Privatising Refineries for Efficient Performances

13 Nov 2012

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Kaduna Refinery

For the Kalu Idika Kalu-led National Refineries Special Task Force (NRSTF), changes in ownership structures and business models of the nation’s refineries remain the solutions to their years of poor performances, write Chika Amanze-Nwachuku and Chineme Okafor
The National Refineries Special Task Force (NRST) was inaugurated about eight months ago by the Minister of Petroleum Resources, Mrs. Diezani Alison-Madueke, with mandates to among others, conduct a diagnostic review of the nation’s four refineries and advise on the best approach to turn them around; review and advise on private refinery licensing and partnership models for Greenfield refineries and to advise on how best to achieve self-sufficiency of petroleum products in Nigeria.

The 22-member committee, headed by former Minister of Finance, Dr. Kalu Idika, had been directed to proffer, within 60 working days, workable solutions on how to revive the refineries, which had been comatose over the years, to global standards.

Nigeria’s traditional refineries at Port Harcourt, Warri and Kaduna with collective installed capacities of 445,000 barrels per day (bpd) cannot meet the country’s daily petrol consumption which averages about 39 million litres per day, even if they were to work at full capacities. The refineries have been operating far below their capacity utilisation due to poor management and lack of maintenance, leaving the country with no option, but to depend on even countries without any oil deposit for refined petroleum products.

Botched sale
In 2007, the federal government had posited that the only way to make the refineries to function at optimal capacity would be to allow the private sector to manage them. Towards that end, the Port Harcourt and Kaduna Refineries were sold to Blue Star Oil Service Consortium, led by frontline business mogul, Aliko Dangote, at a sum of $721million. But the Nigerian National Petroleum Corporation (NNPC) under the leadership of Alhaji Abubakar Yar-Adua had opposed the sale and insisted that due process was not followed. The management of the corporation had also faulted the pronouncement that the refineries were scrap and even claimed that the Port Harcourt Refinery had been working at near full installed capacity utilisation as at 2006, while Warri and Kaduna Refineries were operating at 85 per cent and 80 per cent of their installed capacities respectively. Following the widespread criticisms that greeted the exercise, the consortium was refunded the amount it paid for the purchase of the two plants and the privatisation process was suspended.

Routine TAM
Soon after the botched sale of the plants, the NNPC claimed it had awarded the contract to a Nigerian firm to carry out a comprehensive Turn Around Maintenance (TAM) on the refineries. The contract sum as revealed by Yar’Adua was $57 million. But despite the said TAM, the refineries remained in near-dilapidated states and till date, all the four refineries have been in states of disrepair notwithstanding huge amount of money, which successive administrations claimed had been expended on their routine TAM. Investigations by THSDAY revealed that successive administrations in the ministry of petroleum and NNPC often diverted funds meant for the TAM on refineries.

A document obtained from the NNPC recently revealed that government had never been sincere about the issue of TAM on the refineries.  For instance, it was discovered that the new Port Harcourt Refinery, which was commissioned in 1989 had undergone TAM exercise only thrice. The last one was done in 2000. For the old Port Harcourt Refinery, which was commissioned in 1965, the only major rehabilitation work on it took place in 1989, while the first and only TAM was carried out in 1998.  For the Warri Refinery and Petrochemical Company, the record showed that the last TAM was executed in 2004.
A senior management staff at the Port Harcourt Refinery had confirmed that the two plants located in that city have operated between for 12 and 14 years without TAM and this had caused the equipment to deteriorate.

Root Causes of Poor Performances
In its report submitted to President Goodluck Jonathan on August 2, the NRST identified the root causes of poor performances of the nation’s refineries. The top issues identified by the task force included: maintenance neglect; poor operational performance; organisation and government issues; the refineries business model and supply chain issues. In the well-detailed report, the team noted that all the refineries had operated at an average capacity utilisation of about 20 per cent, placing Nigeria at the bottom of the ladder among African refineries.

The Idika-Kalu committee observed that in the early 1990’s, Nigerian refineries produced enough petroleum products to satisfy national demand and exported the excess, but discovered the refineries had not been efficiently and safely operated and maintained for more than 15 years. Also, the committee noted that the most pivotal of the root causes was that the current ownership structure and business model had failed to adequately provide for the safe and efficient performance of the refineries.

“During the same period they have not been able to refine the designed quantities of petroleum products.
"They have not operated as performance-oriented businesses and are plagued with severe plant maintenance and integrity issues, as well as irregular crude supply and products evacuation. 

“Furthermore, they are beleaguered by poor governance in a non-commercial operating structure, which is considered unsustainable,” the report added.

The committee however expressed optimism that, with the combined capacities of 445,000 barrels per day (bpd), the refineries could meet domestic needs if the root causes of their poor performances in particular were vigorously resolved.
Privatisation as Solution

Top on the far reaching measures recommended by the task force that would help Nigeria attain self-sufficiency of petroleum products within a strong commercial framework, in the shortest possible time was that government should divest its equity from the refineries and allow private entities to manage them. Specifically, the committee recommended that the traditional refineries should be privatised within 18 months, but advised that palliatives to assuage the sufferings of the people should be put in place before full deregulation of the downstream petroleum sector. The taskforce reasoned that changes in the ownership structure and business model of the refineries were very crucial to their efficient performances.

The committee advised the government to as a matter of economic urgency and productivity divest its interest in the management of Nigeria’s refineries especially with consideration to existing business procedures employed in the operations of the refineries.
It noted that the refineries could only operate at their maximum capacities when the government privatises their operations by divesting majority of “its 100 percent equity in the refineries to competent, resourceful and experienced refining private partner(s) in accordance with the Public (Privatisation and Commercialisation) Enterprises Act 1999”.

It suggested an accelerated, aggressive but workable privatisation process and time-frame that should culminate in the transfer of majority ownership and operatorship of the refineries to experienced and capable partners within 18 months, taking special attention on staff pensions, severance and other disengagement issues, as well as technical and managerial skills acquisition by Nigerians and local content compliance. The task explained that the current ownership structure and business model of the refineries were the most pivotal of the root causes, adding that these arrangements had failed to adequately provide for the safe and efficient performance of the refineries.

“In view of privatisation and without prejudice to other plans in the pipeline, full rehabilitation of the refinery plants should be reviewed in all its ramifications. Investment in the proposed TAM and rehabilitation projects for the refineries by the Federal Government should therefore be limited to the minimum required to make the refineries work in a safe and reliable manner,” the task force stated.

The NRST had specific terms of reference that include, conducting diagnostic review of the refineries and advise on the best approach to turn them around, review and advise on private refinery licensing and partnership models for Greenfield refineries, plan for self-sufficiency in petroleum products, review of refineries audit as well as devising effective performance monitoring system for the refineries.

It however observed that, out of the three joint venture Greenfield Refinery options under consideration by NNPC, the economics strongly favour Lagos. It therefore recommended that the proposed 350,000 bpd Lagos Refinery should be pursued vigorously as a priority project by NNPC, in line with the findings of the Detailed Feasibility Studies carried out by Wood Mackenzie & Foster Will and to ensure the project comes on stream by 2016.

“The NRSTF strongly recommends that NNPC should intensify and finalise negotiations with CSCEC or any other credible financier for financing of the new refinery projects along the lines of the MOU. Of the three joint venture Greenfield Refinery options under consideration by NNPC, the economics strongly favour Lagos. This option should therefore be explored as a priority. The other options, Bayelsa and Kogi, should be explored subsequently, with careful attention to the stated conditions required to improve the business case”, the report stated.

The committee also found that import bill for bridging supply gap in petroleum products will rise steadily from current trend of $9.9 billion to $18.1 billion in 2030, while self-sufficiency will decline from about 21percent to less than 13 percent over the same period should the government fails to initiate decisive intervention.

Tags: Business, Nigeria, Featured, Kaduna Refinery, NRSTF

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