Appropriate price for petrol, modular refineries in N-Delta and illegal refiners’ fears

No Comments » May 7th, 2017 posted by // Categories: Nigeriawatch


Appropriate price for petrol, modular refineries in N-Delta and illegal refiners’ fears

By Michael Eboh

With the ongoing review of the petrol pricing template, hope seems to be on the horizon for the reactivation of the numerous refinery projects that had been stalled across the country, while also boosting the country’s modular refineries programme to support existing refineries.

If done judiciously, it is expected that the review would not only encourage oil marketers to resume importation, but would also bring about increased interests in investments in refineries, both conventional and modular.

The Federal Government is seeking to encourage investors, both local and foreign, to build modular refineries in the country to boost local production of PMS, therefore, putting an end to importation of the commodity.

This is under the planned refineries co-location arrangement, modular refineries initiative and the appeal to international oil companies and foreign investors to participate in crude oil refining in Nigeria.

The Department of Petroleum Resources, DPR, had, almost a decade ago, awarded licenses to a number of investors to build refineries, both modular and conventional. Years after the award of the licenses, only one modular refinery had been built. The refinery, producing only diesel, was built by Niger Delta Petroleum Resources.

The investors, who were awarded licenses to build refineries, had, over the years, cited the non-deregulation of the downstream sector as the major reason for their inability to invest in the building of refineries in Nigeria.

They argued that it would be difficult and near impossible to recoup their investments in the refineries with the current state of things in the downstream petroleum sector.

They called on the Federal Government to fully deregulate the sector and allow market forces determine the prices of petroleum products.

As if responding to the demands of the operators, Minister of State for Petroleum, Dr Ibe Kachikwu, in a podcast released few days ago, said the Federal Government is gradually inching towards total deregulation of the downstream petroleum sector and is starting with the review of the existing PMS pricing template

Though the original aim was to effect a reduction in the cost components of PMS, bring about a reduction in the price of the commodity and increase in the profit margin, so that oil marketers can resume importation, it is also expected to work in favour of the planned modular refineries initiative.

The Minister disclosed that in the long run, the Nigerian National Petroleum Corporation, NNPC, would be made to reduce its presence in the country’s petroleum downstream sector because of the cost on its books, adding that the NNPC would have to begin to operate as a profit entity.

If this happens, the burden of fuel import would fall on oil marketers and the need for increased local refining would become very critical.

Before that happens, he noted that the Federal Government is undertaking a review of the pricing template to remove several multi-layered charges and costs that affect the pump price of petrol at retail stations.

According to him, due to the rising cost of PMS, a number of oil marketers had stopped importing the commodity, leaving the NNPC as the major importer of majority of the product into the country.

He said, “The environment has since changed. When we did the price review in 2016, pricing for crude oil was more in the $25 to $30 per barrel; today, it is in excess of $54, which is fantastic because it means that our revenue stream is improving.

“But, it is a twin window, whenever the price of crude goes up, obviously the price of refined petrol goes up and we begin to have systemic challenge in terms of the pricing on the local base. So that gap has begun to return and today what you find is that the NNPC continues to import massively on behalf of the Federal Government. It has gone back to about 90-95 per cent for the whole country and therefore its books are absorbing some of the cost implications of this.

“The second is that once this happens the marketers begin to shift backwards. Participation by individual marketers to help us continue the normal business and marketing cycle that should be what you expect is no longer existing. Most of them are not importing.”

Continuing, he said, “One of the things we are doing is that we are looking at our existing template position, and what we are doing with that is first addressing some of the soft ends of things that affect pricing.

“We are removing too many multi-layered charges on importation. We are working with the ministry of transport to reduce those to what was initially approved by the president, and as such, we should take away a good chunk of the expenses. We are working to see how the Central Bank of Nigeria, CBN, can provide us with a fairly subsidised foreign exchange, FX, for products priced in dollars.”

Kachikwu stated through serious efforts since the advent of the current administration, it had moved the downstream petroleum industry from a fully subsidy based sector to a partially liberalised sector.

In support of this, in their report titled: ‘The Bottom-up Revolution,’ analysts at Pricewaterhouse Coopers (PWC) stated that the plans by the current administration to upgrade existing refineries and the issuance of 25 refining licenses, if executed rigorously, would drive growth and reforms within the petroleum sector in the medium to long term.

The analysts are Mr. Olumide Adeosun, Associate Director & Head, Capital Projects and Infrastructure Advisory Practice, PwC Nigeria and Mr. Ayodele Oluleye, Consultant, PwC Nigeria’s advisory practice.

According to the report, the combined capacity of the 25 potential refineries stands at approximately 1.6 million barrels per day, with three of the licensed companies billed to construct conventional stick-build plants with capacity estimated at over 850,000 barrels per day (bpd), while 22 licenses are to construct modular units estimated at about 700,000 barrels per day in combined capacity.

They argued that the outlook for refining in Nigeria has been tainted with uncertainty due to the adverse effects of subsidies, poor maintenance, general operational failure and inconsistent supply of feedstock, adding that as a case in point, Nigeria’s per capita refining capacity is 0.002bpd/capita.

However, they stated that recent policy leanings and events such as advancement of the Nigerian National Petroleum Policy, coupled with the sustained depression in crude oil prices are ushering in fresh waves of optimism for the sector, while they projected a paradigm shift for the country from a net imports to net exports structure.

Furthermore, in their own report obtained by Sunday Vanguard, titled, ‘Modular Refineries: A Short-Term Solution to Boost Nigeria’s Energy Needs and the Naira,’ Energy analysts at Detail Commercial Solicitors maintained that challenges facing the development of modular refineries in Nigeria are not insurmountable.

According to the analysts, once the appropriate conditions and enabling environment are implemented, it is firmly believed that there would be significant investments in modular refineries.

They said, “Despite the gloomy statistics on oil prices in the international market, Nigeria has the ready market to absorb the supply based on several factors — large population of over one hundred and eighty three million, and the consequential energy needs of Nigeria, ranging from transportation to power generation.

“All things being equal, an increase in the supply of refined products in Nigeria will put less pressure on the foreign reserves and ultimately boost the Naira.”

To show its commitment to the modular refineries initiative, the Federal Government had a couple of days ago, promised to build modular refineries in all the oil producing communities in the country.

Vice President Yemi Osinbajo, who made the promise, said the President Muhammadu Buhari administration was determined to ensure that those who are from oil producing areas of the country are able to see and benefit from the natural resources from their area.

He said that it was regrettable that the communities which produce oil from where the country earns its greater revenue, that such benefits are not reflected.

Furthermore, few days later, the Federal Government also stated that it is not going back on its plans for illegal crude oil refiners in the Niger Delta, declaring that it was working assiduously to ensure that the initiative it is designing for the illegal refiners comes to fruition.

Kachikwu, who disclosed this, stated that the Federal Government was committed to the initiative it is pursuing to incorporate the illegal refiners into the new modular refineries scheme.

He said that already, the Federal Government had in the past few weeks, commenced open and constructive discussions with some of the illegal refiners, adding that the government is assiduously working to ensure that this initiative is carefully implemented without any hindrance. As a result of the various promises and plans by the Federal Government, a number of groups had indicated their willingness to partner with the government in setting up modular refineries.

One of such groups is the Host Communities of Nigeria Producing Oil and Gas, HostCom, which stated that it had entered into an agreement with a number of foreign investors from Germany, United States of America among others, to build 10 modular refineries in Nigeria.

This, the group said, was an improvement on its initial plan to build a single modular refinery in one of the oil-producing states.

National Chairman of HostCom, Mr. Mike Emuh, said that funding for the 10 modular refineries would be provided solely by the foreign investors, while the refineries would be constructed in all oil-producing states.

He blamed the delay in the commencement of the project on issues surrounding licensing and cost and sources of crude oil supply to the refineries.

To this end, he said, “We are, therefore, calling on the Federal Government to grant our foreign partners licenses and all necessary cooperation for the smooth take off of these modular refineries that will be financed wholly by our foreign partners.”

Sensing the silver lining in the horizon, some other oil producing communities, groups and investors had indicated their readiness to partake in this initiative.

With this current tempo and upsurge in interests, it behoves the Federal Government to back its commitment with necessary actions and provide the enabling environment that would spur further and genuine investments in the building of modular refineries.

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