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Published On: Thu, Oct 30th, 2014

Night is arriving in Nigeria

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It took another eight to nine years before the Warri and Kaduna Refineries were commissioned (within a year of each other) with capacities of 125,000 bpd and 110,000 bpd respectively, coinciding with the 1979/80 upstream production peak. Production was again on the upsurge when the most modern of the three refineries was commissioned in Port Harcourt in 1989 with a capacity of I50, 000 bpd. The timing of these investments was very significant as they coincided with major increases in crude oil revenue accruing to the Federation. It was the Government’s intention to plough back revenue surpluses in order to further add value, cater for domestic needs and conserve foreign exchange. In 1988 there was the addition of a polypropylene and carbon black unit in Warri and a linear Alkyl Benzene unit in Kaduna.

The problem for Nigeria is that these refineries barely function; refining less than 24% of their capacity if they work at all. They are aged and decrepit and in desperate need of maintenance. Vast sums have been spent on maintaining them but they still do not function although the contracting maintenance companies have done rather well out of these maintenance contracts. It defies belief but the Kaduna Refinery was designed to handle much heavier crude than is produced in Nigeria. For years the refinery has actually imported large quantities of suitable paraffinic based crude oil from Venezuela, Kuwait, Oman or Saudi Arabia to be refined in Nigeria

Periodically, as political pressures increased new refinery tenders were issued. The local Nigerian companies who won the tenders for this could not attract overseas firms willing to co-operate with them, nor have they been able to raise the capital needed to perform these tasks. These provisional licenses to establish private refineries were awarded in 2002. There were eighteen indigenous oil companies awarded these but none of them were able to get foreign technical partners and the required funding for the projects. These licenses were removed. There have been several repeated failures to build new refineries or maintain the old. That is why the Nigerian Government has adopted a different method of obtaining refined products.

In 2009 and some of 2010 these refineries operated at their lowest levels of between 0 and 30 per cent of capacity, and led to the country importing about 85 per cent of its fuel needs. By early 2011, operational capacity increased slightly but the country still required product imports to meet domestic demand. So, in its wisdom, the government said that they estimated the domestic market required the refining of 445,000 barrels a day of crude to supply the local market. They would deliver these barrels of oil at the domestic price for crude to major international companies like Trafigura and Glencore who would export the crude oil from Nigeria and import the refined products back to the country. This was arranged by the Oil Minister, President Obasanjo who was doubling up his roles in defiance of a Constitutional inhibition on holding two office of state.

When these refined products reach Nigeria they were handled by local oil traders. The list of these traders is very revealing; as a substantial number are linked to ex-Presidents Babangida and Obasanjo or their immediate circle. Obasanjo didn’t waste his time in immersing himself in that part of the industry. His son and the sons of some of the other politicos operated the fuel import business into Nigeria. To assist them the government paid the local traders a subsidy, a ‘fuel subsidy’ to keep the market price down for local consumers. These were substantial sums.

This was a high reward for keeping the price subsidised; in recent years the range has been 400% to 550%. When the government tried to remove the subsidy from the fuel this would have made the heavy extra payments the responsibility of the consumers, not the government and has been a bone of contention on a regular basis. As recent parliamentary report showed that in the last two years the oil traders had siphoned off US$6.8 billion for fuels they supplied and often didn’t supply to the market. What the National Assembly overlooked is that the Nigerian government ships barrels of oil to be refined for the Nigerian markets and imports PMS (motor spirit) diesel and kerosene back to Nigeria at prices equivalent to world market levels. What is missing from the accounts is the rest of the barrel.

Oil refining means using a fractional distillation column to refine different types of oil products based on their boiling point. So, if the traders bring back to Nigeria the gas oil, gasoline and kerosene, what happens with the remaining parts of the refined oil products? If the crude oil exports of the 445,000 barrels a day are only bringing back to Nigeria the PMS, kerosene and diesel, where is the value for the rest of the barrel? Who has the money for the butane, propane, residual oils, asphaltenes, etc. which are an inevitable result of the refining process? These favoured exporters of oil not able to be refined in Nigeria are getting the oil at source at a considerable discount. Including shipping costs to the US Gulf the net cost is under $30.00 a barrel. They are shipping back PMS, kerosene and diesel at the world price for these products. Right now the price of fuel in Nigeria is more than the price of similar fuel in Texas made from Nigerian crude. The sale of the rest of the barrel is not being returned to Nigeria as cash or additional product. As these represent, even with the best of cuts of the fractioning column, slightly more than half of the value of the barrel this is a tidy profit for those who are in the subsidy business. As this crude no longer goes to the U.S. the traders are looking for other co-operative refineries. These sums have never been accounted for to the Nigerian people.

The shift in Nigeria’s oil revenue from the U.S. to Asia will be sustained for a while, but at the lower price of crude of today’s market. However, as the U.S. begins to export its crude worldwide (the U.S. is a lot closer to China and Korea than Nigeria is) and East African plays come on stream Nigerian oil will come under severe pressure. The Ebola epidemic is likely to delay the expansion of oil developments in places like Liberia, Guinea, Sierra Leone, Ivory Coast and Ghana as it will be difficult to recruit enough workers willing to go to these areas until the epidemic is controlled. That might give Nigeria some breathing space.

However, it is clear that night is falling on Nigeria. It has failed to use its treasure to build an infrastructure (roads, schools, houses, electrical power, refining) so desperately needed when it had money; or diversified its economy to include agriculture, mining and processing of it many minerals. How it will do so when money is short is a big question. The rentiers of Nigeria’s wealth are buying up properties all over the world, especially in London. They know when it will be time to get out. The key to Nigeria’s lack of preparedness has been the impunity in which these rentiers operate. Until now there have been few consequences for bad behaviour and corruption. Unfortunately as the economy contracts, the innocent will suffer with the guilty.

Dr. Gary K. Busch @Ocnus.net

 

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