The Nigerian National Petroleum Corporation (NNPC) is considering ceding both majority stake and the management of its ailing refineries to private investors, after completing ongoing rehabilitation, but convincing investors that the refineries would be viable could become a challenge.
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Mele Kyari, group managing director of the Nigerian National Petroleum Corporation (NNPC), in a televised interview on Sunday, said that the corporation is rehabilitating the refineries first and will sell majority stakes to evolve the same model on which the Nigeria Liquefied Natural Gas (NLNG) is operating.
Oil sector operators and analysts have long advocated this arrangement. For example, the Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN) in January urged the Federal Government to adopt the NLNG model to revive Nigeria’s four ailing refineries.
However, the success of the NLNG is based on its unique assurances and guarantee, ownership and operating model which have limited external interference. Its incorporation charter, with companies and their countries being represented, elevates the NLNG Act almost to the status of a treaty.
The ownership structure of the NLNG makes it an independent incorporated joint venture, guaranteeing an independent board of directors, effective decision making as well as funding for its projects.
NLNG’s operation is based on international best standards with all the parties carefully scrutinising every decision to ensure benefits are maximised. This is why the company currently accounts for at least 4 percent of Nigeria’s gross domestic product and is one of the biggest taxpayers in the country.
But the NNPC which had hitherto managed Nigeria’s refineries does not operate under these conditions. It is owned and managed by the government. It has spent billions of naira to repair the refineries and they still don’t produce enough petrol to even power their own generators. The NNPC maintains subsidiaries that make profit on occasion, is largely seen as inefficient, opaque and corrupt.
The plan to cede majority stakes in the refineries can work if similar conditions that have helped the NLNG succeed are created. Key is guaranteed access to feedstock, efficient infrastructure, including pipelines and modest valuation of the refineries considering their current state, experts say.
“A key issue is, what value will the NNPC place on the refineries, the level of demand for a refinery now and even capacity?” said Ayodele Oni, energy lawyer and partner at Lagos-based Bloomfield Law firm.
Oni said that the plan will face challenges ranging from a world that seems to increasingly embrace renewable technologies to a government that is turning towards gas as transport fuel, and the advent of both modular refineries and the behemoth Dangote Refinery with 57 million litres per day capacity can replace Nigeria’s petrol imports.
The refineries currently are not profitable. NNPC’s 2018 audited accounts showed the refineries in Kaduna, Port Harcourt and Warri incurred a cumulative loss of N126.2 billion. They also had cumulative capacity utilisation 8.27percent in the year under review. This does not exactly make the business attractive to investors.
Investors who buy majority stake in the refinery would also contend with a government agency fixing the price of petrol.
On Wednesday, the downstream subsidiary of the NNPC, the Petroleum Products Marketing Company (PPMC), fixed the ex-depot price of petrol at N138.62 per litre.
The refineries built over four decades ago will contend with smarter smaller modular refineries and the Dangote Refinery which are built with improved technology.
The Dangote Refinery is expected to receive crude oil from different exploration and production companies but the Nigerian refineries will still receive supplies from the crude allocated to the NNPC which is currently been swapped for refined petrol, hence supply security could be uncertain.
