Investors’ questions on mini-refining opportunities in Nigeria
It is a new day in Nigeria and there are significantly high levels of expectations in most sectors. The new government of President Muhammadu Buhari has a plethora of problems facing it. The most conspicuous of which are challenges facing the petroleum industry in Nigeria. They include; deregulation of the downstream sector and/or restructuring of the petroleum product subsidy, product supply challenges arising from non-functional refineries (4 state run refineries), artisanal refining business in the Niger Delta that bears off from crude oil theft (an industry estimated to be worth $9 billion and provides about 26,000 direct jobs while catering for over 100,000 people indirectly, poor maintenance/management practices on the over 5,000km of pipelines in Nigeria. Corruption cannot be omitted as a central player in all this.
On the heels of this, the much awaited policy move on petroleum refining in Africa’s biggest economy has come. Decades of dependence on imported refined products has taken a huge toll on Nigeria’s economy. It technically moved Nigerian jobs abroad, put enormous pressure on the naira due to foreign exchange and promoted corruption through subsidies, while encouraging product smuggling. In late May, Nigeria’s Department of Petroleum Resources (DPR) carried out a series of workshops to promote a new policy that encouraged investment in modular refining in Nigeria.
This is indeed a good investment window that holds economic, social and development value for Nigeria and potential investors. However, mini refining holds a tricky margin, which calls for the most skilled and surgical approach to guarantee profitability. The following is an analysis of some of the essential considerations of mini-refining; in the context of Nigeria’s business environment.
Mini refining: essential elements
The new refining opportunity in Nigeria is a great initiative. Its impacts transcend economic gains for investors and entrepreneurs with respect to its potential contributions to national development. The most interesting element of mini refining is the relative low setup cost, when compared with full conversion refineries (with capacities of 200,000 bpd) whose cost will be between $2 – 9 billion. For example, The Turkish Socar refinery is a $5 billion modern refinery funded by the International Finance Corporation (IFC).
Mini-refineries can be established with about $100-$250 million. Depending on the configuration, the cost can be lower or higher. In addition, it offers the possibility of phased construction and the flexibility of quick and easy upgrade to reflect changes in product demand. An initial 30,000 bpd capacity refinery can be upgraded to double or triple the capacity with ease and speed.
Opportunities & challenges
In addition to low capital, being skid mounted means construction time is compressed and the quality of engineering is improved. New demands can be easily met with the addition of new modules. Different plants can serve different markets (such as the 6 geopolitical zones in Nigeria) rather than feeding a whole nation or region with a single plant, together with the associated risk of creating an elephant-sized supply chain and operations management system. However it cannot boost of the same scale and efficiency obtainable from a full conversion plant and will typically require more personnel per Effective Distillation Capacity (EDC)
Major categories of mini-refinery and configuration
Topping plant; it consists of only a crude distillation unit and (usually) a catalytic reformer to provide gasoline. It typically permits only condensates and light sweet crude.
Cracking refinery; this type takes the gasoil component from the crude distillation unit and breaks it further into gasoline & distillate components. It utilizes catalyst, high temperature and pressure. (more sophisticated than a topping plant)
Coking refinery; this type of refinery utilizes residual fuel (the heaviest material from the crude unit. The addition of a Fluid Catalytic Cracking Unit(FCCU) significantly increases the yield of higher valued products like crude gasoline and diesel oil from a barrel of crude. Cooking refineries allows a refinery to process cheaper, heavier crude while producing an equivalent or greater volume of high valued products (Cenam Energy Partners). Due to cost considerations, it is possible to procure and re-attach a used hydro-cracker as an add-on to a modular mini-refinery to obtain a full conversion refinery. The FCCU makes very significant contribution to a refinery’sprofitability.
Economics & viability
The profitable operation of mini refineries requires care. Investors should have a good knowledge and vision of what is to be achieved. The viability and operational economics of mini-refineries depends on a number of factors as well as their interplay namely: Product slate, Crude slate, Refinery’s configuration, Proximity to sizeable market, Proximity and access to crude, Government incentives to support low margins for mini-refineries (due to lack of economies of scale), Logistical issues and others.
A prospective investor should understand each of these elements as standalone forces as well as how they interrelate with one another in the context of the Nigerian investment environment. Mini refining has been embraced in many regions of the world. Emirates National Oil Co’s (ENOC)subsidiary Cylingas and UK-based Pyramid Engineering plans to build a 7,500 bpd modular refinery in Fujairah, UAE. Iran is also building eight (8) new mini-refineries to serve the South Pars gas field. The technology is available in the Middle East and North America where turnkey engineering services can be obtained.
The configuration of the refinery and its economic viability depends largely on the specification of the feedstock it will be processing. With high API crude, there will be limited need for further investments in systems like de-salters (usually for crude having salt content above 1kg per 1000/ bbl) and/or de-sulfurization units (for high sulfur content crude)
In contrast, with heavy (cheaper) crude – if it can be economically sourced – further investment will be required in the form of other processing units to both bring sulfur content to acceptable units and to enhance the octane value of Naphta products and in turn get good quality unleaded gasoline. Gasoline (Petro) is the top consumed petroleum product in Nigeria with a good growth projection towards 2035. Maximum allowable sulfur is specified by different regulatory regimes in different countries so compliance is crucial. Invariably, investments in these extra units do bring additional costs that if not carefully controlled could erode lean margins.
Location decisions & analysis
It will be reasonable for new investors in mini-refining to consider locations in close proximity to existing tank farms or similar facilities with extra capacity(if capacity, design and license permits) or to be factored into ongoing or proposed projects, such as the ones coming up in some areas in Lagos. By having an arrangement where a number of the assets required for running the modular refinery such as storage tanks, power generating units, truck loading facilities and pipeline systems are shared, significant costs can be saved (at least in the short term) Independent oil marketers with complementary product distribution assets can (where capacity, design and license permits) take advantage of the flexibility in construction of modular refineries to incorporate it into existing assets. Likewise strategic partnerships can be struck between these marketers and new investors/entrepreneurs interested in running a modular refinery. Even where an engineering company that manufactures the modular units can provide turnkey services; project owners are required to provide these other assets as they do not ship with the pre-manufactured modules.
Competition & upcoming capacities
Refining capacity in Nigeria may rise. The state owned refineries are undergoing some slow maintenance; NNPC officials recently told Senate Committee on Petroleum (Downstream) that it will restore the facilities to work at their full capacity of 445,000 bpd by the end of 2016 (from present day 40 percent capacity utilization). A new refinery in Lagos by Nigeria’s billionaire business mogul, Aliko Dangote will come onstream by mid-2018, according to George Nicolaides, Dangote industries’ operation director for petroleum refining. It is a full conversion plant that will cost a whopping $9 billion and process about 500,000 bpd.
If these capacities come on stream around 2018 as planned, combined national refining capacity will be about 1,000,000bpd.This is way below the 1,500,000 bpd capacity which the vision 20: 2020 anticipates Nigeria should attain to curtail importation
West African market
Refineries in Europe and North America have suffered huge setbacks in the recent years. A report by the European Petroleum Industry Association (now FuelsEurope) showed that 15 European refineries have shut down between 2008 and 2013. These trends put a lot of pressure on African countries and developing nations of the Asian/Middle East countries. It is both an opportunity and a challenge. Refining capacities in Africa’s energy sector is generally low. Consequently mini-refineries if strategically located can benefit from the petroleum products markets in nearby nations. Current subsidy programs encourage smuggling across Nigeria’s borders in the North East. With the removal of subsidy, the market dynamics will change, eliminating the price differential that makes smuggling viable, opening up new market for producers that can map that region.
Chijioke K. Mama
This is an excerpt from the Report: Analysis of the mini-refining opportunities in Nigeria. Chijoke K. Mama is a Senior Oil and Gas analyst based in Lagos. Chijioke.mama@yahoo.com | @chijiokemama