xCost of NNPC’s Decrepit Refineries

Ibe Kachikwu
Ibe Kachikwu

From its monthly reports, the Nigerian National Petroleum Corporation recently admitted its three refineries in Warri, Port Harcourt and Kaduna are crumbling. This however have deeper implications on the Nigerian economy, writes Chineme Okafor

In December 2015, the immediate past petroleum minister, Dr. Ibe Kachikwu, told members of the National Assembly that about two of the country’s refineries would begin full operation to minimise Nigeria’s reliance on imported petroleum products. Unfortunately, we are in 2019, and none of the refineries are working at the level he promised.

On assumption as NNPC’s chief before he became the country’s oil minister, Kachikwu, had set a December 2015 deadline for the refineries in Port Harcourt, Warri and Kaduna to become fully functional.
He had explained that this was needed to guarantee uninterrupted fuel supply in the country as well as minimise importation. Then, he was really confident that two of the refineries which he didn’t name then, would be re-streamed for production before the end of that month – December.

Shortly after Kachikwu’s statement then, an ex-Managing Director of NNPC’s subsidiary, the Pipelines and Products Marketing Company (PPMC), Esther Nnamdi-Ogbue, had disclosed to Nigerians that the refinery in Kaduna with a nameplate refining capacity of 110,000 barrels per day (bd) had restarted production after it was shut for months for repairs.
Nnamdi-Ogbue, had explained then that the refinery came back on ahead of the Kachikwu’s 90-day target for them to resume full production. The ultimatum was to end in December of that year, but Nnamdi-Ogbue, indicated Kaduna was primed to produce 1.6 million litres daily upon its resumption.

She also said other refineries would come back to production before the year ended, starting with the 210,000bd Port Harcourt refinery. However, by December 2015, the overall capacity utilisation of the refineries was according to the corporation’s reports, only 4.88 per cent, with its yield efficiency abysmal.

That same year, the best months for the refineries in terms of capacity utilisation was August, when they collectively did a 24.08 per cent capacity utilisation. The Kaduna refinery which came back within that 90-day revamp ultimatum was the poorest with 2.95 per cent capacity utilisation while Port Harcourt and Warri managed 4.62 and 7.01 per cent respectively.

To cap it up, they also recorded huge financial deficits in their operations of N1,940.12 billion in January; N5,768.40 billion in February; N2, 893.56 billion in March; N6,234.59 billion in April; N5,596.15 billion in May; N5,899.34 billion in June; N3,211.34 billion in July; N139.12 million in August; N8,841.63 billion September; N1,445.06 billion in October; N7,211.38 in November; and then N7,824.40 in December.

By January 2016, the NNPC announced its Port Harcourt and Kaduna refineries had been shut down because of breaches on their crude supply lines, it said the supply interruptions were huge setbacks to its plans for fully-operational refineries, and it would embark on a comprehensive rehabilitation of the refineries.

At that time, its spokesperson, Mr. Ndu Ughamadu, had said in a statement: “The plan for next year is to get the comprehensive rehabilitation programme done.”
The statement had quoted NNPC’S Chief Operating Officer, Refineries, Mr. Anibor Kragha, on this.
Again, all through 2016, the refineries from NNPC’s records did not fare any better with a paltry 5.08 per cent capacity utilisation – some 0.2 per cent changes.

They also did not produce in most part of the year and recorded financial deficits as well, such that by May 2017, Kachikwu, had in a BBC show, vowed to resign his post if Nigeria continued to import petrol by 2019.
“2019 is the target time… I target 2019. If I don’t achieve it, I will walk…I put the date and I will achieve it,” Kachikwu, was reported to have said then.

Refineries Still Unproductive
Despite the 90-day deadline; promises of revamp and even threats of resignation, nothing with regards to the reports of the NNPC has changed at the refineries which are still decrepit.
With a mild growth in capacity utilisation of 17.56 per cent in 2017 – representing the best so far in four years, and then a sharp drop to 8.02 per cent in 2018, the refineries have remained broken, to the disadvantage of the country’s national purse and efficiency as the nation continues to rely completely on imported petrol.

For 2017, the NNPC report showed that all through the year, the Warri refinery managed a 9.56 per cent capacity utilisation record; Port Harcourt made efforts with 24.14 per cent; while Kaduna recorded 14.10 per cent.

They still did not do so well financially, recording profits only in January – N3, 356.14 billion; March – N3,399.07; April – N1,577.79 billion; May – N2,678.88 billion; and June – N3,343.19 billion, and posting deficits of N522.82 million in February; N8,517.78 billion in July; N4,636.29 billion in August; N3,518.60 billion September; N7,762.25 billion in October; N11,144.81 billion in November; and N11,095.28 billion in December.

In 2018, when the refineries’ utilisation dropped to 8.02 per cent, they equally posted deficits of N13,586.11 billion in January; N8,055.05 billion in February; and N11,889.51 billion in March, before making a one-off profit of N6,321.63 billion in April, and then resumed its losses in May with a huge N20,081.80 billion deficits.

Similarly, in June, it recorded a deficit of N14,510.02 billion; N10,449.19 billion in July; N10,793.03 billion in August; N6,972.98 billion in September; N9,326.32 billion in October; N9,585.04 billion in November; before ending the year with another remarkable deficit of N17,317.03 billion in December.

Even as the year 2019 turned in, the refineries according to NNPC’s records equally started the year with a loss of N8, 362.02 billion, to underpin their inefficiency.
Again, with such inefficiencies, fixing the refineries have remained a tough call for the NNPC, with a couple of models suggested to address the situation.

The last model which would have had investors come in to finance the revamp under mutually agreed business terms failed after negotiations reportedly broke down between the corporation and the investors who were initially interested.
After the breakdown of negotiations, the NNPC then announced it would now use its own money and debt financing from the financial markets to fix the refineries, starting with Port Harcourt, followed by the Warri, and the Kaduna.

It had explained the new strategy would involve the original builders and would be in phases. At the end of the first phase, the NNPC explained the Port Harcourt refinery would hit a 60 per cent capacity utilisation level before shooting up to a minimum of 90 per cent upon the completion of the repair work.

It equally announced that Italian oil firm, Eni/NAOC was engaged as technical advisor for the exercise and disclosed the first phase would run for six months within which detailed integrity check and equipment inspection of the refinery would take place before JGC of Japan which built it and Tecnimont would be invited to undertake the repair on an Engineering Procurement Construction (EPC) basis.
But its optimism with the new model is rather cautious following Kachikwu’s disclosure that Nigeria would be hard-pressed to self-fund the repairs which he said would cost $2.5 billion.

Cost of Dilapidated Refineries
Due to their inability to function optimally, Nigeria through the NNPC have resorted to importation of petrol and other associate products to continue to run its economy, and this development in very simple description means the country relies solely on imported petrol which she also subsidises to operate. That, equally means she’s profoundly vulnerable to energy crisis.

For instance, in 2018, the NNPC indicated it imported 21,100,118,126.30 (21 billion) litres of petrol which translated to 57.8 million litres daily, into the country. In 2017, it said it was 14,430,373,377.03 (14 billion) litres; in 2016, it was 9,264,855,130.33 litres; while it was 6,179,719,852.27 litres in 2015. All these volumes were imported and not locally produced.

Again, because the volumes of petrol are all imported, it also implies the country outsources or exports jobs in its midstream oil industry to other countries where it buys its refined petroleum products from. This then means that her huge unemployed population are short-changed and impoverished.

Besides the conceivable job loss, and because the government subsidises petrol consumption, it also means scarce financial resources that should fund steady provision of socially-beneficial and optimal infrastructure like roads, hospitals and schools, are less and often cut down in the budget. It thus suggests the country struggles year-on-year with fixing her widening public infrastructure gap.
Furthermore, to underpin the import of leaving NNPC’s refineries decrepit, a recent report of the World Bank indicated that Nigeria spent N731 billion subsiding petrol consumption.

The report also said most of the petrol volume Nigeria spent money subsidising in 2018 were inflated as daily consumption rose to 54 million litres per day (ml/d) from 40ml/d in 2017, ostensibly due partly to out-smuggling.

It specifically said with regards to the country’s revenue from oil: “The oil revenues continue to underperform both relative to the budget targets and their realistic potential due to the unbudgeted fuel subsidy (Nigerian National Petroleum Corporation (NNPC) ‘cost under-recovery’), which amounted to N731 billion in 2018, among other discretionary deductions, and the dollar-naira conversion using an exchange rate lower than that prevailing in the convertible IEFX window.

“The NNPC financial reports indicate that about US$2 billion (equivalent to 0.6 per cent GDP) were deducted from the gross oil revenue prior to the transfer to the federation account for the unbudgeted fuel subsidy (‘cost under-recovery’).

“The calculations for the fuel subsidy are based on heavily inflated fuel consumption estimates, with the fiscally severely constrained Nigerian government effectively subsidising neighbouring countries’ petrol consumption as some of the fuel is informally re-exported through the porous borders.”