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Nigeria needs new refineries; fixing the old is waste of cash – expert

By Ruth Olurounbi
Posted on Wednesday, 6 November 2019 09:18

A worker walks past structural parts of an under construction oil refinery plant at Dangote refinery in Ibeju Lekki district, on the outskirts of Lagos, Nigeria August 7, 2019. Picture taken August 7, 2019. REUTERS/Temilade Adelaja

A fresh drive to rehabilitating Nigeria’s ailing and under-performing refineries by January 2020 could help the country end its nearly a decade and a half dependence on the oil subsidy - say the optimists.

The Dangote Refinery, Africa’s biggest oil refinery is scheduled to be completed and go online next year, also.

Fuel subsidies cost Nigeria N648bn ($1.8bn) last year as the country caps gasoline prices at N145 a litre, according to data from the Budget Office.

  • The IMF has urged the government to lift the cap on prices.

The newly appointed group chief of the Nigerian National Petroleum Corporation (NNPC), Mele Kyari is keen on ending the subsidy.

Nigeria will likely spend N450 billion ($1.24 billion) on fuel subsidies next year.

  • According to Finance Minister Zainab Ahmed, this would be an additional cost on the books of the state-owned NNPC that imports most of Nigeria’s fuel needs.

Nigeria’s current spending on oil subsidy is more than four times what the country spends on building schools and health centres in a country of nearly 200 million people, 87 million of whom are living in extreme poverty, according to a World Poverty Clock report.

The country has the world’s 10th largest crude reserves yet spends at least $3.5 billion in fuel subsidy annually and has spent at least N10 trillion over 12 years (2006-12), according to government records.

By Kyari’s schedule, the country’s refineries in Port Harcourt, Warri, and Kaduna, will refine crude oil at optimum capacity by 2022 and could save the nation billions of dollars, which could then be allocated to other sectors, such as health and education.

The question is, will fixing the refinery help the oil-dependent economy end its subsidy regime?

“This is not the first or third time that promises have been made about fixing the refineries,” says former Group Finance Manager, Nigeria LNG, Victor Eromosele. “They’ve all made promises and set targets and they all failed. If you parked your car for a long period, even when you put in a new battery, you may not be able to start that car because of something called regression.”

Rehabilitating the poorly performing refineries seems like a good strategy on paper, but it doesn’t make any economic sense to fix them, says Eromosele, who now consults at Vita Veritas.

“Too many things will have gone bad and refineries are like that car, if parked for a long time. The only way to fix the refineries is to rebuild them from the start. We need to change that model completely and find ways to rebuild the refineries from the ground up,” he says.

Nigeria has four refineries in Port Harcourt, Warri, and Kaduna with the capacity of refining 445,000 barrels per day. Going by available data, consolidated capacity stood at 2.14% based only on the Kaduna facility, while the other three are offline.

  • Kaduna currently runs at 8.7% of capacity.

Eromosele proposes that the Nigerian government adopts “the Eleme strategy rather than waste a lot of money on an unprofitable venture”.

Indorama Eleme Petrochemicals Company Limited (IEPL) is the fifth Nigerian refinery owned and operated by Niger Delta Petroleum Resources (NDPR).

  • Formerly known as Eleme Petrochemicals Company Limited (EPCL), the company was acquired in 2006 from the NNPC during the privatization program by Indorama, who are the core investors.

The acquisition of the previously underutilized plant by IEPL has stabilized petrochemicals production in the country, said Eromosele, who noted that the company is in the process of expanding the plant complex.

While the new Nigerian oil czar sees country’s solution to subsidy payments in rehabilitating the defunct refineries, sector analysts and observers don’t seem to agree that subsidy payments will end in Africa’s biggest economy.

In 2015, Nigeria’s President Muhammadu Buhari, in an attempt to end the oil import subsidy payments, cut out the fuel marketers and, in effect, made the state-run Nigerian National Petroleum Corporation (NNPC) the sole importer of fuel although it lacked capacity for daily import of 51 million litres of petrol.

While the government claimed that it had ended the subsidy payment regime, the NNPC makes provisions for what it called “under-recovery”, which the corporation said rose by a 1.174% in the first two months of 2019.

Data from the corporation’s Monthly Financial and Operations Report (MFOR) in indicated that N206,585 billion was paid out as under recovery in January and February 2019, from N16,212 billion recorded in the last two months of 2018.

“First of all, fuel subsidy removal is a mirage and will remain so until Nigeria adopts a new methodology – an automatic mechanism which adjusts to both exchange rates”, Eromosele says.

“When the exchange was low, that was a very good opportunity to have automatic mechanism which adjust to both exchange rates – if the exchange rate was nice and you have a good deal. You know there was a time when international oil prices crashed to well under $40 and our exchange was at a very good rate. In fact, that time we fixed the pump price that was moving with those two parameters on a monitored basis, but the government failed to implement it. It’s just the failure of the government to be courageous to do the right thing at the right time. Anywhere in the world, petroleum price rises and falls — except in Nigeria.”

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