Downstream Oil Sector and the Dangote Factor

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Timipre Sylva

Business/Economy

The downstream end of Nigeria oil and gas industry has gone through various reforms these past two decades. The last, but on-going is the crude swap and its full support for the 20,000bpd refinery in Niger Republic; as the guaranteed off -taker. The objective is to assist with distribution of petrochemical products in the Northern region. If Nigerian government can play off taker for such a small refinery to boost importation of fuel and other products to the North, surely it can do same to the modular refineries springing up in different parts of the country. Most of all, at 650kbpd, the Dangote refinery is well placed to satisfy the petrochemical needs of the country, while the government prepares Nigeria’s four refineries for 2023. Chris Paul writes

Before you begin to conjecture this as promoting Dangote Refinery, let me quickly disabuse your mind from such thought. Rather, this is a serious conversation about a commodity that has risen above every commercial consideration to the realm of life and death for Nigerians and their nation’s economy at large.

It is a commonsensical argument about what makes sense and what should in other climes of noble and sincere elite, be a given rationale for making life better for the people. It is essentially a discourse on why, without a doubt, Nigerians now have more than ever before the opportunity to buy a litre of petrol at less than N50.

As a former President of Nigerian Chamber of Commerce, Industry, Manufacturing and Agriculture (NACIMA), John Isemede, told THISDAY, it is easier to refine a barrel of crude than to brew a bottle of beer. This is demonstrated in the Niger Delta Creeks with the youth bursting pipelines to steal crude oil which they process into many derivatives.

If you remember that over five decades ago, during the civil war, the Biafran side ran locally-made refineries, relate them to what the Niger Delta boys are doing today, which some of the bigger players would induce government to describe as illegal refineries, then you will agree with Isemede that, indeed, it should be easier for Nigeria to refine her crude without any foreign support.

Regardless of the spurious argument or fraudulent technical claims the managers or technocrat have thrown at us, the logic here is this: Nigeria has crude; the kind that is much sought after. So, as she had done, in the past, according to a former Petroleum Minister, the late Prof. Tam David West, when the nation was almost getting close to fuel scarcity, she enlisted the International Oil Companies (IOCs) to take Nigeria’s crude to refineries abroad in return for refined products. The IOCs would supply the needs of the country, sell the extra and dutifully remit the proceeds to the federation account. This processing arrangement, as it was called back then, happened under Major-General Muhammadu Buhari’s watch, as a military head of state.

A similar arrangement was introduced in 2016/17 and it was referred to as crude swap but known as Direct Sale of Crude Oil and Direct Purchase. The difference between the model David-West superintended upon and the one today’s NNPC adopted, is that rather than deal with the IOCs, the national oil company chose to deal with independent marketers.

Thus in compliance with the Public Procurement Act 2007 and Nigerian National Petroleum Corporation (NNPC)’s Policy and Procedures, NNPC engaged qualified and credible companies in a Direct Sale of Crude Oil and Direct Purchase of Petroleum Product (DSDP), to ensure sustained product supply in the country.

A brief description of DSDP scope shows that NNPC delivers monthly crude oil lifting on Free on Board (FOB) basis to its suppliers who, in return, deliver petroleum products of Nigerian standard specification to NNPC, on Delivered at Place (DAP) basis at designated safe port (s) in Nigeria. The petroleum products to be delivered is the equivalent in value to the Crude Oil received from NNPC subject to the general terms and conditions as would be advised to successful companies subsequently via Term Sheet (TS).

Although, the oil-swap deals provided virtually all Nigeria’s gasoline and some of the diesel and jet fuel, it was introduced to replace the failed methods Nigeria applied to meet its domestic fuel needs in the last decade.

First, is the NNPC refines crude oil at its three refineries and sells most of the output to privately owned fuel marketing companies. Paltry amounts are sold through NNPC’s network of retail filling stations. Through, its subsidiary, PPMC, the NNPC also imported products using fuel marketers.

Second, the fuel marketers deliver the products to PPMC and are given cash in exchange (called “open account” imports). The open accounts method was stopped in 2011 after the process was marred by massive corruption that suddenly shot to trillions of naira.

The third method involved private marketers importing products with permits issued by the Petroleum Product Pricing and Regulatory Authority (PPPRA) and selling them to a range of wholesale and retail buyers.

Finally, NNPC imports and sells products through swap deals in which crude oil is exchanged directly for refined petroleum products. Since the open account system was stopped, Swaps helped the country maintain the flow of fuel into filling stations across the States. However, experts expressed reservations about the probity of the swap deals as many believe the swap deals were not properly structured, monitored and audited.

This option was so good; NNPC announced a 6-month extension of its contracts with private oil firms to swap crude oil for fuel.

The affected oil companies, according to a media report from Reuters, renegotiated the price agreement due to changes that were made in the prices of petrol in the country.

The initial 1-year oil swap contracts to exchange over 300,000 barrels of crude oil per day with 15 company groupings expired in October 2020. The swap deal with these companies supplied a huge portion of Nigeria’s petroleum products which included fuel, diesel and jet fuel, as it had not been profitable for private oil companies to import fuel into the country. And this had prompted NNPC to be the sole importer of fuel for quite a while.

Introduced in 2016 to replace the programme, which at that time, gulped trillions of naira in subsidy payments to importers, most of whom declared fake product delivery papers, the scheme involved about 34 companies under a total of 15 groupings to carry out a swap deal for the supply of refined fuel in exchange of crude oil, as NNPC contractors.

Barely five weeks, the government had expressed its satisfaction with what the policy had achieved for the country, when, in October, it announced that plans were underway to end the oil-for-fuel swap system in the nearest future.

At a virtual conference at the African Refiners & Distributors Association annual conference, NNPC Group Managing Director, Mele Kyari, informed his audience about a plan to end the country’s oil-for-fuel swap system which had saved the country US$1billion a year, as soon as local refining capacity improves by 2023.

The government has been assisting the private sector to develop modular refineries, and a few private refineries are expected to come on stream soon. Such as a 100,000-barrel capacity refinery located near Port Harcourt, the Niger Delta Petroleum refinery in Delta state and six modular refineries. The country is also patiently awaiting Dangote’s 650,000 barrels per day capacity refinery.

The NNPC MD also noted that he expected NNPC’s refineries to be fully revamped and running again by 2023 through partnership with private companies.

Due to countless years of underinvestment and poor maintenance and despite continuous talk of revamping the refineries, in 2019, the combined capacity utilisation of Nigerian refineries fell to 2.5%, an all-time low annual activity level since 1998 when NNPC started providing the data.

All the talk about revamping, resuscitating or resurrecting the dead refineries has been the mantra successive governments have been mouthing since 2000 when the nation resumed this democratic journey. Yet, 20 years down the line, there is nothing to show for it. And from the body language of the relevant regulatory agencies it does not seem that promise will ever come to past.

It was this type of promise that got the former Minister of Petroleum Resources and University teacher, Prof. Tam David West, outraged when in an interviewed published in the 12 November 2019 edition of the Guardian online, the one-time minister accused the immediate past Minister of State, Petroleum Resources, Dr. Ibe Kachuwu, of being economical with the true state of the refineries:

“It is scandalous to hear Dr. Ibe Kachukwu saying all the refineries would be ready by next year. You can’t make statements like a magician. Nigeria has no business importing fuel. There are two questions: Should there be subsidy or should there be no subsidy? My answer is capital no! If you go through the racket, I will tell you why subsidy is nothing but fraud. It is not just one-man business; there are many interests involved in the fraud. When former President Goodluck Jonathan set up the Subsidy Investigation Panel and I was invited, I got my facts ready that there should not be any subsidy. The time I wanted to present my facts at the panel, Jonathan said they shouldn’t allow me,” David-West said.

Another source of David-West’s anger against government is the argument offered in favour of fuel subsidy; “How about the argument that subsidy is benefitting the rich and not the poor? Faulty logic.That’s what the finance minister said. I call it convoluted logic! So, if you say the subsidy exists according to you and you meant it for the common man and it’s not going to the common man… so, when you remove it, how will he get it? Convoluted logic! The President (Goodluck Jonathan) said it that if you remove fuel subsidy, we will build more refineries. So, you kill us first before you build your refineries… when you remove subsidy, prices of everything in the country will increase,” he concluded.

If he could say that about the former coordinating minister in the past administration, what would he have said to the current argument, by the government led by the same Buhari; that Nigeria has the cheapest fuel in the world; either the usually emotional academic will explode into uncontrollable tears or laughter.

Not a few industry insiders noted that the government had supported Dangote refinery so much that it would make no sense revamping the existing refineries at huge costs.

With Dangote Refinery expected to commence operations within the timeline with a capacity of 650,000 barrels per day of crude oil, Nigeria’s existing refineries may cease to operate having continued to record huge deficit over the years. According to the public statement by the group, the integrated refinery and petrochemical project had reached 80 per cent completion, covering engineering, design as well as procurements.

The Nigerian refinery utilisation rate, for more than five years, has been below 30 per cent, with a remarkable drop in the past three years when any month above a five per cent utilisation rate might be considered a successful one.

With a cumulative plant capacity of 445,000 barrels per day, the facilities posted a capacity utilization of zero per cent all through the 13-month period. In other words, Nigerians are to believe that for every day, through all of 13 months, the four refineries were fed with their due ration of crude oil feedstock which amounted to the four facilities’ combined capacity of 445kbpd. However, the volume of crude they recorded as closing stock between August 2019 and August 2020 was 3.78 million metric tonnes. Yet, according to the NNPC’s Monthly report for August 2020, the volume of crude processed by the facilities from August 2019 to August 2020 was at zero metric tonnes and no one was queried or fired!

Kyari said the vision of revamping the pipelines is in tandem with the Refineries Rehabilitation Project, “Which we have promised to deliver by 2023. I am happy to announce that the funding challenge, which had stalled the second phase of the rehabilitation of the Port Harcourt Refinery, has been resolved. The contract for the second phase will soon be awarded and work will commence in Q1 of 2021.” From his statement, the GMD is saying the first phase of the refineries rehabilitation had been done and the refinery should be performing at 60% capacity and with the good news- that the funding challenged for the second phase of the repair has been resolved, the PH refinery should be working at a full capacity by the end of 2021 or early 2022. Let all who know, please note this and hope Kyari would prove skeptics wrong and deliver on his word. If he does, he would have convinced critics that, unlike his predecessors, who made promises to repair the refineries a sing-song for them to give sound bite to the press; he is different and a man of his word.

It was reported that those, who built the PHRC were invited at the outset of this administration but the perception is that the government does not want the refineries to work. Having supported the Dangote refinery to a level that it would become counter-productive to spend so much on the inefficient local refineries.

Most industry players also believe the upcoming Dangote Refinery will solve the problem of production in existing refineries, adding that despite the costs incurred from maintenance and recently, rehabilitation, the refineries are still not working. But how does Dangote refinery solve the problem when the Minister of Finance, Budget and National Planning, Zainab Ahmed, said the refinery will be selling fuel to Nigerians-in Nigeria, where it is operating from, at international price!

Where things stand now, for Nigeria and Nigerians, is that both the national and individual Nigerian life are powered by fuel among other petroleum products.

So, it should not matter where government gets it, at the cheapest price, so Nigerians can get the product at a comfortably affordable rate. That is why the Niger refinery may not be so upsetting when one considers its proximity to the Northern part of the country.

Secondly, in the face of the confusion and cacophony being created by government’s policies, distraction and direction, the silence of Chairman of the Dangote Group, which owns the refinery, Aliko Dangote, is deafening. As a business man, he should be worried that after the government has stopped its importation of fuel, it is not talking to his management fill the gap, which his refinery can do adequately.

The third point is that there is nothing stopping Nigerian government (save for the convoluted logic, David-West accuses them off when they want to deceive the people) from giving Dangote and the other modular refineries, crude oil at little or no cost so government can influence the price of the product downward so Nigerians can buy at an affordable rate.

As far as Nigerians are concerned, the managers of the nation’s oil and gas industry have succeeded in shielding the business from the knowledge of Nigerians, without consequence and so whether the refineries are working or cease to exist, Nigerians it appears could care less. All they care for now is that they want to buy fuel at the less than N50, which the late David-West told them when he was campaigning for his friend and one time boss, Buhari.

Nigerians are not daft, they know and understand all that is going on but decide to keep their peace for now. They know that, for a product that holds the nation by the jugular, even if government has to surrender her domestic portion for free in return for Premium Motor Spirit (PMS) and other petroleum products, it is not a feat that is beyond government.

After all, the same government is still running the crude oil swap, on the Direct Sale, Direct Purchase (DSDP) platform and since the idea is to save the country the logistics cost of freight, transportation and storage and possible demurrage importing from overseas. The Dangote Refinery and the other modular refineries located in strategic regions in the country should attract government’s attention and subsequent partnership to make the products available and affordable for Nigerians.