FINANCE - 20 JUL 2018

Assessing the Future of Nigeria's Oil Refineries

Assessing the Future of Nigeria's Oil Refineries
Nigeria's oil refining capacity may decide our future and production

Oil refining in Nigeria began a decade after we first found oil in 1956 at Oloibiri in the Niger Delta region. By 1983, Nigeria owned its first refinery, with a capacity of 60,000 barrels per day (bpd), after acquiring it from Shell-BP. Soon after, we built three more refineries to bring combined refining capacity to 445,000 bpd by 1989.

Oil refineries use petroleum refining processes and chemical engineering processes to transform crude oil into useful petroleum products like petrol or gasoline, liquefied petroleum gas (LPG), diesel, and kerosene. In Nigeria, we consume over 23 billion litres of these products each year, most of which are still imported. 

 

Bread with no butter

Unlike other sectors in the economy where private sector money has come in to revolutionise the economics of things and improve the status quo, the government has continued to dominate Nigeria’s refining landscape. Some commentators point to unclear policies and poor government regulation, while others blame insecurity and poor infrastructure. To be candid, both are correct.

Weak government oversight has prohibited investment in much-needed infrastructure to spur development and security. Without these basics, the industry is plagued with low investor confidence, a large infrastructure gap, and insecurity. Uncertainty around policy is also a factor. The delay in passing the Petroleum Industry Bill has largely dampened investor confidence in participating in the refining sector.

To date, most of the licences granted by the Department for Petroleum Resources (DPR) are yet to produce any refined products which could have 'saved' the country up to ₦2.6 trillion in importation in 2017.

The DPR carries about 44 proposed private refineries on its books. Modular refineries, which are usually in smaller capacities and provide flexibility of phased construction, make up 38 of the 44 proposed refineries owing to the advantages the model presents. Of the total, seven of these proposed refineries, with a combined capacity of 181,000bpd, are expected to commence construction. Another 20 proposed refineries with a combined capacity of 1,315,000 bpd have active license/approvals.

 

Glimpse of butter 

Refining in Nigeria is not a tall order. 

The Niger Delta Exploration and Production (NDEP) Company successfully operates a private refinery, thanks to its upstream ties – the plant receives crude oil from the flow station operated by its upstream affiliate.

NDEP wholly operates a mini-refinery at Ogbele, Delta State with a capacity of 1,000 bpd and generates revenues of $1m per month. The refinery is not complex, as it already produces a range of refined products including diesel, kerosene and marine diesel.  The company was the first private refinery in Nigeria to receive an operating licence from the Federal Government and has the sole right to sell surplus diesel fuel to the local market. The refined product is largely for internal consumption while the excess is sold to the immediate locality.

Although slow, the government has begun implementing forward-looking moves to encourage even more private sector participation in refineries. Apart from the licenses previously mentioned, granted to the likes of the Dangote Group and Agip, the government has touted incentives such as ease of financing (in partnership with local and regional financial institutions), the guarantee of regular crude oil supply, custom duty waivers, and tax reliefs.

The Ministry of Petroleum Resources has a 7 Big Wins framework which is targeted at taking Nigeria from being a large-scale importer of petroleum products to a net exporter of petroleum products. It focuses on increasing value-added petrochemicals to diversify its export base and enhance import substitution. Some plans within the framework include committing about $1.8 billion for the rehabilitation of local refineries through private sector participation and promoting the setup of modular refineries. Recently, Ibe Kachikwu earmarked the end of 2019 for the rehabilitation of the public refineries.

 

Bread and butter

Refineries will have to restructure, strategically reposition their assets, or leave the market in order to keep up with the change. If Nigeria gains sufficiency in refining within the next 5 years, then the country will be on a path to becoming Africa’s refining hub. Crude oil from Chad, Gabon, Sudan and even Angola could find its way to refineries in Nigeria. 

From the analysis of potential private refiners on DPR’s books, Nigeria could indeed become a net exporter of refined products in the coming years. 

Furthermore, as a result of more private players, the government will be pushed to move from the current formula based retail pricing to a liberalised pricing system in which the market sets prices. This will effectively put the Petroleum Products Pricing Regulatory Agency (PPPRA) out of existence or at least reconstitute the agency and its pricing template. All those extra margins that make refined petroleum products so much more expensive will be gone.

 

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Korede Ologun

Korede Ologun

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