23

Mar

SIX NEW REFINERIES HURRAY! BUT NOT YET UHURU! 09072012

2012-07-09

SIX NEW REFINERIES HURRAY!  BUT NOT YET UHURU!
BY: LES LEBA

Many Nigerians believe that the ever-present challenges of fuel scarcity and subsidy could be conveniently resolved if new refineries are built, as national demand cannot obviously be met from the antiquated facilities available in existing government refineries.  In recognition of this inadequacy, 23 licences for new refineries were approved by the authorities; 20 of these went to investors from the private sector, while the federal government and Chinese investors undertook to build additional refineries in Kogi, Lagos and Bayelsa States respectively.

Surprisingly, no licencee has begun construction; initially, licencees decried the huge upfront start up fee requirement.  Ultimately, the government reconsidered and accordingly reduced the fee in line with investors’ expectation; in spite of this concession, the investors still failed to show serious commitment; raising funds locally was obviously a problem, as bank interest rates of 20% and above would make borrowing for such a project a suicidal mission!

On the other hand, much cheaper foreign loans required certain sovereign guarantees that government did not consider necessary.  Other investors demanded a free market pricing policy that eliminated subsidies, as the uncertainty and time lag related to subsidy refunds could jeopardise the  ultimate success of such ventures.

Over the years, fuel importation has risen above 80% of local demand, but government is unable to muster the will to consolidate funds for building new refineries, because of the poor performance and management of the existing ones.  Incidentally, the huge import volumes also translated to controversial subsidy values of N1 – 2 trillion in 2011.

Consequently, many Nigerians happily welcome the ‘Memorandum of Understanding’ (M.O.U.), between a partnership of a private United States and Nigerian company with the federal government.

Under this M.O.U., six refineries would be constructed in modular forms within 30 months at a cost of $4.5bn; each refinery would process 30,000 barrels of crude oil per day; thus, the six refineries would process 180,000 barrels of crude oil with total output of 30 million litres of fuel produced daily.

If extrapolations of international fuel consumption patterns are anything to go by, output from these refineries may just be sufficient to meet our domestic needs, and reduce any possibility of scarcity.

We recall that a similar memorandum for sourcing of funds for the construction of three Greenfield refineries and a petrochemical plant was also endorsed with China State Construction Engineering Corporation Limited In May 2011; regrettably, the Chinese are yet to move to site.  

In view of such antecedent, why should Nigerians be more confident this time around that the new memorandum would materialise in actual construction?  Even though the Minister has assured cooperation with the Ministry of Petroleum Resources and the NNPC to ensure the actualization of the projects, the terms of the new M.O.U., endorsed by Segun Aganga, the Federal Minister for Trade and Investments, are not yet in the public domain.

Nonetheless, the Nigerian representative of the consortium, Mr. Edozie Njoku, expressed their hope that government would be promptly forthcoming with the issuance of all necessary permits, while Jim Mansfield, the representative of the U.S. firm indicated that the funding for the project will be from a non Nigerian source!  One may deduce therefrom, that the government has no equity in this project.
It is not yet clear why the government singled out this new consortium instead of the 20 other licencees for a formal commitment.  In other words, would similar M.O.Us. with the 20 previously licensed investors also have galvanised their actualization of the refineries?  We do not also know if the M.O.U. included government commitment to allay concerns on the prompt payment of subsidy.  Alternatively, if the terms of the M.O.U. allowed for total export of their refined products, subsidy would be inapplicable, as the owners of the refineries would be free to export their output at more profitable international benchmark prices.  Although such a scenario may be perfect for investors, it may not resolve our challenges of constant fuel availability, if subsidy remains in petrol pricing structure.  

According to Mr. Mansfield, the modular construction process for the refineries, , entails six months of construction work in the US, (including all piping and electrical work), one month  for test-running and dismantling the refinery, another month for transportation to Nigeria, and four months to reassemble the plants and commence production.

Regrettably, the local host communities for these refineries and domestic suppliers and contractors would enjoy little or no benefits from such modular construction process, as such contracts and related employment opportunities would be lost to the United States.  Besides, most of the income from the successful operation of the six refineries may become domiciled in the U.S., with minimal impact on our exchange rate, reserves, employment generation and ultimately on our economy.

SAVE THE NAIRA, SAVE NIGERIANS!