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Government Policy, Funding Stall Proposed Oil Refineries

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  • Government Policy, Funding Stall Proposed Oil Refineries

Government policy in the downstream sector and paucity of funds as well as inadequate technical capacity are pulling a plug on proposed private refineries in the country, even as government-owned plants continue to perform dismally with no new ones built in almost 30 years, ’FEMI ASU writes

For more than two decades, private investors have continued to indicate interest in building refineries in the country on the back of the inability of government-owned refineries to meet growing demand for petroleum products.

While many licences have been granted to investors, only a mini refinery owned by the Niger Delta Petroleum Resources Limited has come on stream, with a capacity to process 1,000 barrels of crude oil per day and produce only diesel.

Between 1976 and 1989, the government, through the Nigerian National Petroleum Corporation, built refineries in Port Harcourt, Warri and Kaduna, in addition to an existing refinery in Port Harcourt, which was built by Shell in 1965 (later bought over by the NNPC).

But the state of the 445 million-bpd refineries has worsened over the years and no new refinery has been built by the government since 1989, making the country rely heavily on imports to meet fuel demand.

Data obtained from the Department of Petroleum Resources showed that the capacity utilisation at the refineries, including the Niger Delta Petroleum Resources’ 1,000bpd refinery, plunged to as low as 4.85 per cent in 2015 from 23.03 per cent in 2011, resulting in increased petroleum products’ imports.

Petroleum products import rose to 13.56 million metric tonnes in 2016 from 8.63 million metric tonnes in 2008, the DPR said in its 2016 Oil and Gas Industry Annual Report.

“Even if all the refineries were operating at full capacity, the 445,000bpd would not be enough to meet our demand,” the Chairman, ARCO Group, Chief Joseph Akpieyi, told our correspondent in an interview.

Akpieyi, a former Chief Executive Officer, Nigerian Petroleum Refining Company (now Port Harcourt Refinery Company) and Warri Refining and Petrochemicals Company Limited, said, “The way to stop this importation of products is to build more refineries such that we have enough refining capacity greater than the country’s demand.”

According to the Deputy Director, Emerald Energy Institute, University of Port Harcourt, Prof Chijioke Nwaozuzu, the country requires a total refining capacity of 1.2 million bpd.

“This capacity would ensure domestic self-sufficiency in the supply of refined products, and provide extra supplies for the smuggled products across our borders,” he added.

An investigation by our correspondent revealed that the government’s long-standing policy of regulating the prices of petroleum products, funding constraints and lack of requisite technical capacity by the licencees were largely for the stalled refinery projects.

Licencees in limbo

With over 100 applications received from interested investors between 1990 and 2000, the Department of Petroleum Resources developed and sought approval of a procedure guide for the establishment of private refineries.

In 2002, 21 companies were granted licences to establish crude oil refineries, with a validity of 18 months. After the evaluation of the extent of engineering design work done, 17 of them were in 2004 granted approval to construct refineries, with a validity of 24 months.

Following the inability of the investors to make appreciable progress on the projects and the expiration of the construction approval, all the licences were cancelled in 2007. This led to a review of the statutory framework for licensing of private refineries and the issuance of the ‘Guidelines for the Establishment of Hydrocarbon Processing Plants in Nigeria’.

According to the DPR, there are a total of 39 proposed modular refineries with capacity ranging from 5,000 barrels per stream day to 30,000bpsd, and six conventional plants with a total capacity of 1.35 million bpsd.

It said 18 out of the 45 companies were still sourcing funds, some of whose licences to establish had expired, adding that 20 licences were active.

The agency said seven companies could break ground, namely Waltersmith Refining & Petrochemical Company Limited (5,000bpsd modular plant in Imo State); Clairgold Oil & Gas Engineering Limited (20,000bpsd in Delta); Niger Delta Petroleum Resource (10,000bpsd our in Rivers); Dee Jones (6,000bpsd in Cross River); Energia Limited (20,000bpsd in Delta); Southfield Petrochemical & Refinery Limited (20,000bpsd in Edo); and Starex Petroleum Refinery Limited (100,000bpsd in Rivers).

Funding and technical capacity constraints

The National Refineries Special Task Force, which was set up by the Ministry of Petroleum Resources in 2012, said it examined 35 greenfield private refinery licencees/applicants, and only seven were found to have reasonable potential.

The task force said it was evident that most of the applicants for a refinery licence did not have the requisite experience and background in petroleum refining and marketing.

“Their technical capability is rather doubtful and their ability to attract the quantum of funds required for refinery projects, running into billions of naira, is questionable. Besides, in many instances, potential financiers evidently insisted on crude supply agreements at rates below international market prices, owing to the prevalent subsidised products pricing regime, as a condition for further consideration of funding applications,” it said in its report.

The Chairman, Eko Petrochem and Refining Company Limited, Mr Emmanuel Iheanacho, described refineries as complex structures, saying interested investors must be able “to cross the hurdle of the technical capacity requirement”.

“The second issue is financing. The third issue that made it impossible for people to build refineries is the market structure and regulatory environment within which Nigerian private sector refineries could be built,” he told our correspondent.

Last year, Eko Petrochem and Refinery Company, which is working on a 20,000bpd modular refinery in Lagos, announced the signing of a grant of $797,343 by the United States Trade and Development Agency.

Iheanacho said, “Once we finish the detailed engineering design, which we are doing currently, we expect that it would take another 18 months before we can stream the refinery.

“Government has to engage more with the people who are committed to this process. They have to weed out those who are absolutely not serious or do not understand what is involved in it. They have to commit resources, not just giving licences.”

The Technical Consultant to President/Chief Executive of Dangote Group on Refinery and Petrochemicals Project, Mr Babatunde Soyode, described funding as perhaps the single most important obstacle.

Aliko Dangote, Africa’s richest man, is building a refinery with a capacity of 650,000bpsd in Lekki, Lagos.

He told Reuters last month that he had arranged more than $4.5bn in debt financing for his refinery project and aimed to start production in early 2020.

“We will end up spending between $12bn and $14bn. The funding is going to come through equity, commercial bank loans, export credit agencies and developmental banks,” Dangote added.

Deregulation as a key incentive

Many industry stakeholders have described the lack of deregulation in the downstream sector of the nation’s oil and gas industry as a major drawback to investment in refineries by private investors.

The prices of diesel and kerosene were deregulated in 2009 and 2016 respectively but petrol price is still being fixed by the government.

A former Group Managing Director, NNPC, Chief Chambers Oyibo, in a telephone interview with our correspondent, described government’s control of petroleum products’ prices as a major obstacle to private investment in refineries, saying, “The other thing is that many of these people who had licences didn’t have any source of crude.

“We had thought the government was going to deregulate. Then politics took over and then they didn’t do what they were supposed to do. Until they do that, private investors would be reluctant to invest. People will say, ‘What of Dangote?’ Dangote has put his refinery in a location where he is free to export all his products if he wants. He is free to also get his crude from whatever sources he can.”

Iheanacho said, “If you have a situation where government dictates the volume of products that can be brought into the country and the price at which it would be sold, it will be difficult to build a refinery because the cost factors and the pricing policy of the refineries might not be in tandem with what government wants.”

He noted that increased domestic refining capacity would save the nation a lot in foreign exchange; create a huge job opportunity, and opportunity for the acquisition of technology.

“The lack of deregulation is a major drawback. There is absolutely no need for us to continue to advocate a situation where we waste money in subsidising fuel. It has created a huge incentive for people to take products from Nigeria across the border to sell for a premium in other countries. We should stop that,” he added.

Soyode also acknowledged the lack of deregulation as a challenge, but said the Dangote refinery would operate profitably without full deregulation.

He said Dangote would buy crude oil at the international markets at the general price and sell refined products at international price, adding, “He will sell at the price at which sensible people in Nigeria would rather buy from him than import.”

On the idle refinery licences in the hands of private investors, he said, “They (the licencees) do not have money. Most of them want to use it to collect crude oil allocation and sell the crude oil. But when the government stopped that, nobody has built anything. Only Dangote has built.”

The crude oil allocation was meant to encourage interested investors to build refineries because the government realised that the capital-intensive nature of such projects.

The NRSTF, in its report, said the uniform and regulated pricing policy of the Federal Government for petroleum products was one of the most widely adduced reasons by prospective investors and entrepreneurs for the lack of investment in new refineries.

“It will, therefore, be necessary to fully deregulate prices in the downstream sector. This should, however, be subject to putting in place adequate palliatives to ameliorate the attendant social and economic burden on the populace,” it added.

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

Economy

Manufacturing Firms Borrowed N570bn from Banks in 2020 – CBN

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Steel Manufacture At Evraz Plc West-Siberian Metallurgical Plant

Manufacturing firms borrowed a total of N570bn from Nigerian banks last year amid the economic fallout of the COVID-19 pandemic.

Banks’ credit to the manufacturing sector rose to N3.19tn as of December 2020 from N2.62tn at the end of 2019, according to the sectoral analysis of banks’ credit by the Central Bank of Nigeria.

The sector received the second biggest share of the credit from the banks after the oil and gas sector, which got N5.18tn as of December.

“The manufacturing sector, which is the engine of sustainable growth, is still struggling with the debilitating impact of the pandemic and is yet to recuperate,” the Director-General, Manufacturers Association of Nigeria, Mr Segun Ajayi-Kadir, said in January.

MAN, in a January report, revealed that most manufacturers said commercial banks’ lending rates were discouraging productivity in the sector.

The report said 71 per cent of Chief Executive Officers interviewed “disagreed that the rate at which commercial banks lend to manufacturers encourages productivity in the sector.”

It said the cost of borrowing in the country remained at double digits even amidst the reforms meant to culminate in lower rates to engender the country’s economic recovery process.

The report said, “Special single digit loans offered by development banks are still hard to leverage as conditionalities to assess the loans through commercial banks are often overwhelming and laden with additional charges that will eventually make the interest rate double digit.

“Seven per cent of respondents were, however, of the opinion that the rate at which commercial banks lend to manufacturers encourages productivity in the sector while the remaining 22 per cent were not sure of the impact of the rate of lending on productivity in the manufacturing sector.”

The report showed that 64 per cent of respondent disagreed that the size of commercial bank loan to manufacturing sector had encouraged manufacturing productivity.

It said the very high presence of the government in the money market, particularly through the sale of treasury bills, had been crowding out the private sector from the market.

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Economy

Nigeria Earns Extra N318.4 Billion as Crude Oil Hits $67/Barrel

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FG Generates Additional Income of N318.4 Billion as Crude Oil Hits $67/Barrel

The Federal Government earned an additional N318.36 billion in February following the surge in crude oil price above $60 per barrel.

Brent crude oil, against which Nigerian oil is priced, average $60 throughout the month of February.

In March, it rose to $67 per barrel.

According to the Minister of Finance, Budget and National Planning, Zainab Ahmed, Nigeria’s crude oil price was retained at $40 per barrel for 2021.

However, she said the nation is presently producing below its 2.5 million barrel per day capacity at 1.7mbpd. This, she said includes 300,000bpd condensates.

“Although Nigeria’s total production capacity is 2.5mbpd, current crude production is about 1.7mbpd, including about 300,000bpd of condensates, which indicates compliance with OPEC quota,” the finance minister stated.

Going by the number, Nigeria is producing 1.4mbpd of crude oil without condensates, but with an additional $20 revenue when compared to the $40 per barrel benchmark for the year. It means the Federal Government realised an additional income of N318.360 billion or $20 X 1.4mbpd X 30days in the month of February.

Crude oil jumped to $68.54 per barrel on Friday following OPEC+’s decision to role-over production cuts.

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Nigeria, Morocco sign MOUs on Hydrocarbons, Others

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The Federal Government and the Kingdom of Morocco have signed five strategic Memoranda of Understanding that will foster Nigerian-Morocco bilateral collaboration and promote the development of hydrocarbons, agriculture, and commerce in both countries.

The Minister of State for Petroleum Resources, Chief Timipre Sylva, led the Nigerian delegation to the agreement signing ceremony on Tuesday at Marrakech, Morocco, while the Chief Executive Officer of OCP Africa, Mr Anouar Jamali, signed for the Kingdom of Morocco, according to a statement by the Nigerian Content Development and Monitoring Board.

Under the agreement between OCP, NSIA and the Nigerian National Petroleum Corporation, Nigeria will import phosphate from the Kingdom of Morocco and use it to produce blended fertiliser for the local market and export.

The statement said Nigeria would also produce ammonia and export to Morocco.

“As part of the project, the Nigerian Government plans to establish an ammonia plant at Akwa Ibom State,” it said.

The Executive Secretary of NCDMB, Mr Simbi Wabote, and the Group Managing Director of NNPC, Mallam Mele Kyari, were part of the delegation and they confirmed that their organisations would take equity in the ammonia plant when the Final Investment Decision would be taken, the statement said.

Sylva said the project would broaden economic opportunities for the two nations and improve the wellbeing of the people.

He added that the project would also positively impact agriculture, stimulate the growth of gas-based industries and lead to massive job creation.

He said the President, Major General Muhammadu Buhari (retd.), had mandated the Ministry of Petroleum Resources and it agencies and other government agencies to give maximum support for the project.

“He mandated me to ensure that at least the first phase of this project is commissioned before the expiration of his second term in office in 2023,” he added.

According to the statement, the MOUs were for the support of the second phase of the Presidential Fertiliser Initiative; Shareholders Agreement for the creation of the joint venture company to develop the multipurpose industrial platform and MOU for equity investment by the NNPC in the joint venture and support of the gas.

Other agreements are term sheet for gas sales and aggregation agreement and MOU for land acquisition and administrative facilitation to the establishment of the multipurpose industrial platform for gas sales and aggregation agreement.

The NCDMB boss described the bilateral agreement as significant to the Nigerian economy as it would accelerate Nigeria’s gas monetisation programme through establishment of the ammonia plant in the country.

The agreement would also improve Nigeria’s per capita fertiliser application through importation of phosphate derivatives from Morocco, he added.

Wabote challenged the relevant parties to focus on accelerating the FID, assuring them that the NCDMB would take equity investment for long-term sustainability of the project.

He canvassed for the setting up of a project management oversight structure to ensure project requirements and timelines are met.

“There is also need to determine manpower needs for construction and operations phase of the project and develop training programmes that will create the workforce pool from Nigeria and Morocco and design collaboration framework between research centres in Nigeria and Morocco to develop technology solutions for maintaining the ISBL and OSBL units of the Ammonia complex,” he said.

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