How FG, NNPC turned refineries into financial sinkhole

  

 

A section of the Port Harcourt Refinery

Despite billions of naira voted for the turnaround maintenance of the nation's refineries, they (refineries) remain comatose, writes STANLEY OPARA

In 2012, the Minister of Petroleum Resources, Mrs. Diezani Alison-Madueke, told the Senate Committee on Petroleum (Downstream) that the total installed capacity of all the country's refineries would be increased to 90 per cent by 2014.

In the same year, the NNPC said it would have spent N152bn on the repair of the nation's refineries by 2013.

The amount was contained in the budget document submitted to the National Assembly Joint Committee on Petroleum (Downstream) then.

The document was made public after the legislators insisted that the NNPC presented its budget. Two members of the House of Representatives Petroleum Committee (Downstream), speaking to our correspondent in confidence, said the NNPC, normally, did not submit its budget to the National Assembly as its budgetary schedules were not reflected in the Federation Account.

The administration of a former President, Chief Olusegun Obasanjo, set aside $369m for the TAM of the nation's four refineries, while the Abdusalami Abubakar and Sani Abacha regimes spent $92m and $216m, respectively for the same purpose.

Alison-Madueke

In 2007, the NNPC claimed it awarded the contract for a comprehensive TAM on all the refineries to a Nigerian firm. The contract sum as revealed by the then Group Managing Director of the corporation, Abubakar Yar'Adua, was $57m.

In 2009, the then GMD of the NNPC, Alhaji Sanusi Barkindo, also announced that the corporation spent $20m on the maintenance of the Kaduna refinery alone.

The NNPC has four refineries, two in Port Harcourt (Port Harcourt Refining Company), and one each in Kaduna (Kaduna Refining and Petrochemical Company Limited) and Warri (Warri Refining and Petrochemical Company Limited).

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

No doubt, Nigeria is Africa's biggest crude oil producer and largest holder of natural gas reserves on the continent. But the country cannot make any meaningful use of these endowments as it has continued to import a very significant portion of petroleum products that are consumed within the country.

The unwarranted dependence on these imports cuts across products like Premium Motor Spirit (otherwise called petrol), Dual-Purpose Kerosene, Automotive Gas Oil (otherwise called diesel) and Liquefied Petroleum Gas (cooking gas).

The Pipelines and Product Marketing Company, an arm of the NNPC, was set up to market refined petroleum products in the domestic as well as export markets especially in West African sub-region, provide marine services and also maintain uninterrupted movement of refined petroleum products from the local refineries.

According to figures obtained from the PPMC, average daily consumption for PMS in Nigeria is 40 million litres; AGO, 12 million litres; DPK, 11 million litres; and LPG, 1.2 million litres.

But Nigeria, according to the company, can only refine 5.10 million litres per day of PMS; 3 million litres per day of AGO; 2.10 million litres of DPK per day; and 0.34 million litres of LPG per day.

With this statistics, Nigeria, on the average, is said to be importing 34.90 million litres per day of PMS; 9 million litres per day of AGO; 8.90 million litres per day of DPK; and 0.86 million litres per day of LPG.

By implication, Nigeria is said to be importing 87.25 per cent of its PMS consumed per day; 75 per cent of its daily consumed AGO; 80.9 per cent of its DPK consumed per day; and 71.66 per cent of LPG used on a daily basis in the country.

Subsidy and its implication on the economy

Before November 2011, the business of fuel importation into the country was an all-comers' affair, resulting in manipulations and malpractices that swelled subsidy claims to about N2tn.

Subsidy, in this context, is a form of financial support extended to Nigerians by the Federal Government with the aim of keeping the price of petroleum products low compared to what it would have been in a perfect market situation. Currently, the government claims to be subsidising the pump prices of petrol, kerosene and LPG. Diesel prices, however, had been deregulated.

A total of 128 companies were engaged in fuel importation in the old regime thus providing an opportunity for the abuse of the system.

Enjugu

The Petroleum Products Pricing Regulatory Agency later reduced the number of participating companies to 42 from 128 in the first quarter of 2012, before it was further reduced to 39 in the third quarter, describing the development a reformatory move.

PPPRA is the apex downstream regulatory agency in Nigeria saddled with the onerous task of ensuring uninterrupted supply and distribution of petroleum products in the country. One of its major roles is to approve quarterly petroleum products import allocation to oil marketers and the NNPC.

The volume of imported products also dropped from 5.036 billion litres in the first quarter of 2012 to 4.20 billion litres in the third quarter of 2012.

But due to growing concerns that the inability of these accredited importers to access credits from the banks could fuel another crisis in the system, the PPPRA later expanded the list to over 40 participating companies, since 2013.

PPPRA recently stated that it paid about N832.06bn in 2013 as subsidy claims to petroleum products marketers under the Petroleum Support Fund.

The case of kerosene, however, is different because oil marketers have refused to sell the product at the N50 regulated price per litre. The product, however, is currently sold at- prices between N100 and N150 per litre in filling stations across the country.

Between January and September this year, oil marketers in Nigeria could have made not less than N148.5bn as illegitimate profit from DPK sold to Nigerians.

With the daily market supply per day of kerosene put at 11 million litres by the PPMC, over N550m illegitimate profit is made by oil marketers daily on the product on the average.

By implication, over N16.5bn abnormal illegal profit is made every month, meaning that between January and September this year, a total of N148.5bn had been illegitimately acquired by oil marketers across the country.

This development had informed a recent directive by the industry's regulator, Department of Petroleum Resources that all oil marketers should revert to the N50 per litre price or get sanctioned.

The Director, DPR, Mr. George Osahon, who made the assertion, described the situation as disturbing and warned marketers against such an act, as DPR would from now on sanction any retail outlet caught selling kerosene above the approved price of N50 per litre.

Osahon, in an interview, says from the PPMC price template, the cost price of kerosene per litre is N40.90, with a five per cent refundable deposit (but never refunded) which put the figure at N42.95.

But amid these threats by the regulator, oil marketers have continued to sell DPK at above N100, while clear sanctions for the act had yet to be seen.

The Managing Director, PPMC, Mr. Haruna Momoh, however, ties the price anomaly in the kerosene market to sharp practices of some middlemen in the industry.

He says, "It is the wish of the government to make kerosene available, but our research from when we came is a totally different picture."

The Chief Executive Officer, Nigeria Liquefied Natural Gas Limited, Mr. Babs Omotowa, says the firm has subsidised LPG to the tune of $50m since the commencement of its intervention scheme on the product nationally. NLNG currently supplies some 80 per cent of the total cooking gas consumed by Nigerians.

The ailing state of the refineries

The latest report by the NNPC shows that 153,110 metric tonnes of dry crude oil, condensate and slope were received in August 2014 by the nation's refineries, with an opening stock of 389,440MT. Total crude oil available for processing was 542,540MT, out of which 296,140MT was processed.

Group Managing Director, NNPC, Dr. Joseph Dawha

The respective average capacity utilisation during the period was 21.68 per cent, 15.79 per cent and 10.94 per cent for KRPC, PHRC and WRPC respectively, according to the NNPC; hence, a total average output of 16.14 [per cent.

The PHRC is made up of two refineries, with a current combined installed capacity of 210,000 bpd.

The installed capacities of KRPC and WRPC are 110,000 bpd and 125,000 bpd respectively.

The refineries, according to stakeholders, have been operating well below installed capacity as they are in different states of disrepair. As a result of this, the country is arguably the biggest importer of refined petroleum products on the continent, creating a lucrative market for refineries particularly in Europe and the United States.

Considering the local refining statistics of the PPMC, Nigeria is said to be refining just 12.75 per cent of its PMS consumed per day; 25 per cent of its daily consumed AGO; 19.1 per cent of its DPK consumed per day; and 28.34 per cent of LPG used on a daily basis in the country.

Failed turnaround maintenance and NNPC's excuses

In 2012, the total maintenance cost for the Port Harcourt Refinery by its original builders, basic engineering design for the Fluid Catalytic Cracking Unit and RFCC plant project was estimated at N76.779bn by the NNPC.

The total estimated expenditure for the maintenance of the Warri Refining and Petrochemical Company was put at N43.12bn; while N32.106bn was to be spent on the Kaduna Refining and Petrochemical Company.

From the foregoing, the Minister promised that by the beginning of the fourth quarter of 2014, the turnaround maintenance project would have been completed, and all the refineries would be refining 370, 000 barrels per day, which is about 90 per cent of the 445,000 barrels per day combined capacity of all the country's refineries.

In a related development, uncertainties have surrounded the country's plan to build 21 new refineries to boost local refining of petroleum products. 18 of the refineries were to be built by private investors while the NNPC was expected to handle the other three.

The Department of Petroleum Resources had claimed that licensing issues for the refineries had been concluded for a long while, but that their take-off could not be ascertained owing to financial constraints.

Specifically, none of the 18 private refinery operators who received their licences from the Federal Government in year 2002 have started operation.

The NNPC has also not made significant progress after getting a go-ahead from DPR to build three Greenfield refineries in Lagos, Kogi and Bayelsa states after it unfolded plans to do so in 2010.

The Corporation, covering for the three refineries, officially, says the original equipment manufacturers of the country's refineries in Port Harcourt, Warri and Kaduna have refused to come for the planned turnaround maintenance of the refineries for reasons bordering on security in the Niger Delta and the North, and financing.

It claims that the OEMs have developed security charts of the country, in which the said areas were described as high security-risk locations.

This development, according to the NNPC, had made the Ministry of Petroleum Resources and the NNPC to go ahead to engage other equipment manufacturers and engineering companies to do the job.

The companies, it explains, are operating in the country already, and have existing partnerships with some foreign partners.

The NNPC also admits that the country had not been getting value from the proposed turnaround maintenance by the OEMs, as the prevailing problem was beyond technical stance.

"These assets require continuous monitoring and intervention. The absence of the OEMs is giving us concern though. But some companies have been recommended by the OEMs, and we are engaging them," the immediate past Group Managing Director of the NNPC, Mr. Andrew Yakubu, had said.

The Managing Director, Port Harcourt Refinery and Petrochemical Company, Dr. Bafred Enjugu, says that aside security issues raised by the OEMs, exorbitant cost frameworks were also being put forward by them.

He says, "TAM must be done within the budget," adding that considering the added security constraint put up by them, this might lead to the Federal Government relinquishing the idea of bringing in the OEMs for the proposed TAM.

"We will put in material, equipment and personnel to ensure the turnaround maintenance happens. Funding is not an issue because it will be done by the owner, which is the government," he adds.

The Group General Manager, Group Public Affairs Division, NNPC, Mr. Ohi Alegbe, describes as false assertions by members of the National Assembly that the NNPC's budgetary schedules are never reflected in the Federation Account. Rather, he tells our correspondent that the NNPC could spend on some projects without getting the approval of the Federal Executive Council.

Experts advocate deregulation of downstream sector

An Economist at the Pan Atlantic University, Dr. Austin Nweze, tells our correspondent that the huge appetite for petroleum products import, which is the norm as of today in Nigeria, is unfortunate because the country will keep advancing the fortunes of other economies of the world to its own detriment.

He says, "That means we don't want our local refineries to work. When our refineries start working, they are going to employ thousands of people. The current situation is not palatable.

"We are building the economies of other countries where we import petroleum products from through that process, while the Nigerian economy gets worse."

He laments that job opportunities are being created for foreigners in the countries where the products are being imported from, stressing that, "This means some people hate this nation and are acting as hired mercenaries, who don't care about what happens to the generality of Nigerians.

"This means there is no hope of growing the economy from within. This makes the country susceptible to crisis, because if there is crisis overseas, there will be crisis within. The Nigerian economy is prone to activities of foreign saboteurs on the international scene."

The Managing Director/Chief Executive Officer, Financial Derivatives Company Limited, Mr. Bismarck Rewane, says Nigeria has no business relying heavily on imported refined products as is the case currently.

He says, "First and foremost, it is not possible. We have a maximum of four or five years to put the refineries' programme together and Nigeria cannot continue to depend on imported refined products. But if the government wants to continue with the trend, then we have some serious difficulties.

"The situation can be resolved within two years; it is the question of having private refineries and deregulating the prices of petroleum products completely and totally. In fact, we can resolve it within one year so that the new investors in the refineries can take over."

The immediate past President, Petroleum and Natural Gas Senior Staff Association of Nigeria, Mr. Babatunde Ogun, says, "What do we gain from creating jobs outside our shores and crying of high rate of unemployment? It is sad! The worst length it will take to build a 200,000-barrel refinery is a maximum of four years."

PPPRA's appetite for more product importation

Further justifying the importation culture, the PPPRA Executive Secretary, Mr. Farouk Ahmed, says, "The Minister of Petroleum Resources has been magnanimous in the prompt approvals and releases of the quarterly PMS allocations (in addition to supplementary PMS allocations) in order to enable marketers to make adequate preparations towards products sourcing and importation, thus in the process, ensuring sustained products availability across the nation."

Outlook of relevant federal ministries

The Minister of Petroleum Resources in a recent meeting with stakeholders in the downstream sector in Lagos said Nigeria and other African countries would continue to be net importers of petroleum products despite the availability of functional and quasi-functional refineries, and plans to build more refineries on the continent.

According to her, plans to build more refineries in Angola, Uganda, Mozambique and Nigeria cannot change the situation.

"Notwithstanding the possibility of building new refineries in Africa, including new projects in Angola (Sonaref refinery); Uganda (Uganda oil refinery); Mozambique (Nacala refinery); and Nigeria, among others, Africa will remain a net importer of petroleum products for at least 20 years to come," she said.

Officially, the Ministry of Finance says the Federal Government is committed to the continuous payment of all verified subsidy claims to oil marketing and trading companies and other independent importers of petroleum products.

Labour seeks deregulation

The Nigeria Union of Petroleum and Natural Gas Workers, in an official statement, says the current drop in petroleum product output from the refineries remains an unfortunate trend for the oil and gas industry.

It maintains that a cabal is benefitting from the importation of fuel at the expense of Nigerian people, noting that the same cabal is working in unison to cripple the nation's four refineries, so that it can be sold to them as scraps.

The union, therefore, urges the Federal Government to ensure that the turnaround maintenance of the refineries is done with adequate crude supplied to them so as to reduce the importation of petroleum products.

The President, Petroleum and Natural Gas Senior Staff Association of Nigeria, Mr. Francis Johnson, says lack of foresight and strategic plan towards local refining, lack of formidable legal framework such as the Petroleum Industry Bill, and huge importation of refined products, were huge setbacks for Nigeria.

"We do not have significant refining capacity and we spend crude oil earnings to import refined petroleum products for local consumption. The four state-owned refineries are not able to meet our local demand for petroleum products due to some avoidable and unavoidable factors," the PENGASSAN boss adds.

While advocating the establishment of refineries by the private sector, he says, "The PIB, which provides for legal and regulatory framework as well comprehensive guidelines for the operations and activities in the oil and gas sector, is stuck in the National Assembly. There is a need for the legislators to consider the bill and not waste time in passing it so as not to further delay or debar investment decisions that can spur development in the nation's oil and gas sector."

Even OPEC feels for Nigeria

Owing to the fact that the demand for refined petroleum products is expected to increase in Africa, a new report by the Organisation of the Petroleum Exporting Countries says a relatively high level of product imports emphasises the need for new refining sector investments.

The report entitled '2014 World Oil Outlook', maintains that demand for refined products in Africa was set to grow, adding that there was sufficient crude oil production to cover demand.

"Despite this need and the number of refining projects under consideration, there are currently only a few projects already under construction or in an advanced planning stage. The result is that only around 600,000 barrels per day of new crude distillation capacity is expected to be available in Africa by the end of 2019," the report said.

"The need for additional capacity in other large countries has led to the talk of several other major refining projects. This is the case in Nigeria where options range from the rehabilitation of existing refineries to several new smaller projects and a large-scale new grass-roots refinery," the report noted.

"Africa is currently a net importer of refined products and is one of the regions where all key products, including fuel oil and the group of other products, are projected to grow.

The legislature advocates deregulation

The Chairman, Committee on Petroleum (Downstream), House of Representatives, Mr. Dakuku Peterside, says one of the factors that has thwarted the planned construction of refineries is the regulatory environment which forces downstream players to sell products at a regulated (fixed) price.

He describes this as stifling the funding environment, saying most Nigerian banks do not like to invest in long-term projects like the refineries.

"Nigeria is still grappling with the PIB currently before the National Assembly awaiting passage. Private investors have refused to come to partner with the government as they were insisting that certain regulatory issues must be addressed before they can invest," he explains.

He identifies non-commitment of government as the reason behind the neglect of the three Greenfield refineries planned for Lagos, Kogi and Bayelsa.

Peterside describes the Nigerian downstream environment as heavily regulated, stressing that a lot of investors will not be willing to commit their money for projects in such an environment.

"That is not to say that deregulation will utterly solve our problem; but it remains very critical if the industry must attract investors to build refineries," he adds.

Peterside says while the country is planning to attract private investors to build refineries, the regulatory and business environment must be made conducive.

Having identified its mistakes now, Nigeria has the opportunity to retrace its steps and reawaken the potential of the petroleum downstream sector. This will not only boost the domestic economy but also give the Nigerian people a future to cherish.

But if the managers of this economy still believe the best they could do is to continue importing petroleum products massively from the international market, then, we all should earnestly expect economic doom.