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Deregulating of petrol price seemingly inevitable, By Prof Chijioke Nwaozuzu

By News Express on 24/07/2015

Views: 3,183

The issue of deregulation of petrol (PMS) price seems inevitable, as well as the deregulation of the refining business in Nigeria. However, we need to be clear on what the challenges are and how we go about deregulating the entire downstream petroleum sector. Recently, the NNPC spokesman Mr Ohi Alegbe announced ‘with glee’ that the national refineries have undergone turn-around maintenance (TAM). Mr Alegbe was short on informing us about the expected capacity utilisation of the refineries post-TAM.

Deregulating the price of petrol will not automatically eradicating the shame of fuels importation into Nigeria. The exercise will only generate extra funds for the government, which if care is not taken will likely be frittered away so long as it is shared by the three tiers of government. The alternative would be to dedicate the entire revenue to major infrastructure development under a strengthened SURE-P with competent management. The next issue would be a forensic analysis of the demand and supply situation with petroleum products in Nigeria, so we can determine the extent of refining capacity needed to bridge the supply gap.

Currently, we have a name-plate refining capacity of 445,000 barrels per day (bpd). As at 2012, the capacity utilisation for all three refineries was about 23%. This implies that the refineries could only process slightly above 100,000 barrels per day, which translates to about 4 million liters per day (ml/day) of petrol, 2 ml/day of kerosene, and 3 ml/day of diesel. Hence, the experienced fuel shortages and resulting massive imports!

According to Organization of Petroleum Exporting Countries (OPEC) figures, Nigeria’s daily consumption of fuels as at early 2012 was as follows: 32 ml / day of petrol, 5.2 ml/day of kerosene, and 4.1 ml/day of diesel. The difference between what our refineries produce and these consumption statistics should constitute our daily imports. The unprocessed portion of the 445,000 bpd (i.e. 345k bpd) is supposed to be swapped for fuels by the Pipelines & Products Marketing Company (PPMC), a subsidiary of the National Oil Corporation. At another end, the Petroleum Products Pricing & Regulatory Agency (PPPRA) issues petrol import licenses to selected marketers. What is not certain is how both agencies reconcile the volumes of petrol they each import. It is against this background that the servicing of our existing refineries is welcome news. However, let us not be overly sanguine yet. Here is why!

In the most unlikely event that the recent turn-around maintenance of the refineries will deliver 90% capacity utilisation (about 400,000 barrel per day), this will translate to about 20 ml/day of petrol, 8 ml/day of kerosene, and 13 ml/day of diesel. The implication is that we will still be short of petrol. The fact is that even with a full rehabilitation of all the national refineries (which may take about 2 years to achieve) we are unlikely to achieve 90% capacity utilisation considering the age of the refineries. The most we could possibly hope for is about an average capacity utilisation of 70% ‘tops’! The newest of them, the new Port Harcourt refinery, is about 30 years old.

To achieve self-sufficiency in the short term, Nigeria needs a minimum refining capacity of 750,000 barrels per day (including diverted volumes of fuels). To produce surplus fuels for export, Nigeria will require about one million barrels per day refining capacity. This will enable us to produce about 56 ml/ day of petrol, 19 ml/ day of kerosene, and 41 ml/ day of diesel. This is achievable, after all a private firm RELIANCE REFINERY INDIA has a total refining capacity of one million barrels per day.

Achieving these refining capacity targets would involve the construction of large-scale (100,000 bpd and above), medium-scale (40,000 to 99,000 bpd) and smaller-scale refineries (1000 to 39,000 bpd). Smaller refineries could be in a modular format. Government would have to be involved in the construction of the larger-scale refineries, at least at the earlier stages. This is because of the capital intensity of such plants and the need for ensuring investors’ confidence.

The capital outlay for a 100,000 barrel per day (bpd) refinery is roughly $2.5 billion, while a 24,000 bpd modular refinery is about $250m (based on a feasibility study I carried out for a firm). Therefore, it is easier to access funds for the modular refining modules (through for instance US Ex-IM Bank) than funding the medium-scale to larger-scale refineries. The manufacturing timescale for plant, equipment and machinery for a plant of 100,000 bpd capacity is within the range of 3-4 years. Start-up for modular refineries of 24,000 bpd capacities is within a timeframe of 18-20 months.

The modular system allows the plant to be expanded to 100,000 bpd capacity in structured increments should the refiner choose to do so. The increments can be funded with the cash flows from phase 1 and additional phases, and so the refinery will not incur additional debt for expansion after the first unit is installed. Unlike big capacity refineries, the expansion of the modular plant capacity can be done without shutting down production from existing modular equipment and plant.

Revenue streams and pay-back periods are faster with the modular refining format, than with the larger capacity refineries. The major short-coming with the modular format is that the plants are semi-automated or fully automated and therefore less labor-intensive, i.e. not many jobs can be created directly. For instance, 20 to 30 personnel can operate a 24,000 bpd modular refinery. Most of the spin-off jobs created are of a secondary nature, and are based around the location of the refinery, e.g. transportation, schools, hospitals, shops, restaurants, etc.

To sum up, modular refineries are simple, efficient and fast to start up. Such refineries usually operate at optimal capacity at all times. The relatively small investment cost allows for private investors to enter the refining business much easier. It also enables government to build the bigger capacity refineries using the modular format, but in incremental stages. However, government- built modular refineries should have full conversion facilities (i.e. catalytic reformers and naphtha hydro-treaters) to enable the refineries produce sufficient petrol.

However, it is unlikely that smaller modular refineries will bring about sufficient refining capacity addition. Perhaps, it may contribute 100,000 bpd ‘tops’. Large-scale Greenfield refineries will still be needed. To achieve this it would seem that the Nigerian Government (through its petroleum agency – Nigerian National Petroleum Corporation, NNPC) has to partner with the Chinese Government (through its petroleum agency – Chinese National Petroleum Company, CNPC). Why?

In the past 20 years, only 3 Greenfield refineries have been constructed in Africa. These were built in Adrar (Algeria) and Khartoum (Sudan) with China National Petroleum Company (CNPC) partnering with the governments, with capacities of 13,000 bpd and 100,000 bpd respectively. The third one was built in Alexandria (Egypt) by Egypt General Petroleum Corporation, i.e. Egypt’s National Oil Company (NOC) with a capacity of 100,000 bpd.

Planned new builds in Africa were constructed by PetroChina at Ndjamena (Chad) and Zinder (Niger) with same 20,000 bpd capacity. The third is being constructed by Sonangol, Angola’s NOC at Lobito (Angola) with a capacity of 200,000 bpd. From the foregoing, refining in Africa is led by NOC’s, and new investments are dominated by the Chinese National Petroleum Companies.

•Prof. Chijioke Nwaozuzu, whose photo appears alongside this piece, is a Downstream Petroleum Economics & Policy Expert and Deputy-Director at Emerald Energy Institute for Energy & Petroleum Economics, Policy, & Strategic Studies, University of Port Harcourt. Email: Tel: 070 6874 3617 (SMS Only).

Source News Express

Posted 24/07/2015 3:00:45 PM





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