The Nigerian Refineries – The Need for Redemption.

Nigeria built its first refinery (Port Harcourt Refinery) in 1965, and since then the country has continued to experience a steady decline in the utilisation rate of its refineries. In 2018, the state-owned refineries recorded losses of NGN154bn according to the audited 2018 financials released by NNPC. Also, the Monthly Performance report shows a loss of NGN148bn in 2019, while from January-April 2020 an additional loss of NGN39bn was incurred. The state-owned refineries include; Kaduna Refining and Petrochemical Company Limited (KRCPC), Warri Refining and Petrochemical Company (WRPC) and Port-Harcourt Refining Company Limited (PHRC), which has two refineries under its control.

 

In the first two months of 2020, the combined consolidated capacity utilisation for all four refineries was 0.00%. In March and April, this increased to 4.50% and 2.30% respectively in the latest report released by the NNPC. The table below shows the designated capacity for each refinery, as well as its utilisation between 2015 and 2019.

	KRPC	PHRC (New)	PHRC (Old)	WRPC
Designated Capacity (BPSD)	110,000	150,000	60,000	125,000
2015	3.00%	6.18%	0.00%	6.67%
2016	9.37%	21.78%	0.00%	11.80%
2017	15.09%	4.67%	0.00%	11.82%
2018	0.41%	15.10%	0.00%	2.31%
2019	0.73%	0.29%	0.00%	6.54%

Sources: DPR Oil and Gas Report 2018 and the NNPC Monthly Financial and Operations Report

The 2018 audited financials, released by the NNPC, shows that staff-related expenses (salaries, bonuses, welfare allowance) account for approximately 40% (c. NGN65bn) of the refineries total expenditure. Despite the refineries lack of productivity, the refineries staff represent 28.7% of Nigerian National Petroleum Corporation's (NNPC) entire workforce of 6,621 workers. The funding of these refineries is coming at the expense of government investment in critical sectors in the country. In comparison to some vital government capital expenditure, the 2020 CapEx budget for power was NGN129bn, while that of transportation, security, and health are NGN121bn, NGN116bn and NGN59bn, respectively. The country will be better off suspending operations of these refineries currently, as they offer little or no value in terms of revenue or solving the problem of importation of refined products. 

 

With the government facing various revenue challenges and exchange rate pressures due to its mono-economy, there might never be a better time to consider restructuring or shutting down the refineries. There are various structures the government can implement, one of which is a Joint Venture structure that places the operations of these refineries in the hands of competent and experienced partners. Also, the government can consider a complete privatisation by selling the refineries to investors. In the last few years, there have also been discussions around a co-location initiative which involves the construction of new refineries around existing refineries. However, like many other initiatives in the country, this concept is far from being implemented.

 

In 2007 before exiting office, Obasanjo's led administration completed the sale of the KRPC and PHRC refineries by a Dangote led consortium for around $761mm. The transaction was close to being reversed by the government before the consortium decided to withdraw from the deal. Thirteen years later, it is unlikely that many investors will be interested in these assets and that the refineries will command anything close to the 2007 valuation. Most of these assets will need upgrades that will require significant investments. In 2017, the former GMD (Ibe Kachikwu) of the NNPC stated that approximately $1.2bn was needed to repair the refineries. The repairs are required to replace obsolete technology, and damages due to a lack of maintenance over the years. 

 

In recent times, there has been a lack of interest in the state-owned refineries, partly due to the construction of the Dangote 650,000 bpd refinery. Expectations are that the Dangote refinery will meet local demand, but market forces may command better prices across the Nigerian border. With dollar-denominated loans to repay, dollar-denominated feedstock and a business to run, it will be interesting to see how the country benefits and to what extent from the said project.

 

There are two important points to note from this article, the unnecessary costs associated with keeping refineries and the inability of the government to run the refineries effectively. Shutting down the refineries today will save the government billions of naira which can be allocated to other projects. It may also be time for the government to become aggressive in shopping for potential investors to either revamp the refineries or work on the co-location initiative. The combination of the Dangote refinery and the state-owned refineries will bring total capacity in the country to over a million barrels per day. In 2019, Nigeria spent $7.4bn on importing fuel majorly from Europe, which accounts for 15.6% of its total import. It might be time to focus on becoming net-exporters of refined petroleum products by leveraging on our existing infrastructure and new refineries. 

 

In summary, the government needs to put an end to the unnecessary expenses incurred in the refineries and find a lasting solution. At a time when other top producers in Africa seem to be getting their acts right, by utilising existing refineries and building new refineries in a bid to meet and exceed local demand for exportation. The refining market will become more competitive than it has ever been, with European refiners and other African refiners grappling for market share.