Friday, June 8, 2012

Nigerian Refineries Need a Commonsense Solution

The four state-owned refineries in Nigeria are on their knees. Though refineries in Nigeria should be consistently out-performing the average utilization rates of refineries across the globe, their performance is characterised by very low utilization and incessant downtime. This owes to the fact that they are owned and run by the government of Nigeria and, are caught within the ‘crossfire’ of corruption, persistent attacks on pipelines by oil thieves as well as the slow progress in the full-liberalization of the refining sector of the petroleum industry.

Recently, the Nigerian National Petroleum Corporation (NNPC) announced that it had commenced discussions with the original builders to carry out a major overhaul of the refineries. NNPC said, Chiyoda would be contracted to handle the rehabilitation of the 110,000 barrel per day Kaduna refinery, Italian firm Saipem would handled the repairs of the 125,000 bpd Warri Refinery, while Japan’s JGC Group, which built the 150,000 bpd New Port Harcourt refinery in 1988, had nominated Tecnimont to take charge of repairs of one of the two refineries in Port Harcourt.

The resolve of the government to heed the age-old suggestion of inviting the original builders to handle the Turn Around Maintenance (TAM) of the refineries is a very good and a well-thought out decision. The hope is, the refineries would witness a genuine Turn Around Maintenance (TAM), and not the usual ones they have been witnessing which has not brought any improvement on their ‘health’. The general consensus among experts in the oil and gas industry is that the fastest and cheapest way to get more volumes of refined petroleum products into the growing Nigerian market at lower cost is to rehabilitate these existing refineries. However, the big question is, after rehabilitating the refineries, what’s next?

In addition to the proposed Turn Around Maintenance by the original builders, which should also include optimization of the refineries to achieve a high Nelson Complexity Index - any refinery with a Nelson Complexity Index of 10 or above is considered a complex refinery with potential in value addition and high value products. When that is achieved, a 4-way approach is also needed to position the refineries and tackle the continuing difficulty of establishing private refineries in Nigeria. Before the completion of the Turn Around Maintenance, with the hope it would be sincerely done as promised, government should consider these four well-known commonsense approaches: grant full autonomy to the refineries, but they still remain government-owned; lease the refineries to oil companies/inventors/communities/etc; outright privatization of the refineries with highly attractive incentives, which should be extended to genuine investors willing to establish private refineries.

Being the oldest, Warri Refining & Petrochemical Company Limited can be retained by the government, but should be granted full autonomy to cater for itself- pay its bills and dividend to the government. Kaduna Refining & Petrochemical Company can be leased to any oil company or group of investors with interest in the petroleum products refining. The Port Harcourt Refining Company Limited should be fully privatized. The old complex should be sold to oil producing communities, while the new complex to interested buyers with technical and financial capacity.

This 4-way approach will take care of all the interests and schools of thought on how to revive Nigeria’s state-owned refineries. Nigerians would know which method best suites the running of the refineries. In addition, it will trigger investors’ interests in the refining sector of the Nigeria oil and gas industry.

However, implementation has to be systematic as well as systemic. i. e. experts from various disciplines should sit-down to develop win-win modalities for the approach to be acceptable to all stakeholders, especially ordinary Nigerians.

With the right approach, coupled with the available cheap and easily accessible crude oil; competent manpower and funds, Nigeria’s refineries would operate at near 100 per cent utilization with minimal downtime. Moreover, a speedy and sustainable increase in Nigeria’s refining capacity that achieves Gross Refining Margins (GRMs) that are consistently at par with Asian benchmark of ‘Singapore Complex Margins’ will generate thousands of jobs and boost the potential of the economy. This way, Nigerian refineries can compete with any refinery in the world including the world biggest refinery with Nelson Complexity Index of nearly 14 - the 1.3 million barrels per day (bpd) Jamnagar Refinery in India.

Zayyad I. Muhammad writes from Jimeta, Adamawa State,, 0803607098

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