a fuel plant commissioned in 1983, and the 30, 000 MT per year Petrochemical Plant in 1988.

The refining plant has two distillation units that utilise Escravos and Ughelli crude oils for fuels production and imported heavy crude oil for lube base oil, asphalt and waxes. Products obtained from KRPC include, LPG, PMS, House Hold Kerosene (HHK), ATK, AGO, and fuel oil. The petrochemical plant produces Linear Alkyl Benzene (LAB).

Current State Of The Refineries
WITH a combined installed capacity of 445, 000 barrels per day; the refineries have for many years performed far below the installed capacity. Most of the refineries have been in a roller coaster mode, especially throughout 2018. The refineries have not been working at up to 15 per cent capacity as of today.

In 2018, the Port Harcourt Refinery, despite being idle almost throughout the year posts the biggest loss of N59.96b. The Kaduna Refinery recorded N31b losses, while the Warri Refinery recorded a deficit of N41.71b.

In total the N13.58b was lost in January; N8.05b in February; N11.88b in March; N20.08b in May; N14.51b in June; N10.45b in July; N10.79b in August; N6.97b in September, N9.32b in October, N9.58b in November and N17.31b in December.

The refineries made a profit of N6.32bn in April for the first time in 10 months.

The Warri Refinery was idle in January, September and October 2018.

Why Refineries Are Performing Poorly 
ACCORDING to most experts, poor maintenance is one of the key reasons why all the refineries are currently performing far below expectation.

The last time some of the refineries were maintained was in 2013. Without significant improvement, over $20b has already been spent on Turn Around Maintenance (TAM) of these refineries since inception.

Operating under the worst form of bureaucracy and opacity, decisions for repairs of technical faults as small as bolts and nuts require approval from Abuja.

Professor of Petroleum Economics and Policy Research, Omowumi Iledare insists that corruption, tribalism, funding and sundry mundane factors were responsible for the perennially poor state of the refineries.

Iledare sees no transparency and accountability in the manner, which government runs these refineries, especially the funds allegedly spent on them.

“I think the way the government spends money to maintain the refineries leaves a lot to be desired. As far as I am concerned, the government is not particular about getting optimum value from the money it is investing in the refinery. That has been the case from one government to the other.”

For Adenikinju, apart from the bureaucratic nature of the operations of the refineries; foundational downstream challenges were enough to keep the refineries as they are. For example, government, instead of deregulated and competitive markets is controlling prices of petroleum products.

“I think the whole pricing policy frameworks needs to be changed if we want the downstream petroleum sector to be virile and efficient. I am appalled at the continuous poor performance of the refineries and the drain on the lean fiscal resources of the government. The poor performance has become endemic and in my view, it has come to a time for the government to take a decisive position on the refineries. Under the current pricing regime for gasoline and the ownership structure of the refineries, they cannot be profitable,” Adenikinju said.

The current state of the refineries is embarrassing to Ekpo, and that is why he insists that mismanagement and corruption were part of the key issues affecting the facilities.

He believes that the elites in the oil business, who prefer to import products with government subsidy, than to allow the refineries to work in the interest of the economy, were responsible for the woes.

“The refineries have not worked to near capacity for several years. Millions of dollars have been spent on repairs and turnaround maintenance, yet the country still imports refined petroleum products,” he said.

Chairman of Tricontinental Group and former President of the Nigerian-American Chamber of Commerce, Chief Olabintan Famutimi is of the view that challenges facing the refineries are man-made and designed to benefit a few individuals, particularly people who are benefiting from oil subsidy. He added that government has no business in doing business, even as he fingered the ownership structure as a main challenge.

Like Famutimi, the Director General, Infrastructure Concession Regulatory Commission (ICRC), Chidi Izuwah, said that government must let go of its dominance in the downstream sector and bring in the private sector as, “this is the only way to go. When you bring in the private sector, you must change the incentive structure.”

When the issue of the poor performance of refineries was tabled at the recent Nigerian International Petroleum Summit, an industry stakeholder who works for the Dangote Group, Babajide Soyode insisted that there were no justifiable reasons for the country’s refineries to be dilapidated

“Why can’t the NNPC reactivate or upgrade its refineries? They are not old. Upgrading, as any engineer would tell you is standard in our industry. All these collocation and others are nonsense. Follow the industry standard and upgrade what you have.

“We are talking of NNPC being efficient, those refineries were built at an average of $1m- Warri for N357m, Kaduna was N377m. That is roughly $1m $1.3m now. If you have been subsidising, you have not accrued enough to maintain the refineries, not to talk of upgrading or expanding, then it is shameful that NNPC would be looking for $1m to pay consultants for a study. It’s a shame for Nigeria.

“Subsidy payment was introduced in 1986, and the aim was to alleviate poverty. Now, it is 32, 33 years of subsidy, can anybody tell me one poor person whose live has been made better by this? It is the elite that have been enjoying the subsidy,” he said.

But as far as NAPE chief, Adesanya is concerned, the lack of transparency and accountability are compounding challenges faced by the refineries.

“I know that it is not lack of what needs to be done that is creating the problem, but the commitment to doing something transparent and honourable. President Muhammadu Buhari must ensure that these negative performances are reversed. I don’t see why we cannot run profitably,” Adesanya stated.

Eromosele on his part stated that government’s interference and lack of transparency were the major factors hindering profitability of the refineries, insisting that the performance of the subsidiaries was shameful when compared with others across the world.

Speaking specifically on the Kaduna Refinery and challenges such as pipeline vandalism, which hinder the flow of crude, Head, Energy Research, Ecobank, Dolapo Oni said: “That refinery will constantly have problems because of its distance from any crude oil field. The refinery depends on pipeline from the Niger Delta laid up to the North. It is also equipped with only one-month storage capacity. The implication is that even if crude oil flow stops for only three weeks, the refinery is out of supply. Those are the disadvantages we have to battle with.”

Gainers And Losers In Current Rot
EARLIER in the year, the Group Managing Director of the Nigerian National Petroleum Corporation Maikanti Baru let out the most shocking fact about the refineries.

According to him, the nation’s refineries had not undergone Turn Around Maintenance (TAM) for an aggregate of 42 years combined.

This is a direct revelation indicating that about $2b, which was reportedly spent on the asset ended in the pockets of a few Nigerians.

The House of Representatives had earlier alleged mismanagement of fund in maintaining these assets and turned down an application requesting for additional $1.8b for a fresh TAM.

A lot of experts, who insisted that TAM remains a major scam that must be investigated, noted that oil marketers and some elite were indeed frustrating the operation of the refineries to their gains.

Famutimi described the current performance of the refineries as an organised sabotage orchestrated by high-ranking government officers and business owners, who prefer personal gains to national interest.

Stressing that government has no business in operating refineries, these experts insisted that the masses are the main losers in the prevailing situation, adding that subsidy regime won’t take Nigerians out of poverty.

Executive Director of Institute for Oil, Gas, Energy, Environment and Suitability (OGEES), Prof. Damilola Olawuyi, said the common citizens bear most of the negative fallout, when a major oil producing nation like Nigeria still relies heavily on importation of oil and gas.

“Importing refined oil means Nigerians would have to pay more to access petroleum products, which creates daily hardship for the Nigerian people. Also, if the refineries were functioning at full capacity, they would create more jobs and economic opportunities for the people,” he said.

Possible Solutions
GIVEN the current state of the refineries, most analysts insist that the government must find a way to either sell the assets off, commercialise them by raising money from IPO or return them to the original operators (Shell) for proper maintenance.

“Commercialisation may be preferred. One is referring to a situation where the public holds majority ownership but privately managed. If privatisation must be undertaken then it must be through public offer with limit on how much an individual can buy. There must be complete transparency,” Ekpo said.

While evidence from other sectors such as telecommunications, education and transportation, show that the Nigerian economy as a whole stands to benefit from private participation and investment in deregulating the downstream sector, Olawuyi noted that the sector needed to be opened up.

“If you imagine what could have been if those sectors remained solely state-owned, then you can understand why we have to be open-minded about allowing private investment and participation in revamping the current moribund state of state-owned refineries. Of course, adequate checks and balances must be put in place to avoid negative externalities, but private participation seems to be a logical way forward,” he noted.

According to him, the default option is for the government to fulfill its promise of revamping the refineries and bringing them to proper and viable functioning by the year 2020, as recently expressed by the Ministry of Petroleum Resources.

“However, in many countries, government alone may not be able to bear the high cost of upgrading and maintaining public infrastructure such as refineries, so a lot of attention is paid to public-private partnerships and other financing mechanisms that allow the private sector to play a part. I think the key is for the Nigerian government to be realistic and proactive in its assessment of how to get the refineries up and running to capacity,” Olawuyi stated.

Adenikinju demanded a review of the current pricing template, insisting that the current pricing regime for gasoline and the ownership structure of the refineries do not support profit making.

He, however, noted that a mere change in the ownership without addressing fundamental problems such as appropriate pricing of petroleum products would not solve the problem, adding, “I think the whole pricing policy frameworks need to be changed if we want the downstream petroleum sector to be virile and efficient.”

Experts like Iledare were hopeful that the new NNPC expected to be born from the PIBG would manage the refineries properly since the corporation would ordinarily run as a commercial entity.

He equally raised concerns over the delay in the passage of the bill, which has been debated over the past two decades.