Fuel scarcity renews calls for local refining, deregulation

 

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As Nigerians are heaving a sigh of relief from the latest scarcity of petrol that lasted for over a month, the need for the Federal Government to address the challenges of inadequate local refining and distribution capacity that has continued to plague the country for many years has resurfaced.

Following the failure of the partial liberalisation of the downstream sector in May 2016 to bring an end to fuel shortages, many industry stakeholders have said full deregulation of the sector would help to stabilise the fuel market and boost local refining.

Nigeria has four refineries with an installed capacity of 445,000 barrels per day, which have continued to operate far below installed capacity for many years.

The Federal Government, in its Economic Recovery and Growth Plan, a medium term plan for 2017 to 2020, which was released last year, stated that it would reduce its stake in some oil assets including the refineries and other downstream subsidiaries such as pipelines and depots. But it has not said exactly when this would happen.

A former Special Adviser to the President on Petroleum Matters, Dr. Emmanuel Egbogah, in a telephone interview with our correspondent, stressed the need to build new refineries in the country.

He said, “When I became an adviser, the first month or two, I made a trip to the Kaduna refinery for an inspection. And after that, my report was that this refinery was as good as scrap. We would be better off building a new refinery that is functional and that time I pressed President Yar’Adua that we needed to build a new refinery.

“That time, I said the subsidy we were paying for petroleum products – what we paid in 2007, 2008 and 2009 – already exceeded the cost of building a huge refinery. And to support my case that a new refinery was better for us than what we were doing with those refineries, I took two ministers to India and showed them the Jamnagar refinery in India – the world’s biggest and most profitable refinery today, and it is operating at 129 per cent efficiency.

“Do you know the efficiency of our refinery in Nigeria? The highest is about 17 to 25 per cent. I said I can bring this company to build and operate our own but we needed only 650,000 barrels per day, and that time the cost would have been $7bn to do it. But what we had spent on subsidy in three years was around $11bn.

“Are we the one operating refineries in the world? There are refineries that have been operating for 100 years and are still operating efficiently.”

Analysts at FBNQuest Capital said in an emailed note that the fuel shortages highlighted Nigeria’s failure to refine domestically the petroleum products it requires for its own consumption.

The scarcity has been attributed to flaws in distribution; upward movement in the international price necessitating subsidy payments under another name (absorbed by the Nigerian National Petroleum Corporation); hoarding; and the fact that the set retail price of N145/litre for petrol is far below that in the countries of the sub-region.

The analysts said, “The FGN’s response to the periodic shortages is to commit public money to another programme of turnaround maintenance for the corporation’s refineries, cost at $1.1bn and said to be achievable over 18 months. An earlier investment in TAM in 2013 made little, if any impact.  In September 2017, the refineries achieved a combined capacity utilisation rate of 6.1 per cent, compared with 9.5 per cent the previous month.

“We cannot say for sure that the latest programme of TAM will not be a success. However, the age of the refineries suggests not: Port Harcourt, inaugurated in 1965; Warri, 1978; and Kaduna, 1980.”

According to the FBNQuest analysts, local refining is the obvious solution to fuel shortages in the country.

They said, “By local, we mean private sector. The corporation’s refineries should be allowed to wither away in our view. The game-changer is the Dangote refinery under construction in Lagos State, which over time is scheduled to process 650,000 bpd crude.

“There are other projects further down the line. To give a typical example, Petrolex plans to invest $3.5bn in a refinery with capacity of 250,000 bpd in Ogun State and is talking of completion within five years. We would expect several more projects if the retail price of the PMS is genuinely deregulated.”

Last month, the Vice President, Prof. Yemi Osinbajo, said the new petroleum tank farm built by Petrolex Group, an indigenous integrated energy group, in Ogun State would strengthen the nation’s distribution infrastructure for petroleum products and would substantially improve retail fuel distribution in the country and increase domestic storage capacity for petroleum products.

At the inauguration of the facility, described as the largest petroleum products storage facility in sub-Saharan Africa, Osinbajo said the operation of the tank farm would decongest the Apapa and Ibafo tanker traffic and facilitate the distribution from Ibefun to practically anywhere in the country.

The Chairman, Petrolex, Mr. Segun Adebutu, said the company had invested over $330m in the construction of a mega oil city, which would include a refinery with a capacity of 250,000 barrels per day.

According to the FBNQuest analysts, the gains from deregulation will include job creation, foreign exchange savings, and the prospect of regular supply and, at some stage, exports to the other countries in the sub-Saharan African region.

The Executive Secretary, Major Oil Marketers Association of Nigeria, Mr. Obafemi Olawore, said, “The truth of the matter is that government must take a bitter decision. It is economics, and we should put politics aside and look at the overall interest of the people, and of the economy.

“If you deregulate, there is no doubt that initially there will be increase in petrol prices. But as many people come into the building of refineries, surely the prices will go down.”

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