Last month alone, Nigeria’s ailing refineries attracted interests from global energy and transportation giant GE and Italian energy company Eni.
Eni says it seeks to rehabilitate the Port Harcourt refineries and increase participation in offshore upstream oil and gas production operations.
GE, which was involved in tenders for refinery collocations last year before it was withdrawn, says it is committed to improving capacity of the refineries.
These developments come on the heels of NNPC’s plan to take the capacity utilisation of the refineries to 60 per cent by the end of the year, and then 80 per cent by the end of 2018.
“It is the procedure or methodology that we are changing a little bit; we are focusing on the process licensors to come and audit our process units in the various refineries,” Maikanti Baru, NNPC Group Managing Director explained recently.
Even Ibe Kachikwu, minister of state for Petroleum Resources have joined the chorus because his principal, who also doubles as the country’s president does not believe that the refineries ought to be sold.
While these initiatives may sound like good news for the downstream sector, many believe that the noise about rehabilitating refineries does not give much cause for cheer and this is because they have heard it all before.
So much of Nigeria’s resources have been wasted under elaborate Turn Around Maintenance (TAM) plans that leaves the refineries poorer than they were and their managers richer than they should.
According to a former NNPC GMD, Funso Kupolokun, an estimated $1.74 billion was spent on TAM of the refineries between 1999 and 2016, $1 billion of which had already been spent by 2007.
Yet, a recent report by the Nigerian Extractive Transparency Initiative (NEITI) puts average capacity utilisation of Nigerian refineries at 8.55 per cent in 21 months. In the period there was no production for seven months.
NNPC has four refineries, two in Port Harcourt (PHRC), and one each in Kaduna (KRPC) and Warri (WRPC) with installed capacity of 445,000 bpd.
While the PHRC has a current combined installed capacity of 210,000 bpsd, the installed capacities of KRPC and WRPC are 110,000 bpsd and 125,000 bpsd respectively.
None of these refineries operate anywhere close to their capacity and there are now plans to import crude from Niger to serve as feedstock for the Kaduna refinery and elaborate plans to rehabilitee the others.
Analysts, however adduce several reasons for the renewed interests in Nigeria’s downstream sector and what seemed to be an attitude to the refineries which goes against current thinking in the sector that the derelict refineries should be sold.
“Nigeria is getting ready to issue a bidding license for new oil blocks this year, it is possible that these companies are positioning themselves,” says Dolapo Oni, head of research at Ecobank.
Oni further said, “Also the cash call deal is giving oil companies confidence that they can negotiate good deals with the government.”
Henry Biose, petroleum economics and policy researcher, with the University of Port Harcourt is of the view that the decisions may be based on a business case stand point, driven purely by profit motivation.
“It is the best practice that is being done all over the world, you allow investors with the capacity to manage refineries while the government own refineries.
“I am thinking they will have something known as a service contract that will allow them service and operate the refineries for a period say 10 years, and there will be a sharing formula for their costs and investments in the project but its profit that drives it really.”
As crude oil prices struggle to leave the floor, derivatives from crude oil are becoming attractive investment options.
While the International Energy Agency, a global oil sector think tank, in its January oil market report said that refined product stocks movements shows a 4Q16 build in the Organisation for Economic Co-operation and Development (OECD) member countries with the overhang in non-OECD implied refined product inventories persisting.
However there are brighter prospects in other sectors. The global petrochemical market worth $514.5 billion in 2014 is projected to reach $758.3 billion by 2022, growing at a compound annual rate of 8.8 per cent according to a Grand View Research released last year .
“Increasing demand for petrochemical products in industries including transportation and construction will drive growth over the next seven years,” the report states.
Chuks Nwani, energy law and vice president Powerhouse International Limited said the benefits from local refining are numerous including saving scarce foreign exchange and boosting economic growth.
Major oil companies and other operators who have secured licenses to operate refineries but have failed to utilise them may yet rue their decision to ignore downstream operations.
According to NNPC November operations report, between December 2015 and November 2016, Nigerians used 11.84billion litres of petrol and 1.11billion litres of kerosene.
In November 2016 average petrol consumption was 38.4million daily even at a supply cap of N145 that marketers say discourage importation.
Total crude oil processed by the three local Refineries (KRPC, PHRC & WRPC) for the month of November 2016 was 232,768MT (1,706,655 bbls).
“There is a massive opportunity in the downstream sector, if we deregulate the market, refineries will make much money,” says Oni.
Already Total Nigeria is reaping rewards of deeper investments in the downstream sector as ended 2016 financial year as the leading company by earnings per share.
Total closed third quarter operations with earnings per share of N34.26, more than four times the N8.16 it closed in the same period in the preceding year.
The company also recorded sales growth of 38% year-on-year at the end of the first quarter from N159.2 billion to N220.2billion.
Profit after taxation grew by 320 per cent to N11.63billion from N2.7billion it pulled in the same period in 2015.
Shareholders also have caused to smile as they saw appreciation of their holdings by 40 per cent from N16.2billion to N22.7billion.
“Total’s results show that there are still opportunities in Nigeria’s downstream sector for any discerning investor despite the challenges imposed by a price cap enforced by the government,” Emeka Akabogu, chairman, OTL Africa Downstream told BusinessDay.
So while the prospects for Nigeria’s refineries do not look enticing, the downstream sector in the country is promising and oil majors, marketers and marginal field operators may miss out on a pile of money in the downstream oil sector.
ISAAC ANYAOGU
