The Federal Government’s regulation of the downstream sector of the oil & gas industry and non-passage of the Petroleum Industry Bill (PIB) are scaring investors from grabbing the mouth-watering incentives introduced to attract investment in modular refineries. Assistant Editor CHIKODI OKEREOCHA reports that the battle for deregulation, which is now gathering momentum, will encourage investors to build refineries and sell products at competitive market prices.
If assurances from the Nigerian National Petroleum Corporation (NNPC) are anything to go by, the Port Harcourt refinery will resume operation next month. The Corporation, through its former Group Managing Director (GMD), Joseph Dawha, said the four refineries will operate up to 80 per cent of their installed capacities, translating to five million litres of petrol per day.
Based on the revised Turn Around Maintenance (TAM) strategy for the refineries, Dahwa also said that Warri and Kaduna refineries will be revamped and become operational within the next 18 months.
With all plants producing at nameplate capacities, a significant improvement is expected on domestic refining and a drastic reduction on importation of refined products.
But, if Dahwa felt his assurances would gladden the hearts of Nigerians and restore their confidence in NNPC’s management of the nation’s oil and gas resources, particularly the refineries, he got it all wrong.
President Muhammadu Buhari, who has not hidden his administration’s resolve to beam a searchlight on the operations of the NNPC, sacked the corporation’s 10-member board last weekend.
The NNPC has been under attacks over perceived sharp practices in the running of refineries and the management of revenues from crude oil sales and swaps.
Not a few Nigerians, including industry operators, experts and stakeholders, saw the NNPC’s sudden assurances as medicine after death. And they have every reason for such skepticism.
For instance, none of the four state-owned refineries has witnessed significant improvement in capacity utilisation despite the several billions of the tax payers’ money spent on yearly Turn Around Maintenance (TAM).
Even, the five million litres daily production expected from the Port Harcourt refinery from next month, will be a drop in the ocean. On the average, Nigerians consume about 40 million litres of petrol daily. So, if all the four refineries – Port Harcourt (two), Kaduna and Warri- produce 80 per cent of their nameplate capacities, it will translate to five million litres from each of the refineries. All four will produce 15 million litres, leaving a shortfall of 25 million litres and a far-cry for local consumption demands.
Impliedly, the much-needed succour may not come for Nigerians, who have been battling with acute fuel shortage since the beginning of the year. Yet, the problem is not limited to petrol alone. In all, the two refineries in Port Harcourt have a combined refining capacity of 210,000 barrels per day (bpd). The other two in Kaduna and Warri have installed capacities of 110,000 bpd and 125,000 bpd respectively.
All added, the four refineries have a refining capacity of 445,000 bpd. But the Organisation of Petroleum Exporting Countries (OPEC) says that Nigeria has capacity to produce 30,400 barrels per of gasoline, 15,800 bpd of kerosene, 18,400 bpd of distillates and 20,700 bpd of residuals.
The oil cartel put the country’s output of petroleum products by country at 89,000 bpd, which is a far-cry from 445,000 bpd.
Experts blame the embarrassing scenario on mismanagement of the refineries.
Modular refineries to the rescue
The stakeholders and the authorities in the oil and gas industry have proposed the establishment of modular refineries as the quickest way to halt declining efficiency and productivity of the existing refineries. They believe such facilities will boost local refining capacity.
Modular refineries are crude processing facilities with narrow product line, limited to kerosene, diesel and low pour fuel oil (LFPO) with a production capacity of between one to 30,000 barrels per day or bigger. They have a completion period of between 18 – 24 months.
Promoters of modular refineries believe the option will address the recurrent and embarrassing fuel scarcity within a short time and at rock-bottom costs.
Looking at it from the investment angle, experts agree that investing in, and construction of refineries is capital intensive, and that mini/modular refineries are cheaper and easier to build.
According to the Department of Petroleum Resources (DPR), Nigeria’s oil and gas industry regulator, an investor requires between $1 million to $15 million to build a modular refinery.
Stakeholders identified flexibility as another attraction as investors can build refineries that are relatively inexpensive, in multiple locations as and where demand is required.
Besides, modular units can be expanded, thereby providing a cost-efficient and highly flexible means of delivering ‘on the spot’ refining capacity, either to remote geographical locations, or to regions requiring the benefits of locally processed oil products to meet increasing operational and local demand.
This was what the 20, 000bpd modular refinery in Rivers State, Southsouth set out to achieve. The project, with an initial cost of $480 million and a 12-month completion period, is to be handled by an international consortium comprising the National Standard Finance of the United States (U.S.) and Omega-Butler Refineries of the United Kingdom (UK).
Apart from producing petrol, diesel and gas, it will also produce bitumen. The Rivers State government will provide 40 hectares of land for the project, that has a capacity to generate 1,500 jobs.
The job creation potential of modular refineries is not lost on the Joint Task Force (JTF) Commander, Maj-Gen Emmanuel Atewe, who believes that modular refinery will improve fuel supply, create jobs and grow the economy.
Gen. Atewe told The Nation that if modular refineries were working, scarcity and distribution glitches would become a thing of the past.
He said: “I think the country needs modular refineries to refine crude oil. By this, I mean refineries with smaller capacities. When we have modular refineries, they will help in refining thousands of barrels of crude oil and the economy will be better for it. Besides reducing the perennial fuel scarcity, it will also provide jobs for people.”
According to the JTF Commander, with gainful employment for the restive Diger Delta youths, they will no longer engage in pipeline vandalism and oil theft.
“Even, if they are going to commit such crimes, the rate at which they do so would not be high. Job creation is one way of reducing restiveness in the Niger Delta. I’m advising stakeholders to come together and see how they can build modular refineries and further provide multiplier effects on the economy,” he said.
The Registrar/Chief Executive Officer, Institute of Business Development (IBD), Mr. Paul Ikele, was on the same page with the JTF chief. He described modular refineries as a sustainable option that will boost products supply across the country and also resolve the subsidy controversy.
He said the granting of franchise to investors to build and operate modular refineries with newer technologies, will end the raging controversy over whether or not to remove subsidy.
“If petroleum products are available to Nigerians on sustainable basis, the issue of payment of subsidy would not arise,” the IBD manager said. He pointed out that the technologies used in building the existing refineries were obsolete and demanding so much in maintenance.
He said the country cannot cope with such huge resources on TAM in the face of the prevailing global economic downturn, occasioned by tumbling oil prices.
“Let’s look at modular or mini-refineries with newer technologies that can assist existing refineries whose maintenance demand so much due to obsolete technology,” he recommended.
The government has not lost sight of the benefits of modular refineries. At a recent conference on Health, Safety and Environment (HSE), organised by the DPR, the former Petroleum Resources Minister, Mrs. Dizeani Alison-Madueke, gave a hint of a plan to scrutinise and franchise aspiring operators to install and operate modular refineries.
She said the government believed the short project cycle, low cost and flexibility for the establishment of modular refineries will stimulate investors’ interest in local oil production and minimise oil theft and operation of artisanal (illegal) refineries.
The minister further stated that to ensure the success of the initiative, several financial institutions had been approached to assist operators in the funding of the initiative, adding that the regulatory agency will soon roll out the details of the programme.
At a one-day sensitisation programme, organised in Lagos, for the sstablishment of modular refineries, the DPR Deputy Director in charge of Technology and Standards, Mr. Alfred Ohiani, echoed Mrs. Alison-Madueke that the government has decided to once again encourage the establishment of modular refineries.
He said investment in modular refineries, whose timeline and cost is limited, holds a better chance of achievement more quickly than the conventional refineries.
Pointing out that the DPR will fast-track the process for investors in modular refineries, Ohiani added that the regulatory agency has slashed the licensing fee from $1 million to $500, 000 to further sway investors’ interest.
Apart from reducing the fee, the government is also dangling other incentives such as reliable, sustainable and cheap sources of crude oil feedstock for the refineries and freedom to locate plants at numerous tax free zones across the country.
Investors are also to enjoy the liberty of exploring regional and international markets.
Price regulation, PIB as clogs
With such mouth-watering incentives, investors should be falling over themselves to establish modular refineries. But that has not been the case. Rather, most investors have adopted a ‘wait-and-see-attitude’.
The Nation learnt that government’s regulation of petroleum products’ prices and the delay in the passage of the controversial Petroleum Industry Bill (PIB) are two critical issues clipping investors’ wings.
An economist, Mr. Henry Boyo, captured investor’s frustrations when he said there is uniformity in the price of crude oil produced in Nigeria, Saudi Arabia, and America, or elsewhere and that most investors are afraid of being asked by the Nigerian government to sell below production cost.
Boyo said: “The process of producing crude oil or refined products is the same everywhere in the world; it is the same equipment. So, if you put in the same feed stock, what you will get at the end will be the same price.
“At that level of business, investors have to go and borrow money. If they borrow money to set up refineries here in Nigeria and they produce and the output from their refineries is priced all over the world at X dollars per litre, that price is uniform because crude oil is the same price all over the world.”
Boyo, who identified labour as the only thing that might change, Boyo said those who have either gotten licenses for refineries, or ready to do so, are worried that repaying loans may become herculean when compelled to accommodate subsidy after borrowing to set up refineries.
According to him, the existence of local refineries is not the issue, the price at which the products will be sold is critical, as this will determine how fast the investor recoups his money.
Noting that although, the government, through the NNPC has pumped in so much money, enough to build new refineries, on TAM, the issue at stake is at what price will the products sell?
The economist insisted that the issue is not whether or not to sell the refineries, but pricing.
“Investors cannot produce and sell to marketers below the production cost. In no time, they will pack their loads and go,” he said, adding that once the pricing is right, those who got licenses for refineries will begin operation.
He, however, was quick to point out that the naira-dollar mechanism will influence pricing.
In 2002, the Federal Government, through the DPR, franchised 18 investors (local and foreign) to establish refineries.
But, 13 years down the line, only the Niger Delta Petroleum Resources is in the process of activating the license. The remaining firms have been watching the investment environment to make informed decisions.
Although, investors continue to hold back because of stringent guidelines, corruption and a harsh business climate, inadequate project funding, among others, Boyo said government’s regulation of the downstream sector remains the greatest reason behind the investors’ cold feet.
He said this was what informed the decision of President of Dangote Group, Alhaji AlikoDangote that after borrowing to provide a world-class refinery, he will not sell at a price below his production cost.
Dangote, Africa’s richest man is currently investing $9 billion in aworld-class refinery in the Lekki area of Lagos, Nigeria’s commercial capital.
According to the master plan, Dangote Group wanted to build a 450,000 bpd-capacity refinery, it has since increased the capacity to 650, 000 bpd.
Analysts in the industry say despite Nigeria having the largest petroleum refinery in the world, Messrs Dangote will sell products at international prices.
PIB also a spoiler
Beyond pricing, the failure of the Sixth and Seventh National Assembly to pass the PIB into law has also not helped investors. The non-passage of the bill has made the commercial framework unclear to banks that will offer loans to investors.
The PIB was designed to reform the entire hydrocarbon sector to increase the government’s share of revenue; increase natural gas production; streamline the decision making process by dividing up the different roles of the NNPC into a profit-driven company; privatise its downstream activities; and promote local content.
The PIB will also provide for greater share of oil revenues to the producing communities and expand the use of natural gas for domestic electricity generation.
For as long as the bill remained in the works, Nigerians cannot reap the fruits of the benefits.
The bill has since become a subject of intense politicking at the National Assembly, which has different versions, especially around the more contentious contents such as the renegotiation of contracts with the International Oil Companies (IOCs), the changes in tax and royalty structures and clauses to ensure that companies use or lose their assets.
Experts argue that if the PIB, which they described as the roadmap for the opening up of the industry for increased investments had been passed, it would have comprehensively addressed the persistent fear of investors in building refineries, settled the issue of deregulation, as well as uncertainty concerning regular supply of crude oil at reasonable prices.
Rivers State chapter Chairman of the Trade Union Congress of Nigeria (TUC), Comrade Chika Onuegbu, recently warned government and politicians to stop playing politics with the passage of the PIB.
According to him, the non-passage of the document has blocked foreign investment in the sector that accounts for over 90 per cent of the nation’s foreign exchange earnings.
Onuegbu, who made the declaration at a media chat with reporters in Lagos, noted that investors have continued to adopt a wait-and-see game, refraining from making any new investment pending the passage of the PIB.
He said no Final Investment Decision (FID) has been taken on any oil and gas project in the country, not even on the government-promoted, Brass Liquefied National Gas (LNG) project since the introduction of the PIB as an Executive Bill in 2008 by the administration of the late President Umaru Musa Yar’Adua.
Onuegbu said: “It is worrisome that while we are dithering in Nigeria, there are new oil discoveries all over Africa, drawing in investors just as new technology is making hitherto unreachable and uneconomic hydrocarbon deposits accessible in Europe and North America, thus attracting investors to those environments.
“We believe that the PIB represents a great opportunity for Nigeria to ensure a solid foundation on which the future of oil and gas operations in the country will rest. Also, that the petroleum resources which Nigeria have been endowed, work for and benefit the Nigerian people.”
The delayed passage of the PIB is also believed to be responsible for the non-take-off of the three new green refineries with a total capacity of one million barrels in three states. The $23 billion (N3.7 trillion) project remained in the pipeline five years after it was conceived.
On May 13, 2010, the Federal Government signed an agreement with the China State Construction Engineering Corporation (CSCEC) for the establishment of Greenfield Refineries in Lagos, Bayelsa and Kogi states at the cost of $23 billion (about N3.7 trillion) with a five-year completion period.
Under the terms of the agreement, 80 per cent of the project cost was to be funded with a loan provided by CSCEC and a consortium of Chinese banks, led by the Industrial Commercial Bank of China (ICBC). The NNPC was to provide 20 per cent of the funding as Nigeria’s equity stake.
But five years after, the project is yet to see the light of the day, prompting legislative investigation last year by the House of Representatives Committee on Petroleum (Downstream).
Calls for deregulation gather steam
President, Lagos Chamber of Commerce and Industry (LCCI), Mr. Remi Bello, called for the deregulation of the downstream sector of the oil and gas sector as a way of out of the myriads of problems in the industry. He noted that a deregulated downstream will end scarcity of petroleum products, halt corruption in the subsidy regime, resuscitate the collapsed refineries, boost investments and create jobs.
Insisting that the current regime of subsidy and government’s direct involvement in the operations of oil and gas sector should be discontinued, the LCCI chief said government’s management of the sector has done a colossal damage to the economy.
“It is in the overall interest of the economy and the citizens that government should quickly deregulate the sector,” Bello said, urging labour unions and Nigerians to give the reform a chance.
He was not alone. The Nigeria Employers’ Consultative Association (NECA) is also rooting for deregulation. It’s Director-General Segun Oshinowo argued that the the N10 reduction in the pump price of a litter of petrol by the government begged the more fundamental issue of appropriate policy framework that will promote investment in the sector and put a stop to the embarrassing and shameful practice of importation of products.
Oshinowo said: “Our expectation therefore, is that government would seize the opportunity of the current decline in the price of crude oil to commence implementation of the policy on deregulation.
“This is a unique timing the government cannot afford to miss as full implementation of deregulation, which in time past had led to price increase and reaction by the labour movement in form of industrial action, does not have any negative effect on the masses.”
The NECA director further said that rather than the reduction from N97 to N87, there ought to be a far more holistic announcement of a new policy thrust of deregulation of the downstream sector and privatisation of the four refineries.
According to him, the economy stands to gain a lot from the deregulation of the oil sector.
Oil marketers’ position
Oil marketers, under the aegis of Major Oil Marketers Association of Nigeria (MOMAN), argues that deregulation will bring in investments into the sector and encourage the establishment of private refineries.
Its Executive Secretary Obafemi Olawore said the government should summon the courage to fully deregulate and remove subsidy, or embark on continuous subsidy regime payment as at when due.
Olawore said: “If the government likes, they can introduce gradual removal of subsidy. But, it should not go beyond six to 18 months period.”
He added that if fully deregulated with rules, the country will have serious investors coming in to invest adequately.
He insisted that deregulation is the answer and that the government must educate the people to make them understand the advantages.
Director-General, Enugu Chamber of Commerce, Industry, Mines and Agriculture (ECCIMA), Sir Emeka Okereke, urged the government to muster the political will to push through the deregulation policy.
“The government has no business in business. Deregulation is an idea whose time has come. Put the right policies in place so that private investors can come in,” he told The Nation.
Okereke recalled that because of political exigency, the administration of former President Goodluck Jonathan could not take the bull by the horns and deregulate the sector.
He recalled how the Federal Government administration buckled under the pressure of civil society groups in 2012 during the nationwide protest against the removal of fuel subsidy.
Saying that subsidy has become unsustainable, Okereke said: “Subsidy doesn’t make economic sense anymore. It has become unsustainable. We will never come out of the wood as long as we continue to subsidise the price of petroleum products. We cannot continue to postpone the evil day.”
Agreeing that Nigerians will pay more at the initial stage, he said the benefit will be more on long-run when price mechanism, determined by competition, ultimately forces down prices.
One of the key issues driving the agitation for deregulation is the payment of an estimated N1 trillion annually as subsidy. This has pitted the government against oil marketers on one hand, and against Nigerians on the other.
Will President Buhari retain or jettison oil subsidy? He has left nobody in doubt on his plans to reorganise the NNPC. He has begun that process with the disbandment of the corporations’ board.