Towards a private oil refinery market in Nigeria
Nigeria, Africa’s largest crude oil producer, is arguably the biggest importer of refined petroleum products in the continent, creating a lucrative market for refineries particularly in Europe and the United States (US).
The country, which is home to over 170 million people, imports more than 80 percent of its refined petroleum products for the servicing of its economy, because of its inadequate domestic refining capacity. The country’s fuel needs is put at 35 million litres daily, equivalent to 279,000 barrels per day (bpd), while crude oil production averages about 2 million bpd.
Nigeria’s four refineries with a combined capacity of about 445,000 bpd have for long been operating far below their installed capacity as they are in various states of disrepair. The four refineries operated at an average of 31.1 percent of capacity in 2012, according to recent data from the Central Bank of Nigeria.
Despite gulping billion of dollars, successive rounds of turnaround maintenance (TAM) have failed to expand domestic refining capacity, while the subsidy structure of fuel sales incentivises the import of premium motor spirit (PMS) from EU refineries, which oversupply the European market.
As KPMG notes in its 2014 Africa Oil and Gas Report, problems in the refining industry on the continent include corruption, poor maintenance, theft, and other operational problems. “Subsidies have also contributed to low capacity utilisation at refineries. In Nigeria, for example, current subsidy schemes lead producers to sell crude overseas rather than to local refineries and therefore add to increasing volumes of refined product imports, which present a large cost to the economy.”
In February 2014, Nigeria emerged as the largest and second-largest importer of US kerosene and jet fuel respectively, according to data released by Energy Information Administration (EIA), the statistics arm of US Department of Energy.
EIA data shows that Nigeria imported 864,000 barrels of US jet fuel in February, rising from 292 barrels in January. In November 2013, a record 1.58 million barrels were imported. Nigeria also brought in its largest kerosene cargo – 292,000 barrels – in February, and only its fifth-ever kerosene cargo from the US, including one each in July, October and November.
While Nigeria continues to fritter a fortune on importing petroleum products and TAM on the refineries, attempts by government to sell off the existing refineries to competent private investors remain hampered by misguided policies, corruption and the lack of political will to confront entrenched, short-term interests.
A number of private companies have expressed readiness to step in to build and operate their own refineries, but their efforts have often been delayed or cancelled, partly due to uncertainties around the government’s plans to deregulate the downstream sector.
We laud the courage of Aliko Dangote, Africa’s richest man and business mogul, who has taken concrete steps in building a $9 billion refinery/petrochemical/fertiliser complex in Nigeria. The refinery will initially have a capacity of 400,000 bpd, doubling Nigeria’s refining capacity as well as cut imports of refined petroleum.
Successive governments have promised to revive the four state-owned refineries and improve their capacity utilisation, but none has succeeded to date. We wonder if the new round of TAM at existing refineries would boost local refining capacity. The government plans to boost utilisation rates of the refineries to about 90 percent of their installed capacity.
We would like to reiterate here the urgent need to privatise the refineries to enable competent investors take them over and reverse their dwindling fortunes and rid the country of the drain importation of refined petroleum products and lingering TAM have been on the economy.