Lack of Refining Capacity and Subsidy in NIGERIA: What all Good People of Nigeria must Know

By IndepthAfrica
In Article
Mar 12th, 2014
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Dear Fellow Nigerians,

 

The year 2014, which we hoped for certain expectations have come and is already advancing faster than we thought. As we always hope that our dear country will be part of the positive outcomes in our lives, we will keep our fingers crossed and keep praying.  Though praying (faith) without work is as fruitless as a barren tree.

Let’s start like this, what is actually happening and going on in the country we call our own? It’s a little more than 2 years since President Goodluck Jonathan announced the removal of the petrol subsidy. This culminated to the then popular ‘Occupy Nigeria’, which claimed over 15 innocent lives, yet there’s nothing to show for such a struggle.  After government shut down for about 2 weeks, the government and the labor union agreed to a partial subsidy removal against the wish of the Nigerian populace, which pegged the official price of petrol to N97/liter ($0.62/liter). The government then promised to fix the almost non-functional refineries with the savings from the partial subsidy removal, and also fix the other cardinal sectors of the economy.  Yet today, we are still enveloped with scarcity of petroleum products. What a pity.

According to the House of Representatives Ad Hoc Committee on fuel subsidy regime, the federal government pay subsidy for 59 million liters of petrol per day, yet we were told we only consume 35 million liters per day (I still don’t believe this figure, as well as many Nigerians too). Where then does the extra 24 million liters per day of petrol go to? What happens to the subsidy paid on this extra 24 million liters per day?

We were even told that our refineries work at very low capacity. If this is the case, why then do we import 35 million liters per day? The refineries of course would have produced some fraction for our daily consumption. The Federal Government of Nigeria through the Ministry of Petroleum now says that we consume about 39.66 million liters of petrol daily (17). Please, Nigeria’s won’t accept this fact, we don’t drink this petrol, and I’ve not heard of anyone drinking petrol in any part of this mortal world. These are ways by which funds are being siphoned into personal pockets.

More implicating fact is that, according to the OPEC 2013 statistical review, Nigeria imported 350,700 bpd or 55.76 million liters per day of petroleum products in 2012 (24). Meanwhile the Federal Government tells us that (in 2012) we consumed 35 million liters of PMS per day, 10 million liters of DPK per day (25), and 12 million liters of AGO per day (25), all totaling 57 million liters of petroleum products per day. Why the excesses? Do not forget that data’s from OPEC are compiled based on ‘orders made for a particular destination’ (which is Nigeria). Some government officials say that, most of the ordered petroleum products are not eventually sent to Nigeria, but they order it based on Nigeria so that they will receive the subsidy payment from the federal government. By the way, there’s no government parastatal or ministry that publishes (in their website) the actual amount of petroleum products imported per day. We only hear it from the Federal Ministry of Petroleum, Nigerian National Petroleum Corporation (NNPC) or top government officials in our national newspapers. Remember, we can’t live on just hearsay.

 

For the purpose of this article, let us for now be silent on the excess subsidy being paid (for 24 million liters per day) by the government in previous years before 2012 or on the excesses when compared with facts from Organization of the Petroleum Exporting Countries (OPEC).  Let’s highlight on the savings made by the government on partial subsidy removal, and the simple calculation goes this way;

Total petrol consumption per day = 35, 000, 000 liters (35 million liters)

Total petrol consumption per year (365 days) = 12, 775, 000, 000 (12.775 billion liters)

Savings from petrol subsidy per liter = ₦32 (₦97 – ₦65)

Total savings from petrol subsidy per year = 32 × 12, 775, 000, 000 = ₦408, 800,000,000 (408.8 billion or $2.637 billion).

Note: Prior to 2012, the federal government was paying about ₦74.77 per liter in subsidy to lower the cost of petrol imported into the country to ₦65/liter, but this was later reduced to ₦42.77/liter after the huge protest and government shut down. An extra ₦32 paid by the customer (which is savings for the government) increased the pump price to ₦97/liter.

 

I will start my analysis like this;

 

First Analysis

According to the United States Energy Information Administration, a conventional refinery (which our 3 refineries fall into) will produce 19 gallons of gasoline (95% constituent of PMS) per barrel of crude oil refined (18). Also note that a barrel of crude oil which is 42 gallons, when refined produces 45 gallons of products (expansion of crude oil). That is to say that, our 445,000 bpd (capacity of the 3 refineries combined) refineries will produce about 8.455 million gallons per day or 32 million liters per day (3.78 liters equals 1 imperial gallon) of PMS (gasoline). This of course means that we only have to import 3 million liters of petrol per day (1.095 billion liters per year), which will amount to only ₦46.83 billion yearly expenditure by the country, instead of the ₦546.386 billion yearly (12.775 billion liters yearly × ₦42.77/liter) that is currently being paid.

 

 

Second Analysis

Why establish SURE-P? The so called Subsidy Reinvestment and Empowerment Programme (SURE-P) was meant to address the infrastructural decay of Nigeria, and the funds for such a committee will come from the savings from the partial subsidy removal. What is actually wrong with Nigerian leaders? We have a big problem of non-functional refineries, which have prompted the government to import petroleum products, so why not address the problem once and for all, FIX THE REFINERIES WITH THE SAVINGS FROM PARTIAL SUBSIDY REMOVAL. Simple ‘Root Cause Analysis’ is what Nigerian leaders can’t apply? I can’t just imagine for crying out loud, this ₦408.8 billion or $2.637 billion which is saved annually, can fix the refineries, and also extend to other cardinal sectors of the country. Yet all we hear is the mismanagement of funds by the SURE-P committee.

So, what exactly is the problem? I am totally against the privatization of the refineries; rather it should be a joint venture with a reputable investor. In 2013, TOTAL SA, the national oil company of France, commissioned a highly sophisticated 400,000 bpd full conversion Jubail refinery with the Saudi Arabian National Oil Company (Saudi Aramco). The name is Jubail refinery and owned by SATORP (Saudi Aramco Total Refining and Petrochemical Company), with 62.55% for Saudi Aramco and 37.5% for TOTAL. This same TOTAL SA exist in Nigeria, so what is actually the problem? If military juntas saw the need and built refineries, why can’t the civilian government do better?

For our information too, it takes a maximum of 4-5 years (it’s usually 3 years) to build a refinery (from MOU to Start-up), meaning that any government can afford to assist in building a refinery, period. A 400,000 bpd (conventional) refinery does not cost more than $7-8 billion. This means that with such savings from 2 years amounting to $5.274 billion, NNPC can confidently engage an investor (foreign or local) to build a refinery (Joint Venture). With a 400,000 bpd refinery, plus our moribund existing refineries, Nigeria will be a net exporter of petroleum products to other parts of Africa. Hence, actualize part of the tag ‘Giant of Africa’.

 

 

 

 

Third Analysis

The Federal Ministry of Petroleum keeps telling us that refineries are not profitable. According to BP Statistical Review of World Energy (2013) (7), refinery crude runs increased by a below-average 480,000 bpd, or 0.6%. Non-OECD countries accounted for two-thirds of the net increase, rising by 320,000 bpd. OECD throughputs grew by 160,000 bpd, with continued throughput declines in Europe more than offset by throughput increases in North America, where the US consolidated its position as a net product exporter. Global refinery capacity utilization improved to 82.4%, the highest since 2008.

Now the question is, how did she come about such information? Is it because nobody challenges the government on specific comments they make, which misleads the entire populace?

For our general information, the major factors that affect profitability of refineries, which can prompt shut down are highlighted below;

1)      Volatility of Crude Oil Prices: Refineries (for countries that import crude oil) have been struggling to cope with the high cost of crude oil in the spot market, which was in the range of $106 – $109/barrel in 2012, as their refining margin  continued to shrink. This is largely caused by prolonged strike in Libya’s oil sector, Middle East unrest, ongoing war in Syria, sanctions on Iraqi oil etc.

Gross Refining Margin of refineries can be calculated with the simple formula below;

 

 

*Total Cost of Crude Oil includes the shipping cost

 

So, the issue of high price of crude oil doesn’t affect our dear country. We don’t import crude oil.

 

2)      Refinery Structural Challenges and Strict Products Specifications: Another important challenge facing the refining industry (mostly in Europe) is that, most of them were built in the 1960’s and 1970’s, and have low capacity (below 100,000 bpd), and less technology, more like the premier refinery in Port Harcourt (60,000 bpd) which was built in 1965. Currently, with the increasing demand for ultra-low sulfur diesel and gasoline of about 5 -10ppm sulfur (EURO VI and EURO V), most of these refineries have found it very difficult to meet the market demand specifications, prompting their shut down. This is not the case for Nigeria because we are still using EURO III specification of 500ppm sulfur content, and our refineries are not up to 40 years (the expected lifetime of a refinery), except for the 1st refinery in Port Harcourt (60,000 bpd).

3)      The Diesel/Gasoline Demand Ratio: Previously in the 1960’s in Europe, refineries were built to maximize gasoline production (installation of FCC Units) based on the high gasoline demand. This trend has long changed, and most European countries have now shifted to more efficient diesel engines in recent decades. This has caused many refineries to find it very difficult to sell the excess gasoline produced, and shortage of diesel which is then imported. The excess gasoline are usually exported to the USA, but since the 2008 financial crisis, and the boom of shale oil and gas, US gasoline import have shrunk, which is no good news to the European refiners. Refiners then started upgrading their refineries to maximize diesel production (installation of Hydrocracking Unit and Delayed Coking Units). Where they found it almost impossible to upgrade, they have no other option than to shut down. Remember that most refineries that are shut down are those below 100,000 bpd. In addition, while some refineries where being shut down (due to difficulty in upgrading), many other refineries have increased their throughput (capacity) to further increase their profit margin. This has prompted the global refining capacity to increase despite shutting down of some refineries (in Europe) (7). As a rule of thumb in the present refining market, more favorable profit margins are made by refineries with at least 200,000 bpd (if you import the crude oil).

 

Let’s not forget that at least 75% of all refineries in Europe import their crude oil at the spot market price of about $106 – $109/barrel in recent times, yet they also have favorable though slim refining margin of about $4.1 per barrel (using Brent crude oil) as of 2012, as stated by Wood Mackenzie (21). Average US Gulf Coast sour coking margins exceeded $8/bbl, the best since 2007, whilst NW European sweet cracking margins averaged $7/bbl, the highest since at least 1990 (7).

Meanwhile, in the case of Nigeria, 445,000 barrels per day is allocated to NNPC for our refineries, and they only spend on the production cost ($45/bbl) (2). Since it’s a joint venture, NNPC only contributes 60% of the production cost ($45/bbl ×0.6 =$27/bbl).  In some cases they contribute only 55%  ($45/bbl ×0.55 =$24.75/bbl). This is due to the joint venture (JV) agreement with the oil producing companies. In JV agreement, NNPC share the production cost with the contractors, which stands at 60% (NNPC/MPN JV), 60% (NNPC/MPN JV), 60% (NNPC/CNL), and 55% (NNPC/SPDC/TEPNG/NAOC) (31).  More so, in cases where they operate with production sharing contract (PSC), the contractor (and not NNPC) bears all the exploration and production cost. PSC is used for all the deepwater offshore oil and gas resources in Nigeria. NNPC and the contractor only share the ‘profit oil’ after the contractor must have deducted his ‘tax oil’ and ‘cost oil’ (11). Remember, the ‘tax oil’ also goes to NNPC. Currently, Statoil, SNEPCo, Esso, Elf, Nigerian Agip Exploration Limited, Addax, Conoco and Petrobras, Star Deep Water, Chevron, Oranto Philips are operating the PSC in the country (11).

This then means that the gross refining margin of our refineries will be far more than that of European refineries in several magnitudes.

 

Remember, none of the above mentioned factors affects Nigeria, because we don’t have to buy crude oil, neither do we have issues with the Diesel/Gasoline demand. Our refineries were constructed to maximize gasoline production, and our market in the transportation sector is gasoline dependent too. Our refining operating cost is much lower because we still use EURO III specification, and will still be lower (than that of European refiners) if we even start using EURO IV.

 

Let’s do some brief calculations on the possible price of petrol in Nigeria, with a much favorable refining margin for the refiners;

 

Base Case: Price of imported petrol at current partial subsidy removal

According to the Petroleum Products Pricing Regulatory Agency (PPPRA), the price of petrol when imported is highlighted below;

Landing cost (23) = ₦124.28/liter

Distribution, bridging and profit margins (23) = ₦15.49/liter

Total (23) = 139.77/liter

This means that if we import petrol, a liter will cost = ₦139.77/liter

Due to the partial subsidy being paid by the federal government (₦42.77/liter), the pump price of petrol now stands at ₦97/liter or $0.62/liter.

 

 

 

*$1 = N155 (16)

* 1 bbl = 159 liters

* 1 bbl = 42 gallons

* 1 gallon = 3.78 liters

 

 

 

 

 

Let’s go ahead and compare the above ‘base case’ to different cases/scenarios if we refine our crude oil locally;

 

Case I: Price of petrol if our refineries are working at full capacity (Crude Oil available from Joint Venture Companies)

  • Refinery Operating Cost per barrel (6, 4) = $2.20 – $4.00 (USA), $3.40 – $4.00 (Europe), $3-7 (Asia-Pacific), $7/bbl (Nigeria). I assumed the highest operating cost, at the worst scenario.
  • Average Production Cost of Crude Oil in Nigeria (2) = $45/bbl × 0.6 = $27/bbl
  • Pipeline transportation of crude oil (Qua Iboe terminal) to the refineries (WRPC/PHRC) (127 km) (4, 27) = $1.5/bbl ….(from Houston to the New York harbor which is 2,886 km is about $1/bbl).
  • Distribution, bridging and profit margins (23) = ₦15.49/liter or $15.89/bbl (The actual value will be less than this if we refine locally).
  • Refining Margin (Profit Margin) (6, 7) = $8/bbl (let’s assume our refiners should make the highest margin in the world refining business. Refer to the paragraph after diesel/gasoline demand ratio above).
  • Total = $59.5/bbl or $0.37/liter

This means that if we locally refine our crude oil (with an excess refining margin for the refiners, and at the highest refining cost, which must be lower), a liter of petrol will cost $0.37 × ₦155/$ = ₦58/liter (maximum).

Note: In JV agreement, NNPC provides either 55% (0.55) or 60% (0.6) of the production cost. I used the highest value (60%) to indicate the maximum price of PMS.

 

 

Case II: Price of petrol if our refinery is working at full capacity (Crude Oil from Production Sharing Contract Companies, eg. NNPC/EEPNL PSC)

Refinery Operating Cost per barrel (6, 4) = $7/bbl

Average Production Cost of Crude Oil in Nigeria (11) = $0/bbl (due to PSC agreement NNPC don’t contribute to the production cost).

Pipeline transportation of crude oil to the refineries (WRPC/PHRC) (4, 27) = $1.5/bbl

Distribution, bridging and profit margins (23) = ₦15.49/liter or $15.89/bbl

Refining Margin (Profit Margin) (6, 7) = $8/bbl (same as Case I).

Total = $32.39/bbl or $0.2/liter

This means a liter of petrol will cost $0.2 × ₦155/$ = ₦31/liter (maximum).

 

 

Case III: Come up with the possible price of gasoline in Nigeria using the USA template

The Federal Ministry of Finance and that of Petroleum have at several occasions told us that the price of gasoline is very high in USA. They did not also mention about the minimum income rate (minimum wage) which is at $7.1/hour (19) (N176,080/month, @ 8 working hours a day and 20 working days a month). Neither did they ever mention about the efficient transport system in USA, Canada etc. Meanwhile the minimum wage in Nigeria is at ₦18,000/month (at 160 working hours a month), which translates to ₦112.5/hour or $0.73/hour. What a comparison‼.

According to the US Energy Information Administration, the national average retail price of a gallon of regular gasoline in September 2013 was $3.53/gallon (1) or $0.934/liter.  The four main components of the retail price and approximate shares of the total price were (1);

  • Crude Oil Cost: 71%.  Refiners paid an average of about $105/barrel for crude oil, or about $2.5/gallon ($0.661/liter). Don’t forget USA imports 40% of their consumed crude oil (3).

 

  • Refining Costs and Profits: 6%. This then account for exactly $0.212/gallon or $8.9/bbl.

 

  • Distribution, Marketing, and Retail Costs and Profits: 11%. This equals $0.39/gallon or $16.31/bbl.

 

  • Taxes: 12%. This amounts to $0.424/gallon or $17.79/bbl (both federal and state tax combined).

 

Total price of gasoline in the USA:  $2.5/gallon + $0.212/gallon + $0.39/gallon + $0.424/gallon = $3.53/gallon ($0.934/liter).

 

Let’s use the price template from USA and go ahead with the simple calculation of what should be the price (another option) of petrol in Nigeria.

  • ·         Crude Oil Cost:  In the case of Nigeria, since part of our crude oil is produced based on Joint Venture (JV), NNPC will only account for the production cost which is at maximum of $27/bbl(2) or $0.643/gallon ($0.17/liter).

 

  • Refining Costs and Profits: $8.9/bbl or $0.212/gallon

 

  • Distribution, bridging and profit margins(23) : ₦15.49/liter or $15.89/bbl or $0.378/gallon

 

  • Taxes (12%): $0. 17/gallon or $7.14/bbl.

 

Therefore, the price of gasoline (using this case study for JV) will be:  $0.643/gallon + $0.212/gallon + $0.378/gallon + $0.17/gallon = $1.4/gallon or $0.37/liter × 155/$ =

 57.35/liter (maximum).

 

Case IV: We don’t have to import petroleum products

Now, let me use the most current price of gasoline in the USA (28);

30th December, 2013 = $3.331/gallon or $0.881/liter = 136.55/liter

6th January, 2014 = $3.332/gallon or $0.881/liter = 136.55/liter

13th January, 2014 = $3.327/gallon or $0.88/liter = 136.4/liter

 

According to PPPRA, the actual price of imported gasoline is ₦139.77 (23).

This is heart breaking‼ We as Nigerians really need to act on this once and for all‼ Refiners in the USA purchase crude oil at an average of $105/barrel and yet the pump price of gasoline is cheaper than importing it in Nigeria. So why don’t we refine?

At the worst instance, it’s a lot better for us to refine in Nigeria, then at ₦136.4/liter for gasoline, and the federal government can decide to pay the subsidy to the refiners to reduce the pump price to ₦97/liter.  This subsidy can either be paid in cash or by deducting the subsidy from the price of crude oil sold to the refiner. For proper accountability, the latter is more preferred.

This will be a double victory for both the federal government and the Nigerian populace; affordable gasoline as well as enjoying the full benefits of having functional refineries (see Fifth Analysis).

 

 

So, if you compare Case I, II & III (if we refine crude oil in Nigeria) against the Base Case (importing petroleum products using subsidy), and also quietly looking at Case IV, the question now becomes, who is fooling who?

 

 

Another critical information that will further reduce the pump price of petrol if we refine locally is that, we won’t have any reason what so ever to pay ₦15.49/liter or $15.89/bbl asDistribution, bridging and profit margins’.

Nigeria has a good infrastructure for the transportation of refined petroleum products- a 5,120km pipelines network connecting 21 oil depots and 19 pump stations (20). PPMC’s network of petroleum pipeline products are segmented into ‘systems’ -  System 2B transports petroleum products from the Atlas Cove to five oil depots in the southwest-  Mosimi, Ibadan, Ilorin, Satellite(Ejigbo) and Ore. System 2E & 2EX  connects Port Harcourt Refinery with depots in Calabar, Aba, Enugu, Markurdi and Yola. System 2C & 2CX connects Warri Refinery and Petro-Chemical with depots at Benin, Suleja and Minna, while System 2D & 2DX connects Kaduna Refinery with depots in Kano, Gusau, Jos, Gombe and Maiduguri (20). All these systems are all interconnected.

If our refineries are working, bridging margin will totally be non-existent. This is because marketers who lift petroleum products from the private depots in Lagos and transport them to filling stations, covering a distance of up to 450 kilometers (26), are those paid bridging claims to ensure that they do not sell above the pump price because of the additional costs they incurred on transportation.  Meanwhile, from the 21 depots of PPMC to all parts of Nigeria they cover, there’s no distance up to 450 kilometers.

This means that the actual Distribution, bridging and profit margins will be ₦9.64/liter (see table below).

 

 

 

 

 

 

 

Table 1 Comparing the current and actual Distribution, bridging and profit margins

 

Current  (Based on Subsidy) (23)

₦/liter

Actual (If refineries are working)

₦/liter

Retailers 4.60 4.60
Transporters (Depot to Filling Station) 2.99 2.99
Dealers 1.75 1.75
Bridging Fund 5.85 0.00
Marine Transport Average (MTA) 0.15 0.15
Admin Charge 0.15 0.15
Total 15.49 ($15.89/bbl) 9.64 ($9.89/bbl)

 

This ₦9.64/liter rather than ₦15.49/liter  in the distribution, bridging and profit margins will further reduce the price of PMS in the Cases I – III.

 

Fourth Analysis

The Federal Government keeps comparing Nigeria with other countries that their gasoline prices are high. Are they saying that they just don’t understand the reasons why?

Let me kindly point out major countries/regions and the various reasons why gasoline prices are high in in those areas, yet it does not apply directly to Nigeria.

  • USA – The gasoline price in USA is a bit high ($0.934/liter or ₦144.77/liter equivalent) (1), and reasons are simple. USA produces crude oil, but yet imports 40% of their consumed crude oil (3). This is largely because of their high demand on gasoline (and thus high refining capacity), and other accompanying hydrocarbons from crude oil. So they are not self-dependent when it comes to crude oil consumption. More so, due to their very high demand on gasoline, this has also prompted them to import large quantity of gasoline from Europe, and as well export some diesel to Europe (in exchange). In addition, which is very important (if not the most important) are strict specifications (5 – 10ppm sulfur) which have been specified for fuel grade gasoline, and this has directly increased the refining cost, and hence price of the end-user gasoline. In order to switch to alternative energies for vehicles (fuel cell, flex-fuel vehicles, H2 vehicles), gasoline prices was also increased a bit (through tax). This will encourage investors of alternative energy vehicles. Vehicles in USA are not solely dependent on petrol (gasoline). There are natural gas vehicles (NGV), propane vehicles, hybrid vehicles, ethanol-flex fuel vehicles (E15) etc. There are various options for customers in the USA. Also take into account their efficient transport system, which puts less pressure on the populace in terms of buying vehicles.

 

  • Europe – Most European refiners import their crude oil based on the spot market price, and it’s highly affected by the volatility of the crude oil prices. This impact heavily on the price of the products. In addition, most refineries in Europe were built in the 1960’s and 1970’s, and they were built to maximize gasoline production, instead of diesel which is mostly consumed now.  Also strict specification on diesel to EURO V (10ppm sulfur), and very soon to EURO VI (5ppm sulfur) has been a challenge for the old and low technology refineries in Europe. This increased its refining cost, and hence price of the gasoline & diesel. High cost of diesel in Europe is also being attributed to policies to encourage bio-energy production. Europe has a large number of NGV’s and biofuel vehicles. Let’s not forget the good train system in all European countries for easy transportation.

 

  • OPEC Countries – Gasoline prices in most OPEC countries are below that of Nigeria, except Iraq and Angola.  That of Iraq will be attributed to the 10 year war which ended in 2011, which they are still recovering from. The gasoline price in Angola is $0.63/liter, which is almost the same with that of Nigeria ($0.62/liter), yet Angola refines crude oil and produces 50% of their petroleum products locally (9). All the OPEC members refine crude oil locally except Nigeria‼. What exactly is our problem?

Below is the pump price of gasoline in all OPEC member states according to World Bank;

 

 

 

 

 

 

 

Table 2 Pump price for gasoline 2013 (US$/ liter and Nigerian ₦ /liter equivalent) in OPEC (8)

Angola $0.63/liter ₦98/liter
Libya $0.12/liter  ₦19/liter
Iraq $0.78/liter ₦121/liter
Algeria $0.29/liter ₦45/liter
Qatar $0.27/liter ₦42/liter
Saudi Arabia $0.16/liter ₦25/liter
Nigeria $0.62/liter ₦97/liter
Venezuela $0.02/liter ₦3.1/liter
Kuwait $0.23/liter  ₦36/liter
UAE $0.47/liter ₦73/liter
Ecuador $0.58/liter ₦90/liter
IR Iran $0.33/liter ₦51.2/liter

 

 

  • African Countries – How many African countries produce vast amount of crude oil like Nigeria. How many African countries export crude oil? By the way, why do we have to compare ourselves with African countries when we are the leaders in crude oil production? There’s no basis of comparison in this case.  For a country that wants to have a lifeline and achieve the so called vision 20-2020, you have to compare yourself with fast developing countries. Countries you were better than some 2 decades ago, but are far ahead of you at the moment (Asia in particular). Let’s only consider South Africa as the giant of Africa at the moment. They don’t have crude oil; they import all that they refine, yet the sell gasoline at $1.27/liter (5). We need to ask ourselves questions.

 

 

Fifth Analysis

Let’s come to think of it, if we have our refineries working and end-users buy gasoline at an outrageous price of ₦100/liter ($0.645/liter), it might still be regarded as being manageable.

Why say so? Let us imagine about the several other products produced from crude oil which we don’t have access to? Below will give us a hint of several benefits of having our refineries working in full capacity;

  • Refineries generate their own power and as well extend the power supply to the host and surrounding communities. This will in turn reduce dependence on the national grid.
  • What of the Corporate Social Responsibility (CSR) which the refiner will embark on, like soft scholarships for students of host communities, assist in providing health care, access roads etc?
  • A 445,000 bpd (3 different nameplate capacities) will employ over 7,000 staffs directly, and several thousand indirect staffs (combined).
  • At the moment airline operators import jet fuels, this has caused the corresponding high charges of air tickets. Yet this same jet fuel which is a type of kerosene (ATK) is produced from our refineries.
  • Regarding diesel, do we have to import and pay more for diesel if we actually produce from our refineries? Remember our diesel is sold at ₦153.55/liter (15), and no subsidy is paid on this. As at 13th January 2014, the price of a gallon of diesel in the USA is $3.886/gallon ($1.02/liter or ₦156.2/liter) (28).  So why do we even import?
  • What actually happens to the LPG, which can be used as cooking gas, vehicles, and even for petrochemical plants?
  • What of Naphtha which is a major feedstock to the petrochemical plants?
  • Refineries produce bitumen/asphalt which is basically for road construction. This would have reduced the cost road construction in Nigeria, if they were available from our refineries, and as well facilitate the entire road network in Nigeria.

 

This is just a highlight of the several benefits of refineries.

 

 

Recommendation

  • We now hear that the Federal Government wants to sell the 4 refineries to private investors. This is quite unfortunate. If the government can’t manage their facilities, then there’s no need to have the government in place. Is Nigeria not operating in the upstream (production) under JV? What of the NLNG, is it not under JV? If JV can work effectively in these important sectors, why not follow same direction for our refineries. Instead of selling them, NNPC can go into JV with competent private or foreign investors, simple. The refinery working in Angola is being operated as JV (jointly owned by Total, Sonangol and other small private investors) (9). What of the newly commissioned Jubail Refinery (400,000 bpd full conversion refinery) in Saudi Arabia, owned by SATORP, a JV between Saudi Aramco (62.5%) and Total (37.5%). What of the Saudi Aramco and Mobil refinery (400,000 bpd) in Saudi Arabia? This is the same Total oil company and Mobil which exists in Nigeria. This is just to mention a few of the several JV refineries. If the federal government is sincere to Nigeria, they should not out rightly sell the refineries, but welcome some investors (local or foreign) based on JV.

 

 

                               Table 3 List of world’s top 25 largest refiners, Jan 1, 2013 (Oil & Gas Journal) (10);

Rank Company
1 ExxonMobil Corp. (USA)
2 Royal Dutch/Shell (NL/UK)
3 Sinopec (China)
4 BP (UK)
5 Valero Energy Corp. (USA)
6 PDVSA (Venezuela)
7 CNPC (China)
8 Chevron Corp. (USA)
9 Phillips 66 (USA)
10 Saudi Aramco (Saudi Arabia)
11 Total SA (France)
12 Petrobras (Brazil)
13 Pemex (Mexico)
14 NIOC (Iran)
15 JX Nippon Oil & Energy (Japan)
16 Rosneft (Russia)
17 Marathon Petroleum Co LP (USA)
18 OAO Lukoil (Russia)
19 SK Innovation (South Korea)
20 Repsol YPF SA (Spain)
21 KNPC (Kuwait)
22 Pertamina (Indonesia)
23 Agip Petroli SpA (Italy)
24 Flint Hills Resources (USA)
25 Sunoco Inc (USA)

 

The companies in italics and bold all exist in Nigeria, and produce large amounts of crude oil. The important question now is, if companies can refine crude oil in countries that don’t even produce, why don’t they refine (a fraction of their crude oil) in Nigeria, where they produce large quantity of crude oil? If the Federal Government is sincere, they should provide incentives (tax relief or holiday etc.) for these international oil companies to refine, say 10% of their produced crude oil locally. This will further prompt the international oil companies to build a joint refinery/petrochemical plant alongside with NNPC, more like the NLNG which is a JV between NNPC (49%), Shell (25.6%), Total (15%), and Eni (10.4%) (22).

  • For our information, all these international oil companies in Nigeria are no longer ‘oil and gas companies’ but ‘energy companies’. They all have huge investments in Europe, America and Asia covering methanol production, gas to power, gas to polymers, coal to power etc., and they should do same in Nigeria, both for local utilization and exports. Nigeria will be the home we all dream of, if we have JV refineries, JV methanol plants, JV gas to liquids plants, JV gas to fertilizer, JV gas to power plants, JV coal to power plants, JV biodiesel and bioethanol plants etc. This will in turn make almost the entire Africa dependent on Nigeria for their various imports.
  • I have read quite a lot about the proposed 400,000 bpd refinery by Nigerian Billionaire Aliko Dangote, but the staggering issue now becomes, can Nigerians actually afford the petroleum products from that refinery? Or will he end up exporting them, since the refinery is sited near the shore. Considering my earlier case studies on the actual price of PMS, if Aliko Dangote will purchase crude oil at the stock market price or anything close to that, then it’ll be almost impossible for an average Nigerian to pay for a liter of PMS etc. This might end up exporting most of the products. How many Nigerian’s can indeed pay about $0.934/liter or ₦144.7/liter? If for any reason Nigerians are subjected to ₦144.7/liter of petrol, then life will be very very difficult and almost impossible to live for an average Nigerian.

This also goes back to my first recommendation, that for  the refining industry to run effectively, and also make the products available and affordable for the local end-users, then it has to be a JV between a competent private investor (like Aliko Dangote) and a crude oil producer (NNPC, International Oil Company, or Independent Producers). This option will enable the potential refinery investors to have access to crude oil at the production cost or a little above that.  Otherwise, we follow the ‘Case IV’, where the federal government will pay subsidy to the refiners, either by paying it cash or by deducting the subsidy from the price of crude oil to be sold to the refiner. For accountability the latter is more preferred.

  • I hear about Greenfield Refineries in Lagos, Kogi, and Bayelsa States. Please, if each of their capacity is not up to at least 150,000 bpd then don’t even think of investing in it. It can never be profitable in this world or the next.
  • What has happened to the associated gas we produce? From Europe to North America to Asia to South America, they all encourage and utilize natural gas vehicles (NGV). So, what is the problem with Nigeria? We have dedicated NNPC filling stations, so why can’t they incorporate NGV pumps? Why can’t the federal government, regulate the importation of vehicles to equate it between gasoline and NGV? Say for every 100 cars imported into Nigeria, 20-30 should be NGV. The federal, state and local governments can even start it up by using NGV officially. What is so difficult in doing this?

Below is the 2012 list of top 10 countries with NGV.

                             

 

 

 

 

  Table 4 Top 10 countries of NGV population (source: NGV Global, 2012) (12).

NGV Population: TOP TEN COUNTRIES

COUNTRY NGV Population(number of vehicles) % all NGV’s in the World
Iran 2,859,386 18.8
Pakistan 2,850,500 18.8
Argentina 1,900,000 12.5
Brazil 1,694,278 11.2
India 1,100,000 7.2
China 1,000,000 6.6
Italy 779,090 5.1
Ukraine 390,000 2.6
Colombia 348,747 2.3
Thailand 300,581 2.0

 

Iran which is an OPEC member currently ranks 1st, yet we flare huge amount of produced gas. If countries that don’t produce gas utilize NGV, then why can’t we go into NGV’s since we even flare the gas?. We only hear of gas to power projects in the news and it doesn’t translate much in reality. Though the power sector has just been privatized, we are eager to experience the much needed changes. More recently, the Ministry for Power notified Nigerian’s about shortage of gas to the power plants. Why are we still talking about pipeline vandalism or third party interference in this 21st century? What has happened to all the technologies for protecting pipelines? Or do we intend to position military men all through the length of the pipeline?

  • What has happened to E5 (5% of ethanol blended with 95% gasoline) and B3 (3% biodiesel blended with 97% of unleaded gasoline)? Both E5 and B3 are commonly used in Europe, North America and many parts of Asia (especially in Thailand). These two blends can be used in normal gasoline and diesel engines without any form of engine modification. So why can’t we go into this? It will further increase the octane and cetane numbers of gasoline and diesel respectively, is environmentally friendly, and most importantly encourage agriculture to a very large extent. Some people argue that this will increase the price of food, and I strongly say it’s not true. For instance, Thailand produces and consumes 2.53 million liters per day of ethanol (using cassava and molasses from sugar canes) (13) and 2.8 million liters per day of biodiesel (using palm oil) (14) for their transportation sector, yet they export large amount of rice (even to our country Nigeria) and consume a lot of cassava etc. An average plate of food in Thailand goes for 20 THB (Thai Baht), which equals to roughly ₦100. I’m sorry to say that an average plate of food in Nigeria goes for as high as ₦150-₦200. Nigeria with large land mass and fertile soil can do better.

 

  • The way we have DGSO (Domestic Gas Supply Obligation) which stipulates that oil and gas producers must set aside 50% of their produced gas (associated gas) for onward local utilization, there should be similar law for crude oil. This oil belongs to all Nigerians and not to a selected and selfish few.

 

  • We keep hearing about crude oil pipeline vandalism. It’s important for us to note that crude oil is not a commodity like garri, rice, beans, yam etc, which can be sold easily by an average Nigerian. Crude oil is sold in the spot market, and hence crude oil theft is perpetrated by top government officials and their private cronies, under the protection of security operatives. As well-meaning Nigerian’s, we can’t be fooled forever.

 

 

 

Conclusion

These pressing issues which have hovered and still hovering around our dear country must be part of the discussions at the proposed national conference.

A farmer can never, should never and must never beg and cry for food’‼. It’s unthinkable that a farmer that produces cassava will buy garri in the market‼.

May God help Nigeria to find leaders who have the vision and urge to work and not to embezzle tax payer’s money and the rich/enormous resources of the country. More so, help the youth’s and the up-coming generation to shun ethnic sentiments and think towards the overall development of Nigeria.

 

Long live my fellow Nigerian’s

Long live Federal Republic of Nigeria ‘Our Dear Country’

 

Chikezie Nwaoha an MSc Petroleum Technology Student/Scholar writes from Bangkok

Chikezie.N@student.chula.ac.th

Google Scholar Page: http://scholar.google.com/citations?user=_uRdzLoAAAAJ

 

References

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2.       EIA, 2012. How much does it cost to produce crude oil and natural gas? Available at: http://www.eia.gov/tools/faqs/faq.cfm?id=367&t=6

  1. EIA, 2012. How dependent is the United States on foreign oil? Available at: http://www.eia.gov/tools/faqs/faq.cfm?id=32&t=6
  2. Agbon, I.,2011. The Real Cost Of Nigeria Petrol. http://mobile.saharareporters.com/article/real-cost-nigeria-petrol-dr-izielen-agbon
  3. Okonjo-Iweala, N., 2011. Brief on Fuel Subsidy. FMF/BOF/CEAP © 2011
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  1. NGV (Natural Gas Vehicles) Global, 2012. Available at: www.iangv.org/category/stats/

 

  1. Platts, 2013. Daily production of Ethanol for transportation sector in Thailand.

http://www.platts.com/latest-news/agriculture/bangkok/thailands-jan-sep-ethanol-use-for-transport-jumps-27587631

  1. Platts, 2013. Daily production of Biodiesel for transportation sector in Thailand.

http://www.platts.com/latest-news/oil/singapore/thailand-plans-to-raise-biodiesel-output-target-27287876

  1. http://www.pppra-nigeria.org/ago.htm
  2. Central Bank of Nigeria, 2013. CBN Exchange Rates. www.cenbank.org/Rates/ExchRateByCurrency.asp
  3. Energy Mix Report. Nigeria consumes 39.66m litres of petrol daily. http://energymixreport.com/nigeria-consumes-39-66m-litres-of-petrol-daily/
  4. EIA, 2012. Products made  from 1 barrel of crude oil. http://www.eia.gov/energyexplained/index.cfm?page=oil_refining
  5. Bloomberg, 2013. Highest Minimum Wage Countries.  http://www.bloomberg.com/visual-data/best-and-worst/highest-minimum-wage-countries
  6. http://www.eftngr.com/opal/analysis/46-comment/2366-remodeling-the-management-of-nigerias-oil-pipelines
  1. Lin Noueihed, Ron Bousso and Claire Milhench, 2013. EU refiners burn last barrels as closures loom. Available at: http://business.financialpost.com/2013/11/20/eu-refiners-burn-last-barrels-as-closures-loom/
  1. US Energy Information Administration, 2013. Nigeria. (Updated December 30, 2013) Available at: http://www.eia.gov/countries/cab.cfm?fips=ni
  2. http://www.pppra-nigeria.org/pms.htm
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  4. Chika Amanze-Nwachuku, 2013. One Million Barrels per Day-Refining Capacity Target: Illusion or Reality?. http://www.thisdaylive.com/articles/one-million-barrels-per-day-refining-capacity-target-illusion-or-reality-/156730/
  5. http://www.thisdaylive.com/articles/regulatory-failure-in-enforcing-fuel-prices/154089/
  6. Association of Oil Pipe Lines, 2013. Pipelines Help U.S. Consumers. Available at: http://aopl.org/pdf/Pipelines_Help_US_Consumers__2_.pdf.
  7. US EIA, 2014. Gasoline and Diesel Update. Available at: http://www.eia.gov/petroleum/gasdiesel/

 

Note: The referencing style was prepared just for the purpose of this publication. It’s not a recommended scholarly format (like APA, MLA or Harvard referencing style etc).

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