FUEL CRISIS:STILL WAITING FOR PRIVATE REFINERIES

Alison Madueke
Nigeria's energy crisis, particularly the inability to operate functional crude oil refineries to meet the needs of consumers of petroleum products in the domestic market, continues to be a source of worry to government, citizens and other stakeholders in the industry.

Nigeria remains one of OPEC's top ten crude oil producer nations, and most analysts are quick at pointing out the prevalent contrast or what perhaps, passes for one of the ironies of contemporary times as the nation continues to rake in billions of dollars yearly from sales of crude oil in the international market, yet it remains a net importer of petroleum products.

With the nation's four state-owned refineries ran aground due to years of bad management and non-maintenance at due times, government had made a bold move to woo private investors into the crude oil refining business. The four refineries are located in Port Harcourt, Warri and Kaduna and they are managed by the NNPC. Equally are the two petro-chemical plants attached to the refineries in Kaduna and Warri.

Besides, the federal government through the NNPC owns and manages most of the strategic infrastructure in the downstream, sector pf the industry mostly depots and pipelines. Most of these assets are non functional resulting in Nigeria over the last twenty years earning the unenviable position of being one of the world's leading importer of the following refined petroleum products: AGO, PMS, HPFO, DPK, LPG, Bitumen, and Base Oil.

Although an initial award of licences to 18 firms to construct and operate refineries were cancelled for failure to bring those projects on board as scheduled, the government through the Department of Petroleum Resources (DPR), had later awarded fresh licences to eight new firms. Four of the licences were for 'approval to construct refineries' while the other four were 'licences to establish refineries.'

According to the DPR, Approval to Construct had been granted the following refineries having met all the pre-construction requirements which included a detailed environmental impact assessment screening: Resource Petroleum & Petrochemicals International (with a 100,000 barrels per day capacity); Sapele Petroleum Limited (120,000 BPSD); Antonio Oil (27,000 BPSD); and Amakpe Refinery (12,000 BPSD).

Those granted Licences to Establish (LTE) are: Ologbo Refinery Limited (12,000BDSD); Amexium Refinery (100,000 BPSD); Gasoline Refinery (100,000 BPSD); and Rehoboth Refinery (12,000 BPSD).

The DPR said the eight refineries have the right to refine for the local market and also to export. Nigeria's petroleum products refining capacity will receive a big boost of 483,000 barrels per day by the time the eight licenced private refineries come on stream, the DPR added.

But almost nearing a decade after the first set of licences were issued, none of those private firms have brought their plants on stream to halt the nation's reliance on foreign products, thus fueling strong speculations that either the government lacked the will to see to the emergence of private refineries or as many allege there was truly the presence of a cartel benefiting from the nation's net import status and hence was sabotaging efforts to end the trend.

The first set of firms granted licences and who had failed to actualize their work proposals had cited the inability to secure strong commitments from the government to get crude oil on credit or on subsidized rate as reasons for non-performance.

The NNPC enjoys such loans, the firms argued, sometimes getting allocations of more than 450,000barrels per day of crude oil allocation on credit for refining purposes, it does not matter if this crude is shipped abroad, refined in foreign refineries and ferried back to the country for domestic users. It makes some common sense, the firms had maintained, for them to get such crude grants as a booster noting that under a regulated environment it would be difficult if not impossible recouping investments from a project whose end-product prices is determined not by market forces, but by the government.

Interestingly, while existing licence holders are still grappling with how to bring their projects on stream - and to make profits under a price regulated environment, the government in a manner reminiscent of the publicity given to previous awardees of licences announced to Nigerians last week the visit of a team of Chinese investors to build private refineries in three states of the country - Bayelsa, Kogi and Lagos.

For all the excitement generated, the Chinese, it is said, only came with a proposal covering plans to investing about $8billion in the construction of Greenfield refineries to be cited in Lagos, Kogi and Bayelsa states. It was an exploratory visit. And no one can tell when such a plan would become reality or if it might remain a mirage as the others preceding it considering the prevailing regulated environment, the same excuse or scapegoat which licence holders, and lately government has held as marring the operation of refineries.

Rasheed Bolarinwa, brand specialist, denies the regulated-environment theory as a responsible factor for the inability to refine products domestically. It is a depiction of visionless leadership and will power by those at the helm of government, Bolarinwa said, as government over the years had failed to deregulate the downstream industry if that indeed was the major bottleneck.

'It is a shame for us as a people that at this age when we are marking 50 years of independence that we keep selling our raw crude to other foreign countries and then turn around to import the finished products from them for domestic use; what an irony,' lamented Rasheed Bolarinwa, Brand Specialist/Principal Consultant, BrandScope Nigeria.

'It doesn't speak well of our country, it is not about regulation or deregulation, it is a clear depiction of lack of vision on the part of our leaders, it demeans our ingenuity as a people, and its continuity cannot be described as a value addition to our image or the brand called Nigeria at 50; something must be done to stop it,' Bolarinwa told Daily Sun in an interview.

But Levi Ajuonuma, spokesperson for the NNPC, would not agree in its entirety with Bolarinwa's position as he maintains that although none of the private refineries was on stream, the state-owned ones managed by the NNPC were functioning and adding substantially to the energy mix. 'We are only importing to augment what we are refining from the local refineries, and that is not abnormal considering the millions of Nigerians who use petroleum products,' Ajuonuma told Daily Sun in a recent chat in Lagos trying to dispel the position that the country was dominantly import dependent.

'The Warri, Kaduna and Port Harcourt refineries are working; we had a slight problem with Port Harcourt because of gas to power the facility but that will be sorted out soon,' he added.

However, a recent data from Department of Petroleum Resources (DPR) which regulates the industry would puncture Ajuonuma's position as it puts the refining capacity of the NNPC refineries at 18.72 per cent, an abysmal record considering the huge funds pumped into their resuscitation in the last ten years.

The DPR described the refineries as performing 'poorly'. Said the DPR, 'the existing refineries (Warri, Kaduna and Port Harcourt) performed poorly attaining 18.72 per cent of the combined installed capacity for the first quarter of 2010.'

Reasons for the low performance were: equipment failure; lack of haulage for some products and intermediates; lack of feedstock; and the shutdown of the old Port Harcourt Refineries awaiting Turn Around Maintenance (TAM). But it is not just about the bad image or negative brand it gives to the country, for it is indeed very obvious that the absence of functional refineries poses far more reaching implications for the nation's economy; it is a big strain on the economy - on foreign reserves in particular.

Why? Nigeria's downstream oil sector is tightly regulated by government, and to ensure that products, notably petrol, is sold at a uniform price throughout the country, government continues to pump in millions of dollars year-in-year-out into subsidies of products which are imported at rates also influenced by price volatility at the international market.

Indubitably, operating functional refineries in Nigeria would not only boost products supply for the domestic markets, it would also guarantee supplies to neighbouring West African countries, and for a country with an agenda to stem unemployment and halt a fast-encroaching poverty and hunger, the resultant job creation to the nation's teeming unemployed youths via functional refineries can indeed not be overemphasized. Even at that, the big price the nation pays for being import dependent cannot be overstated when the additional cost of fright, storage and sometimes demurrage incurred at the port for late discharge or delays of products from vessels is built into the cost chain.

A recently published data from the Petroleum Products Pricing Regulatory Agency (PPPRA), had put government expenditure on fuel subsidy at about N580 billion in the last 16 months, spanning the whole of 2009 and first four months of 2010. 'We wish to state categorically that the total subsidy paid to all participating marketers in 2009 amounted to about N450billion, out of the amount, the NNPC was credited with N212.5billion, while the rest of the marketers got the balance N238billion,' the PPPRA said.

'So far in 2010, N130,635,434,605:34, has been paid out, from which NNPC was credited with N61,004,532,568:49, while other marketers received N69,630,902,036:85,' the regulatory agency added in a statement made available to Daily Sun.

But the PPPRA, which regulates products prices in the country, in its submission had underplayed the glaring fact that these figures could be slashed by at least a quarter with the presence of refineries in different parts of the country which would mean an end to bridging cost, price equalization, petroleum subsidy fund (PSF), and other related subsidies paid to oil marketing firms to enable them assist in products imports, storage and distribution under a regulated environment without eroding their profit margins as business establishments.

The PPPRA has been at the forefront of the clamour for a total deregulation of the downstream oil sub-sector in Nigeria and the regulatory agency maintains that its position was informed by the urgent need to free the sector of all forms of encumbrances; be it administrative, social or economic.

'We believe in a free market economy as being sine qua non to a vibrant downstream oil sub-sector that is both profitable and self sustaining,' PPPRA said.

Indeed marketers and prospective investors favour the total deregulation of the industry if they must come in to own refineries. Femi Olawore, secretary of major marketers oil cartel, MOMON says 'there is no other solution to the problem of local refining except to deregulate the downstream sector to guarantee full cost recovery for investors.'

A proposed Petroleum Industry Bill (PIB) is currently before the National Assembly and part of the reform recommends the deregulation of the downstream sector of the oil and gas industry. Presenting the draft of the PIB to journalists in Abuja late year, former Petroleum Minister, Rilwan Lukman said the proposed BIP will change the face of the industry by 'encouraging third party investments in new refineries.'

'For an effective and competitive domestic petroleum products market to be developed in Nigeria, the downstream sector must be deregulated to encourage investment in refining and marketing infrastructure,' said Lukman.

Deregulation is a position that government has been toying with, though lacking the will to announce a take-off date for fear of opposition from labour and the general public. Former President of the Lagos Chambers of Commerce and Industry (LCCI), Mr. Solomon Onafowokan in a chat with Daily Sun frowned at government continuous ambivalence position on the deregulation of the sector if that is the panacea.

'I am particularly disturbed over the rather ambivalent position of government on the question of the deregulation of the petroleum downstream sector,' Onafowokan told Daily Sun in a chat.

'Government needs to make a categorical statement on the issue bothering on the deregulation of the downstream sector in order to aid decision making by investors in this sector,' he said. He believes that the problems of the downstream sector of the petroleum industry have lingered for too long and it's about time an enduring and sustainable solution was found. 'This would boost private investment in the sector, create more jobs and enhance the sector's contribution to national output,' he added.

On its part, manufacturers in Nigeria under the aegis of the Manufacturers Association of Nigeria (MAN) had commissioned an 'Energy Infrastructure Development Study in Nigeria' to evaluate the cause of the crisis and to make recommendations on how to stem the crisis and move the sector forward.

MAN, in the final report of the study made available to Daily Sun also listed the following as factors responsible for the crisis in the sector: the poor government policies in the downstream sector, products diversion, sub-optimal pricing of products in the nominal terms, vandalisation of petroleum products pipelines, inadequate linkage of storage and transportation for distribution components, and extensive reliance on road haulage.

The manufacturers' cartel, in its recommendations demanded that the government create an enabling environment that will attract both local and foreign investors into the sector. MAN also called for the privatization of the refineries to entities that have experience in refining business. The group noted that sub-optimal pricing of products would lead to high demand but low income for the supplier. 'Pricing should therefore be balanced to allow reasonable profit margin for refinery operator as well as taking into consideration consumer needs,' MAN said.

'If this is done effectively, it will catalyze the attraction of investors into this sector of the economy,' the group added. For Mr. Ifeanyi Ubah, Managing Director/CEO of Capital Oil & Gas Limited, only a partnership between Nigerian banks and indigenous oil and gas firms can guarantee the establishment of functional refineries in Nigeria. According to him, the challenge of ending fuel scarcity and ensuring uninterrupted supplies of products was one that could be handled by consistent investments in infrastructure in the sector.

He said, given the socio-economic situation in the country, no foreign firm would be willing to invest in such structures, especially in a refinery. Only local firms have the patriotism and were ready to take the risk to sink funds into the construction of refineries, said Ubah. But, he wants local banks to mobilize funds and bankroll proposals submitted by indigenous oil firms for refineries in the country as that remains the best way to accomplish that task.

'If we want to end the problem of importation of products and we want to see functional refineries operating in Nigeria, then the local banks should be ready to partner with indigenous firms; the banks should be prepared to give facilities to local operators to build refineries or they should help us to get a foreign credit line,' Ubah said in a chat with Daily Sun.

'The truth that we must begin to appreciate that it is only Nigerians that can put down funds and be so committed to establish a refinery in the country. No foreigner will do it. In fact they have proved they can not do it because in the over 20 years of major marketers doing business in Nigeria, none of them have considered it worthy to establish a refinery in Nigeria, they have not even thought of doing it as a group,' Ubah added.

According to him, the number of depots and storage facilities that local firms in the downstream sector have put in the last three years is a clear testimony of their strength and willingness to invest in the growth and development of the sector. Ubah said Capital Oil had stood at the forefront of the revolution in the downstream sector by constructing the biggest private jetty to eliminate demurrage on products and that with the right government support; even his firm could float and operate a refinery.

'We need government support and encouragement, we need funds to grow, we need strong banks, we need the banks to encourage us and we will do more. It was done in Brazil and Venezuela and today these countries that testify that it was the local oil firms that indeed added value to their oil and gas industry and not the foreign firms, that is what Capital Oil wants to do in Nigeria, we can operate a refinery in this country, there is nothing so special about it, not like rocket science,' he added.

Bolarinwa suggests tfinancial ly, greater efforts should be made in improving the level of electricity generation and distribution in the country as well as in harnessing other alternative source of energy - like solar, coal, and wind - for domestic and commercial usage. The challenge of meeting Nigeria's growing energy needs can only be met through a holistic approach.