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Global Process News
How non-deregulation of downstream sector discourages investment in refineries

Efforts by the Federal Government to promote investment in the private refineries have, several times, met a brick wall due to non-deregulation of the downstream sector.

Nigeria remains the only OPEC member country that imports refined petroleum products despite being the 9th largest producer of crude oil in the world and the largest in Africa.

Countries like Angola, Mozambique, Equatorial Guinea and Ghana have functional refineries that could satisfy their domestic consumption. Lack of political will power to pass the controversial Petroleum Industry Bill (PIB) and corruption in the subsidy payment management have continued to result in investment apathy in the business of refineries.

Industry stakeholders have argued that there exist only about 40 refining capacity in Africa, and there are huge business opportunities in the refinery business but the investment and policy climate have remained unfriendly to investors.

The Federal Government had granted licences to private investors to construct new refineries since 2002 by issuing licences to 18 investors to build new refineries. These included Akwa Ibom Refinery and Petrochemicals; Tonwei Refinery; Badagry Petroleum Refinery; Clean Water Refinery; IIaje Refinery and Petrochemicals and Niger Delta Refinery and Petrochemicals.

Others included NSP Refinery and Oil Services and Ode Ade Refinery; Orient Petroleum Resources Limited; Owena Oil and Gas; Rivgas Petroleum and Energy; Sapele Petroleum; Southland Associates; Southwest Refineries and Petrochemicals Company; Starex Petroleum Refinery Ltd; The Chasewood Consortium; Total Support Refineries and Union Atlantic Petroleum.

The development was considered important for many reasons. First, it attracted much attention, especially as promoters of the plants had expressed much optimism in meeting set targets and eventually completing works within four years. Second, the refineries were targeted at meeting rising demand for petroleum products. Third, they were aimed at assisting the nation to conserve scarce foreign exchange expended to import products. More than that, the proposed refineries were further expected to assist in generating additional foreign exchange, as well as boost local content and capacity building in the nation.

Sadly, about 13 years after, the nation continued to depend on imported petroleum products, apparently because it lacked the capacity to meet its domestic needs. Nigeria consumes about 30 million liters per day of Premium Motor Spirit (PMS) otherwise called petrol, 15 million liters per day of diesel and about 10 million liters of Household Kerosene otherwise called kerosene.

The nation’s four refineries could barely meet 10 per cent of the need, hence the need for over reliance on importation of refined petroleum products.

Despite the unfriendly environment, some stakeholders were still committed to building a modular refinery that would be cost-effective and serve the need of their customers.

An example is the 1,000 barrels Ogbelle mini refinery in Port Harcourt producing just Automotive Gas Oil (AGO) otherwise called diesel. The Niger Delta Petroleum Resources (NDPR)-operated refinery gets crude supplies from the Ogbelle Marginal field, and it is the only operating facility not owned by the government. “We are very proud of the privileged accomplishment of not only conceiving of the idea, but implementing and running this small facility safely and in compliance to high environmentally compliant standards,” said Layiwola Fatona, Managing Director of NDPR. This feat becomes achievable because diesel has been technically deregulated and it does not get subsidy from the Federal Government.

The Chairman of International Energy Services Limited, Dr Diran Fawibe, said the nation’s environment had not been made attractive to investors. He explained that local and foreign investors could only invest in environments that can guarantee adequate returns on their investments. Fawibe said investors would not invest in new refineries because the Federal Government still regulates the prices of many petroleum products, including petrol.

Recently in a forum in Lagos, the Chairman, House of Representatives Committee on Petroleum (Downstream), Mr Dakuku Peterside identified other constraints. “The other one is even the funding environment, it is stifled. In terms of security, you know the challenges we are having every day. Pipelines are being destroyed and so even when you bring in a vessel, piracy is still on. So, many things are going on in terms of security. We are not getting it right yet.

“Not very many persons will want to invest in the real downstream assets in this kind of environment. The environment is heavily regulated. It is not like deregulation will solve all our problems, but it is very critical. The regulatory environment will stifle any investment and so I don’t see anybody investing to build refineries until we address those fundamental issues.

“Are we happy that we are importing almost all our petroleum products, the answer is outright no. That is not where we desire to be. That is not where we want to be. We are concerned as other Nigerians. But the reality is that most of our refineries are in a dilapidated state. And in the short-term, we must import,” he said.

He argued that, “are we providing that environment? We are making effort, but we have not provided the environment yet. In terms of power, you know we are not getting power right. In terms of regulation, we are still grappling with the Petroleum Industry Bill. In terms of funding, most Nigerian banks do not like to invest in long-term projects.”

The National President of Oil and Gas Service Providers Association of Nigeria, Mr Colman Obasi, said these and other constraints should be eliminated to pave way for the establishment of proposed plants. “These and other challenges which scare investors should be tackled in order to pave way for the establishment of new refineries, especially now that Dangote Industries Limited has disclosed its plans to construct a new refinery in the country,” he said.

Besides, Dangote Group plans to invest up to $8 billion to build an oil refinery with a capacity of around 400,000 barrels a day by late 2016. “This will really help not only Nigeria but sub-Saharan Africa. There has not been a new refinery for a long time in sub-Saharan Africa. In five years, when our population is over 200 million, we won’t have the infrastructure to receive the amount of fuel we use. It has to be done,” the company said.

Dangote Group said making a new refinery runs at a profit would work even if the government failed to scrap the subsidised fuel price that has deterred others from investing. As the company puts it, “We’ve done our numbers and the numbers are okay.”

The Managing Director, Energia Limited, an independent indigenous Exploration and Production company, Mr Felix Amaeye-Ofori, also stated that his company would commence the building of about 15,000 barrels capacity refinery.

“We are pushing very strongly on our modular refinery project. We have laid the foundation and construction works have started. By end of next year (2016), we would have completed the project,” he said.

Other stakeholders also throw their weights behind the need for new investments in new refineries considering the fact that most of the nation’s four refineries were constructed before 1990. For instance, the old Port Harcourt refinery was commissioned in 1965 with 60,000 barrels per day (bpd) capacity while the new refinery was commissioned in 1989 with an installed capacity of 150,000 bpd

Also, the feasibility studies for Warri refinery was undertaken by BEICIP, an international oil and gas consulting, and software solution provider from Paris, in 1974 with the objectives to establish the demand and consumption patterns of petroleum products and also determine the size of a new refinery to be constructed. The tendering involving international engineering contractors resulted in the award of a contract to Snamprogetti Spa of Milan, Italy, in 1975. The contract was for the design, procurement and construction of a new grassroots petroleum refinery in Warri. The design capacity of the refinery was 100,000 bpd and the project duration was 30 months. This project was completed and the Warri Refinery was commissioned in 1978.

The Federal Government decided to expand the capacities of the fuel units in the existing refineries at Warri and Kaduna. This project was completed in 1985 and the capacity of Warri Refinery was expanded to 125,000 bpd. The Nigerian National petroleum Corporation, which confirmed the development, stated that, “NNPC’s long term plans for the development of a petrochemicals industry, were formulated in 1977, and were structured in three phases. The 1st phase comprised of three plants: a linear alkyl benzene plant (LAB) in Kaduna, and the carbon black and polypropylene plants in Warri. The 35,000 MTA Polypropylene and 18,000 MTA Carbon Black Plants built in Ekpan, Warri were commissioned in 1988. The Warri Refinery and the Ekpan Petrochemical Plant were merged in 1988 to become the Warri Refining and Petrochemical Company Limited.”

“The decision to construct the third Nigerian National Petroleum Corporation (NNPC) refinery in Kaduna was taken in 1974 along with that of the second NNPC refinery located at Warri. However, it was decided that work would commence on the construction of the third refinery whenever the projection of the consumption of petroleum products justifies it,” it maintained.

The Corporation added that, “by early 1975, in view of the fuel shortages experienced then, the Federal Government decided that work on the third refinery should be advanced. It was envisaged that the refinery was to be a simple hydro skimming type refinery in order to meet up with the fuel demand then.”

It maintained that based on the feasibility studies carried out, which took into consideration the consumption of the various petroleum products within the Northern Zone, and adequate means of disposal for the surplus products, a Refinery with crude oil capacity of 42,000 barrels per day could be easily justified. “Hence, the refinery was designed for a capacity of 60,000bpd. It was much later that the Federal Government decided that the capacity for any refinery in Nigeria should not be below 100,000bpd. However, this would have led to the production of large quantity of heavy ends. And one practical and viable solution is reprocessing the heavy fuel oils,” it stated.

The Corporation maintained that in order to do this, the whole project plans had to be modified so that what initially was planned to be simply a hydro skimming type refinery, developed into an integrated refinery. “The refinery would now be able to produce a wider variety of petroleum products, some of which should be lubricating base oils. Hence, it became necessary to import suitable paraffinic based crude oil from Venezuela, Kuwait or Saudi Arabia. Products from the Refinery include; Fuels for use as Liquefied Petroleum Gas (LPG), Premium Motor Spirit (PMS), Automotive Gas Oil (AGO) or Diesel oil, Kerosene, Fuel Oil, Sulphur and those from the lubricating oils complex are Base Oils, Asphalt (Bitumen) and Waxes,” it said.

The company added that the contract for construction was awarded to Chiyoda Chemical engineering and Construction Company in 1977. “The Refinery project was completed and the Fuels Plant was commissioned in 1980. However the Lubes Plant was commissioned in 1983 and Petrochemical Plant much later in 1988. The initial operation and maintenance was carried out by Nigerian Staff and expatriate personnel as technical back up. By 1985, Nigerian staff had virtually taken over all the maintenance and operations,” it added.

This clearly showed that the nation’s refining capacity has remained static at 445,000 bpd for several decades, thus constraining the country’s ability to meet demand that is fuelled by rising population over the years. It is against this reasoning that many concerned stakeholders, including a Port Harcourt based energy analyst; Mr. BalaZaka has called on the government to create the enabling environment for investors to stake their resources in the downstream, especially refinery construction.

Source: Tribune Newspaper

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