Nigeria missing out of the refining party

According to the monthly financial and operations report of the Nigerian National Petroleum Corporation (NNPC) for January to August 2015, Nigeria’s three refineries in Port Harcourt, Warri and Kaduna recorded average capacity utilisation of 10.04 per cent,

The NNPC report indicates that during the eight-month period under review, the three refineries operated at a total loss of N31.682 billion, with Kaduna refinery accounting for the highest loss of N26.183 billion, while Warri and Port Harcourt refineries made losses of N8.496 billion and N8.057 billion respectively.

While Kaduna refinery recorded losses throughout the eight-month period, Warri and Port Harcourt refineries recorded profits in some months within the period under review. The Kaduna refinery operated at a loss of N5.111 billion in January; N2.673 billion in February; N2.260 billion in March; N3.045 billion in April; N2.595 billion in May; N2.662 billion in June; N3.847 billion in July and N3.990 billion in August.

The Warri refinery recorded profits of N4.668 billion and N79 million in the months of January and July, respectively, but recorded losses in February (N1.390 billion), March (N1.338 billion), April (N1.753 billion), May (N1.288 billion), June (N1.532 billion) and August (N1.195 billion).

Port Harcourt refinery also recorded profits of N705 million in March, N557 million in July and N5.045 billion in August. The refinery, however, operated at a loss of N1.497 billion in January, N1.705 billion in February, N1.437 billion in April, N1.713 billion in May and N1.705 billion in June.

Nigeria subsidizes fuel and relies on imports for more than 70 percent of its supply. Nigeria also depends on crude exports for about two-thirds of state revenue and more than 90 percent of export earnings. A drop in crude prices in the past year has put pressure on public finances, while the naira has declined 7.4 percent against the dollar this year.

Refiners toasting to low crude oil prices

While the refining arm of NNPC groan under huge losses and inefficiency, refiners in other parts of the world are reaping a windfall from low oil prices. Crude prices are down by more than half from their 2014 peak.

Refiners in Asia have enjoyed better-than-expected margins this year as low crude prices kept down costs and pushed world oil demand to a five-year high. In the US, Tesoro Corp. reported record profit in the third quarter, while Valero Energy, Phillips 66 and Marathon Petroleum posted their best quarter in at least three years.

The profit margin for converting oil into gasoline has soared this year as crude prices fall and driving demand rises. On the Gulf Coast, home to about half the nation’s refineries, the margin has averaged $12.21/bbl this year, the highest since at least 2010.

Due to the high margins, refiners are churning through as much crude as they can. US plants set a processing record during the last week of July, going through more than 17 MMbopd. Tesoro said it ran its plants at 101 percent of their capacity during the third quarter.

No stopping the party anytime soon

Crude oil prices are expected to hold at $50 a barrel to $60 a barrel next year, buoying global demand for fuels and keeping refining margins elevated. Margins could ease slightly next year as slower economic growth curbed demand, while crude prices could rise in the second half of 2016 on tighter supplies, analysts say.

The World Bank has said it is lowering its 2015 forecast for crude oil prices from 57 dollars per barrel in its July report to 52 dollars per barrel. It stated that the revised forecast reflected a further slowing in global economic performance, high current oil inventories and expectations that Iranian oil exports would rise after the lifting of international sanctions.

“This was led by a renewed plunge in oil prices prompted by expectations of slower global growth, particularly in China and other emerging markets, abundant supplies and prospects of higher Iranian exports next year.’’

The refining party would not be stopping anytime soon, said Harold York, vice president of integrated energy research at consulting company Wood Mackenzie. Margins may weaken next year from this record level, but they will still be good enough for plants to operate at high rates.

While the party lasts, refining companies are using the current windfall to diversify by buying pipelines and other assets that offer more stable profits. Refining is cyclical. Pipelines and storage are always going to be in demand. It is a safety net for them if things start to turn south sooner than they expect, analysts said.

FRANK UZUEGBUNAM