65 MORE REFINERIES! HURRAY!.... BUT!! 07092015



The release of licenses, in June this year, to 65 Nigerian companies to establish local refineries must be welcome news to everyone who is unhappy with the overwhelming Foreign Exchange bill for our fuel imports. The successful licensees, according to a report in the Vanguard edition of August 28th 2015, were apparently selected from "285 applications which were screened for that purpose, in a process that was, reportedly conducted over a 6 months period".

The licenses were granted barely two weeks after President Buhari's inauguration, and this early intervention is probably a strong indication of PMB's burning desire to reduce Nigeria's huge fuel import bill and hopefully also reduce and ultimately eliminate the incidence of subsidy in fuel pricing. Indeed, in an attempt to attract investors to this venture, the Department of Petroleum Resources(DPR) is reported to have reduced the licensing fee for new refineries from $1m to just $50,000.

It is however, not yet clear if the 18 companies which had earlier paid $1m for their licenses to establish refineries since 2002would now also be favored with a partial refund to maintain some level of equity in the application fee. Nevertheless, Nigerians may also wonder why, till date, only one of the 18 licensed companies had actually come on stream with a modest capacity for just 1,000 barrels per day output of diesel.

Furthermore, industry observers may similarly wonder why nothing came out of the celebrated Memorandum of Understanding signed between the Federal government with an American and Nigerian Joint Venture Group in July 2012 for the construction, within 12 months, of six modular refineries, with a combined capacity of 180,000 barrels per day at an estimated cost of about $4.5bn.

Incidentally, the promoters of the project had claimed on that occasion that, within 30 months, "the six refineries would produce 30 million litres per day of refined products, as the entire modular refinery complex, including all piping and electrical fittings would be built and test operated in the United States to ensure that each of the six plants will achieve 100 percent of their projected average five million litres per day production capacity before 2015!

The firm assurance by Olusegun Aganga, the serving Minister of Trade and Investment, at that time, that his ministry would work together with the DPR and the NNPC to ensure the actualization of the project, makes the apparent failure of the venture, more disturbing. Instructively, Nigeria's estimated daily domestic demand of about 40m litres would have been adequately covered if existing government refineries with their original capacity for 445,000 bpd could produce just 10m litres to compliment the output expected from the 2012 MOU with the American-Nigerian consortium!

Indeed, in July 2012, we had cautioned in a related article titled "6 new refineries, Hurray, but not yet Uhuru" that "in its anxiety to facilitate adequate fuel supply, the Nigerian government appeared constrained to fetch water with a porous and poorly cellotaped basket! The ultimate result can only be frustration and failure".

The unanswered question therefore, is why companies which received licenses to establish refineries continue to dash our expectations for self sufficiency in fuel supplies. With this hindsight, what changes, we may ask, have now been made to guarantee that the 2015 batch of 65 licensees would not also disappear and frustrate our country's hopes of ultimately becoming a net exporter of fuel. 

Some observers have suggested that lack of access to adequate funding will be a stumbling block in the path of the Nigerian companies granted refinery licenses in June 2015. Thus, even if it is true that modular refineries are easier and cheaper to build, it would certainly still be a hazardous venture to pay 20 percent interest on a medium to long term loan of about N6bn ($30m) to complete a refinery which has only a modest 5,000bpd processing capacity. Alternatively, relatively much cheaper external funding may also be difficult to access without some form of government guarantee. Besides, investors would rightly be concerned that if government owned refineries are constantly forced to shut down due to irregular or unguaranteed supply of crude oil, the success of their own private interventions could similarly become jeopardized. 

In any event, the usually time consuming and thorough process of project evaluation, and the clear challenges of sourcing for funds and clean titles to the substantial land requirement for such facilities, may suggest that the modular refineries expected from the 65 licensees, may not become fully functional to adequately supplement local fuel output until 2017 and beyond. So, the question is, what do we do until then?

Nevertheless, the most critical hurdle for investors would clearly be the prevailing 'bondage' of government's control of fuel pricing. Expectedly, in recognition of the persistent delays that attend applications for subsidy refunds, financiers would certainly not be too excited about funding a business which first sells its products below cost and subsequently applies for a refund of the related shortfalls from actual market price from a bureaucratic quagmire, that has so far, shown little respect for timely settlement of contractual obligations to current fuel suppliers.

Clearly, fuel importers are probably the highest sectoral debtors to the banks and payment delays and/or another round of Naira devaluation will make it difficult to liquidate their existing commitments and may inevitably sound the death knell to those operators with substantial loan portfolios in the supply and payments chain. Consequently, the popular expectation that more refineries will lead to fuel surplus may be more appropriately re-phrased, as "a deregulated market is absolutely necessary before multiple refineries will come on stream to fully satisfy the alleged 40m litres daily requirement". 

Furthermore, any suggestion that refineries should be provided with crude oil at a price below international market price will inadvertently be an attempt to transfer the element of subsidy from the level of finished product to the base of raw material supply. Ultimately, if the Naira exchange rate continues its slide or crude oil prices unexpectedly, rebound, the attendant subsidy values on crude supplies will not be drastically different from current annual outlays of about N1tn.
Curiously, however, despite the colossal losses persistently incurred in their operations, Dr. Emmanuel Ibe Kachikwu, the new NNPC CEO has expressed his intention not to sell our existing refineries; however, so long as fuel price remains arbitrally controlled by government, it is unlikely, that NNPC would easily find interested private joint venture partners who could promote operational efficiency by revamping and reducing the huge corruption deficit in these government refineries.

Similarly, five years after it was conceived in 2010, the $23bn Greenfields refinery venture slated for Lagos, Kogi and Bayelsa States to refine 750,000 barrels per day by the China State Construction Engineering Corporation (CSEC) and a 20 percent NNPC minority interest is yet to manifest.

Conversely, inspite of the above woeful disappointments, Africa's richest man, Aliko Dangote, is steadfastly progressing with his $8bn, 650,000/bpd refinery project in the Lekki free trade zone in Lagos State. Nonetheless, Dangote has made no secret of the fact that on completion in 2017, sales of products from his refineries would be denominated in dollars to local marketers at the prevailing international market prices for fuel. 

Consequently, even though we may possibly have excess domestic supply in 2017, ultimately, our dollar commitment for fuel supply may not significantly diminish, while abolition of fuel subsidy will also be a challenge without a significant Naira appreciation. Such Naira appreciation will be facilitated when the CBN stops substituting Naira funds for allocations of dollar derived revenue.