Evaluating Fresh Plan to Revive NNPC’s Refineries

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Mele Kyari
Mallam Mele Kyari

Chineme Okafor writes on recent plan by the Nigerian National Petroleum Corporation to repair its four decrepit refineries

The Group Managing Director of the NNPC, Mallam Mele Kyari, last week revealed that the corporation will spend money to repair its four broken-down refineries in Warri, Port Harcourt and Kaduna, after which it would hand them over to select Operation and Maintenance (O&M) experts to operate for it.

“We are going to get an O&M contract, NNPC won’t run it. We are going to get a firm that will guarantee that this plant would run for some time. We want to try a different model of getting this refinery to run. And we are going to apply this process for the running of the other two refineries,” Kyari said in a television interview. According to him, the ultimate plan would be to enlist private partners who would invest in the refineries and get them to run on the business model currently used by the Nigeria Liquefied Natural Gas (NLNG) Limited.

The NLNG is an incorporated limited liability company operated as a joint venture between four shareholders comprising the federal government which has 49 per cent of its shares, Shell – 25.6 per cent, Total Gaz Electricite Holdings France – 15 per cent and Eni – 10.4 per cent.

With the proposed model, Kyari inferred that the prospective shareholders of the refineries would thus be free to decide how the refineries operate. He also noted that the model being different from those previously adopted by the corporation will guarantee recovery of the refineries’ efficiencies.

But revamping and handing over the refineries to select O&M experts as disclosed by Kyari isn’t the first time the corporation would be making such plan. In fact, in most of the first term of President Muhammadu Buhari, the corporation and former Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, also made such pronouncements and failed with various options except privatisation or liberalisation to revamp the refineries.

The inefficiency of the refineries has resulted in Nigeria importing most of the petroleum products it uses to run her domestic economy, an unpleasant development that pushed Kachikwu to offer to resign his ministerial portfolio by May 2019 if Nigeria continued to import petrol.

NNPC also made effort to get private investors to fund the repair of the refineries on terms that would have been beneficial to both parties, but the arrangement collapsed eventually when they could not agree on terms.

A familiar pledge
In his early days in office, Kyari as it was with his two predecessors – Kachikwu and Maikanti Baru – had promised to repair the refineries. He stated that repair works on the refineries would begin in January of 2020 and completed in 2022, with their optimum production capacities restored. Then, he had said the full rehabilitation of the plants was a priority to the NNPC which was reportedly committed to the 2022 capacity recovery plan.

“We will stick to time; we will deliver this project by 2022. We will commence actual rehabilitation work in January. We will do everything possible between October and December to close out all necessary conditions for us to deliver on that project.

“I believe that with the support that we have from the shareholders – government of this country, the entire staff of this company and the contractors, I believe it is doable and we will deliver the project,” Kyari had promised. He had explained that contractors for the revamp programme which included the original builders of the refineries would be tasked with their commitment to the plan.

He said: “For the original builders of the refinery, Tecnimont, Eni/NAOC and NNPC, let us be conscious of the fact that our reputation is at stake as far as this project is concerned… the NNPC leadership has promised this country that our refineries will work, therefore, we must work not to disappoint over 200 million Nigerian stakeholders.”

Huge costs incurred on failed repairs
Beyond disappointing Nigeria which relies on imported petrol, the NNPC has also misused scarce financial resources in its failed repair of the refineries, reportedly spending a whopping $396.33 million between 2013 and 2017 to carryout repair works under the Turn Around Maintenance (TAM) scheme.

As was disclosed in a report of the Nigeria Natural Resource Charter (NNRC) which reviewed the operations of NNPC’s refineries from a cost perspective, efficiency and value for money, the corporation also spent N276.872 billion on the operating expenses of the refineries between 2015 and 2018, as well as $36 billion on petroleum products importation between 2013 and 2017

The NNRC implements the Natural Resource Charter (NRC) in Nigeria, which is a set of principles intended for use by governments, societies, and the international community to determine how best to manage natural resource wealth for the benefit of current and future generations of citizens. Its activities are equally funded by the United Kingdom.

It noted that the refineries of the NNPC contribute less than 10 per cent to Nigeria’s Gross Domestic Product (GDP) annually, in addition to being amongst the league of refineries with the highest operating costs worldwide.

While highlighting the socio-economic losses Nigeria endures from the dysfunctional refineries, the NNRC explained that the strategic goal of establishing local refining facilities and its associated supply chain as a socio-economic game-changer which results in national development has however continued to elude Nigeria.

It further explained the $36 billion the country spent on importing petroleum products in four years could have built for her four brand new refineries of similar capacity with the 650,000 barrels per day processing Dangote refinery in Lagos.

Nigeria, it added would have also been able to produce up to 200 million litres per day of fuel from these refineries if they had been built with the $36 billion spent for importation of petroleum products.
Additionally, the corporation’s monthly financial reports disclosed that between January and October 2019, the refineries recorded a cumulative loss of N123.25 billion while their capacity utilisation plunged.

The NNRC in its report on the refineries thus recommended that the federal government divest up to 75 per cent of its shareholding in NNPC’s refineries which have the capacity to refine 445,000 barrels of oil, to competent investors under a transparent and fair bidding process.

Funding planned repairs
Considering the existing oil market fundamentals and Kyari’s disclosure that the NNPC would fund the repairs and subsequently hand over the refineries to O&M experts, THISDAY spoke to industry experts such as the immediate past president of the Nigerian Association of Energy Economics (NAEE), Prof. Wumi Iledare for insights on how this could work.

“At the moment, I think NNPC is spending its money more or less to rehabilitate the refineries. Certainly, this is necessary, if the refineries are not to become a scrappage. As to where to find money under the current dispensation of Covid-19, the falling oil prices has negative implications.

“However, low oil prices imply elimination of under-recovery cost of PMS import, and perhaps over-recovery of PMS landing cost. The over-recovery could then be a legitimate money to rehabilitate the refineries,” Iledare explained.

He also warned against potential thoughts of getting foreigners to run the refineries after the repairs, saying: “Are you saying Nigerian engineers are incapable of running refineries? Who ran them before when they were newly built? Why are Nigerians running things effectively all over the world? Honestly, I ache when we disparage and ridicule our professionals.”

“Let me disagree with the premise that Nigeria cannot run refineries well. Who are the engineers running the petrochemical plants in Eleme? Who supervised the construction of this refineries and ran it at inception?”

“Perhaps, and I said it severally, could the failure of NNPC refineries be management capability and not technical? Could it be government failure because of political interference, patronage and sentiments? I am just sick and tired of undermining the brilliance of Nigerian professionals. Nigerians went to school with these people, perhaps, dusted them in class. They came back, you prefer the other.

“Even ordinary PIB, you prefer foreign opinions to what your competent experts say and 20 years later, there is no progress. Please don’t dispose NNPC of its priceless assets. Let the government hands off and not NNPC unless you are telling me NNPC is government. Government is just a mere investor,” Iledare added.
He noted that the refineries’ efficiency began to decline from 1995, but that the country needs to realise the need for prioritising competency in its national development plans.

“We have competent hands to turn things around. Give your competent people free hands to run things. Give the GMD the power to make commercial decisions with his team and staff. Get people with acumen, men and women of timber and calibre on NNPC board not based on unconstitutional geopolitical zones, ridden with godfatherism.The future is at stake,” Iledare stated.

Privatisation, liberalisation likely options
Based on the failures of the NNPC to successfully repair its refineries and the seeming lack of altruism in its running of them, others expert who spoke to THISDAY suggested that the adoption of privatision or liberalisation to revive the refineries.

According to them, a template used previously by the Bureau of Public Enterprises (BPE) for the refineries’ privatisation which late President Umar Yar’Adua annulled could be culled up and refitted for this purpose.
Yar’Adua in 2007 reportedly reversed the sale of Port Harcourt and Kaduna refineries to Mr. Aliko Dangote who was said to have assembled investors to completely turn around the plants and their operations.

Accordingly, the reversal was based on claims that the process did not follow due processes and Yar’Adua who promised to follow through rule of law had to refund the preferred investors the money paid for the acquisition.

In his comment on the possibility of privatisation as a solution, Mr. Dan Kunle, an expert in global energy business stated that the National Council on Privatisation (NCP) and BPE could still be called back to revive the rested privatisation exercise on the refineries.

Kunle explained that the NCP and BPE have established template for the refineries’ privatisaton which could be reviewed and adapted to fit their current situation.

He maintained that the capacity of the BPE to undertake a transparent privatisation excerise in this regards was doubtless, adding that the bureau in the canceled privatisation was consistent and followed standard procedures which included the engagement of a globally recognised transaction adviser, Credit Suisse.

Kunle equally explained that it could be difficult for the NNPC to come up with the funds needed for the repairs, in addition to the possibilities of challenges concluding the Engineering Procurement and Construction (EPC) contract on time and in line with its 2022 delivery timeline.

“If at all the corporation decides to go ahead with its plan, it is already running against time especially with the Covid-19 situation where the world is currently locked down. It will take at least six months for it to conclude and hire EPC contractors for this even if it has the money which I think will be hard to come by,” he said while urging the corporation to team up with the BPE to revive the efficiency of the refineries through privatisation.

“Government is a continuum, and the NCP and BPE are part of the government; they are responsible for privatisation and liberalisation which are aimed at engendering optimum efficiency. Let the minister and NCP sit down on a table to draw up a solution; privatization is an option,” Kunle noted.