Projects line up, but no end in sight to Nigerian refining woes

With the first attempt at privatisation ending in disarray and the Bureau for Private Enterprises facing reorganisation, prospects look bleak for the divestment of Nigeria’s oil refineries, seen as essential to end chronic fuel shortages. On the plus side, a number of new projects are on the table, and although by no means all will see the light of day a few are making real progress, writes Leonard Lawal in Lagos.

No one doubts the need for far-reaching reform of Nigeria’s downstream fuels sector. Paralysed refineries, unsustainable government price subsidies and far-reaching corruption all contribute to a disastrous situation where one of Africa’s leading crude producers cannot meet domestic needs. Nigeria currently consumes about 40m litres/d of refined products, and domestic refineries can only meet 20% of demand, so the government imports fuel to bridge the demand gap with a costly subsidy of almost $4bn/yr – a figure confirmed by Senator Sanusi Daggash at a Business Roundtable organised by Economist Conferences in Abuja earlier this month.

Between 1998 and 2007, ex-president Olusegun Obasanjo’s government spent $730m on the refineries, to no great effect. Some progress is expected in the coming weeks: the 125,000 b/d nameplate capacity Warri refinery is due back on stream this month, according to Nigeria National Petroleum Corporation (NNPC) group managing director (GMD) Abubakar Yar’Adua (no relation to President Umaru Musa Yar’Adua). The refinery has been closed since December 2006, following an attack by Niger Delta rebels on a key supply pipeline.

Lack of maintenance is blamed for the explosion of Warri’s crude heater in 2000 and much else that is wrong in the sector. Turn-around maintenance (TAM) was last carried out in 1994. Capacity utilisation was as high as 72% in 1992, but had fallen below 25% before the refinery was shut down in 2006. The 170,000 b/d Kaduna refinery has similarly been affected by lack of maintenance, diversion of funds, corruption and labour issues, not to mention malfunctioning fluid catalytic cracking, water intake and cooler units. TAM in 1992 ran over budget and the 1998 TAM programme was never concluded.

Both Yar’Aduas want to reverse this chronic situation. The NNPC chief said repairs to the Kaduna refinery were due in Q2 2008, and “materials worth over $23m are already on site to commence repairs.” Full TAM will be carried out in early 2009. Abubakar Yar’Adua headed NNPC’s refineries unit before replacing Funsho Kupolokun as GMD last August – a fact that has aroused optimism and anxiety in equal measure.

At the smaller of the two Port Harcourt refineries, TAM was carried out in 1994 but only repeated in 2000. Long-standing problems with the power unit have yet to be resolved. A contract for its repair was awarded to Chrome Oil Services Ltd, run by Chief Emeka Offor, the former chairman of Gulf of Guinea player ERHC Energy (AE 121/15). This unit was abandoned and was only reactivated in 1993-94 when it was rehabilitated, otherwise remaining shut in favour of the main one, either because of lack of power or lack of crude allocation.

On a recent visit to Port Harcourt, Minister of State for Energy (Petroleum) Odein Ajumogobia was told by CEO Olusola Alabi that the refinery had had only three TAMs since it was built, instead of the eight that would have been expected. Funds were allocated but were said to have been misappropriated or never to have reached the refinery for the work to be done.

New refineries lined up…

Even if its refineries were operating optimally, with an estimated 13%/yr growth in demand and consumption of refined petroleum products, Nigeria would still need to increase its refining capacity. The Obasanjo government encouraged sector liberalisation between 2002 and 2004, as part of reforms backed by the International Monetary Fund and World Bank. Some 18 licences were issued to local and foreign investors, out of a total of 38 bidders to build new refineries.

Among those issued with licences were Badagry Petroleum Refinery Ltd in partnership with Trican Corporation of the United States; Anambra Orient Petroleum (AOP), in Otuocha, Anambra state; Amakpe Oil Refinery, based at Eket in Akwa Ibom State (AE 116/17); Starex Petroleum Nigeria Ltd in Onne Gas and Oil Free Zone in Port Harcourt; Ilaje Refinery and Petrochemicals Ltd; Ode-Aye Refinery Ltd, RivGas Petroleum and Energy Ltd; South West Refinery and Petrochemicals Ltd; Clean Waters Refinery; Niger Delta Refinery and Petrochemicals Ltd; NSP Refineries and Oil Services Ltd; Sapele Petroleum Ltd; Southland Associates Ltd; the Chasewood Consortium; Tonwei Refinery; and Total Support Refineries.

However, last March, all the construction licences were suddenly revoked, and the companies were asked to show audits and proofs of access to funding, as well as detailed engineering designs with work plans. The local companies found themselves unable to raise the foreign funds required for these basic design packages. They were also asked to pay security deposits and revalidation fees for the licences to be reissued.
Only a few remain in the game

The only companies to be relicensed were Amakpe, AOP – which has started some work at its Anambra site – and Starex. Of these, varying degrees of progress have been reported:

• Amakpe – a groundbreaking ceremony for the 12,000 b/d refinery was postponed, because the project’s partners in the Akwa Ibom state government insisted on signing a memorandum of understanding with the investors to secure their $10m investment in the project. The MoU was signed on 1 January. The developers say they are fabricating the equipment with Texas-based Ventech Engineers, with the help of a loan guarantee from the Export-Import Bank of the United States;

• AOP – the Anambra company, whose chairman is former Commonwealth secretary-general Emeka Anyaoku, plans a 55,000 b/d refinery. The site has been cleared, but no date has been announced for completion; and

• Starex – Godwin Ololuka, who heads the local content division of Starex, situated at the Onne Oil and Gas Free Zone in Port Harcourt, said work on the 100,000 b/d refinery would start in Q1 2008. He did not elaborate on the completion date.

Not quite a level playing field

Investors are wary of committing funds to private refining because the government, through NNPC, is still dictating the prices of refined products, and the subsidy regime makes it hard to compete. Nigerian crude is light and needs to be blended with heavier crudes for refining, in a 60/40 ratio in favour of the local Bonny Light. The government had initially promised to provide 100% of the local crude, while the private operators would source the heavy crude themselves. To compete with state-owned refiners, the private operators wanted to buy crude at the price the government sells to NNPC, not the going international spot price.

In the final days of his presidency, Obasanjo sold the Port Harcourt refineries to a group of Nigerian private investors for $721m through a special purpose vehicle called Blue Star Consortium established by business magnate Aliko Dangote, Femi Otedola (owner of Zenon Oil and Gas, a major supplier of imported diesel) and the Rivers State government (AE 119/20). The sale was criticised for unloading the refineries at a knock-down price to close associates of the outgoing president.

Incoming President Yar’Adua cancelled the sale, returned the investors’ deposit and decided to carry out repairs and TAM – although inevitably, questions have been asked about the identity of the TAM contractors and the timetable for the work. “Really it’s just a face-saving pronouncement, since the subsidy on fuel importation is wreaking havoc on government finances, a hike in refined products prices is the only option and labour unions are bracing up for another strike,” commented magazine editor Samuel Emehelu.

To complicate matters further, no one is certain whether the refineries are still for sale. A source at the BPE said the agency itself was facing a crisis of confidence as the entire structure could face re-organisation. According to this source, the government intends to repair and run the refineries before deciding on a longer-term plan: “We are looking at a minimum timeframe of four years, when this government will seek re-election.”

Taking an alternative route, the federal government has just invited Indian steel billionaire Lakshmi Mittal to establish a refinery to produce 172,000 b/d of products (AE 130/17). Mittal bid unsuccessfully in the privatisation of the Port Harcourt refineries. The ONGC Mittal Energy Ltd joint venture had earlier won oil exploration blocks, paying a signature bonus of $50m for OPL 285 and $75m for OPL 279. A source at the presidency told African Energy: “Talks are still in preliminary stages at the presidency level with Mittal. When it’s finalised, it will come to NNPC in a few months and we will set up a technical committee.”

In addition, NNPC has invited Helix Oil International to build a 300,000 b/d refinery at a cost of some $6bn. The Greek company is in talks with the government.

But observers remain sceptical about the government’s efforts to attract private investment. “I do not believe in the song and dance of these new refineries,” said First Energy Foundation campaign director Tive Denedo: “The [Department of Petroleum Resources] DPR and NNPC have not given guarantees to any of the private refineries which will make it work, such as the one for feedstock… Most OPEC member nations usually make available land, put some infrastructure in place and give generous tax breaks to entice foreign investors in this highly demanding sector. Nigeria is an exception.”