Formalizing illegal refineries: Good, Promising, Delicate, Difficult

The unorganized business of small scale refining of crude oil in the Niger Delta is often called “illegal” because the promoters are undocumented and in most cases can be viewed as accomplices to the business of crude oil theft; since they procure their feedstock from stolen crude which is criminal. However it is also a fact that the regulation governing small volume refining business in Nigeria is ambiguous and not properly tailored, to accommodate very small volumes and low capital refining ventures (even when you choose to be legal)

In February 2017, the Nigerian government indicated its intention to liaise with the promoters of illegal refineries; without further details on the structure and modalities. As people wait for that detail, it is good to note that formalizing illegal and artisanal refineries in Nigeria is good and promising but also delicate and difficult. As such; proper formalization must be based on a strategic, well-rounded and well tested framework.

Good and Promising

According to the work of researchers Patrick Tolani and others; Nigeria loses about $6 billion annually due to crude oil theft. Since the operation of illegal/artisanal refining is one of the motivations that support the theft, it could help tackle it. The crude oil theft economy which sustains illegal/artisanal refining has an economy valued at $9 billion, employing about 26,000 direct and 100,000 indirect persons.

Refining capacity is very poor in the entire Gulf of Guinea and formalized artisanal refining in the Niger Delta has significant small scale export potential in both Central African countries and West African countries

Projected growth in petroleum product consumption cannot be met by all current efforts towards growing refining capacity in Nigeria (i.e. assuming all 4 state refineries in Nigeria with 445kbbl/day work at full capacity + Dangote group’s 650kbbl/day).  The gap can be augmented by formalized artisanal refiners, especially in the creeks and remote areas of the Niger Delta, where difficult terrain and poor infrastructure makes it nearly impossible to run the normal petroleum product supply chain.

Delicate and Difficult

Initial ideation is not the huddle, but long term planning, strategic vision, gritty commitment, use of systematic methods and expertise – which is often absent in Nigeria – could be the bane of this initiative.

Illegal/artisanal refining is the second daughter of crude oil theft. (International sales of stolen crude being the first daughter) this makes illegal refining one of the major motivations for oil theft.

This $9bn underground sector is organized by financially and politically powerful persons. Consequently, formalizing all illegal refineries without properly tackling crude oil theft can lead to a proliferation of more illegal refineries, since locally stolen crude has to be put to use in one way or the other.

Being a clandestine business, there is limited data on the operation of artisanal refiners and any formalization framework that is not data-driven and fact-based cannot survive. The risk of doing otherwise will be the unavoidable high failure rate of supported operators.

Articulating a convenient participation channel for the private sector including, upstream operators for feedstock supply and financial institutions for funding will be possible but difficult.   

In view of the attractions and challenges, a successful formalization program must be well rounded and detailed, taking into consideration matters such as; the definition of new regulatory conditions/policies meant to nurture very small scale refining in the long run; refining skill gap assessment meant to guarantee long term/wide spread domestication of refining skills in Nigeria and the definition of a properly-phased support and expansion program for promoter (for up to 20 years).

CHIJIOKE MAMA                    

** CHIJIOKE MAMA is an energy research analyst, doctoral researcher and founder of EnergyDatar | chijiioke.mama@yahoo.com