Nigerian goverment boosts refining capacity by increasing involvement of private sector actors

When President Muhammadu Buhari took office in 2015, he pledged to increase the country’s crude oil refining capacity, fix state facilities and put an end to expensive fuel imports. The effort to address refining is ongoing; however, as more businesses enter the market, progress on these issues could make private sector involvement a crucial factor, with a number of collaborative plans seeing progress on the issue. As of February 2017 there were already a handful of private sector refinery projects in the works – enough to add 400,000 barrels per day (bpd) by February 2019, and a total of 1.24m bpd by 2023. First and foremost among these projects is the plan by Dangote Industries to build one of the world’s largest refineries, with a capacity of 650,000 bpd, in a free zone near Lagos.

Challenges

While the NNPC estimates domestic refining capacity at 445,000 bpd, BP has calculated the figure closer to 345,000 bpd due to the condition at the state’s four facilities. Capacity utilisation was at 5.9% in 2017, with facilities either chronically underused or not functioning at all. According to Diezani Alison-Madueke, the former minister of petroleum resources, the current state of Nigeria’s refineries is due to years of neglect, with some facilities going 20 years without any repairs or upkeep, leading to questions of whether repairing or refurbishing the facilities was even possible. Adding to the problem is the state’s insistence on keeping prices for consumer fuels below market value through subsidies (see analysis). While such policies are popular with the public, they cause the twin problem of straining state coffers and disincentivising investment. Damaged sustained by the network of pipelines, either by militant groups or neglect, also contributes to logistical challenges.

Changing Direction

Having tried in the past to privatise refineries, including a plan in the 2000s to sell one to Dangote, state officials have realised that facilities would most likely sell for no more than the salvage value. This has led Abuja to embrace a different strategy, where both foreign and domestic investors work on a performance-based model. Under such a system, companies would then be paid via the offtake of refined products rather than cash.

The scheme has garnered interest from multiple private industry players. The consortium contracted to perform the work at the refineries in Warri and Kaduna includes Vitol, the world’s largest oil trader; Italian engineering firm Saipem; and US conglomerate General Electric. Other firms include Sahara Group and MRS Oil Nigeria, which are two domestic firm that have previously worked importing refined products. For the two facilities at Port Harcourt, consortium members include Geneva-headquartered commodity trading company Trafigura, Italian integrated oil company Eni, Spanish refiner Cepsa and Nigeria’s Oando, an energy company which has at various times held assets at most points from upstream to downstream.

Terms have yet to be finalised and published, but Maikanti Baru, group managing director at NNPC, told industry media in January 2018 that the projects would require around $700m in state spending, while Emmanuel Ibe Kachikwu, the minster of state for petroleum resources, estimated that the figure was closer $1.2bn. While their projections for project costs varied, both said the solution is expected to end the country’s reliance on imported fuels by 2019.

Dangote Project

While Dangote’s large-scale refinery project is expected to provide the lion’s share of added capacity, a number of issues have caused delays. For example, the facility was scheduled to come on-line in 2019; however, as of mid-2018 the completion date remained unclear, with CITAC, a consultancy specialising in downstream energy in Africa, estimating the facility’s inauguration could be pushed back to 2022. One question about the project’s progress relates to the extent to which piling at the site has been completed – a procedure necessary to provide a solid foundation at the site’s swampy ground. Company officials denied local media statements alleging that piling work was incomplete as of August 2018, confirming that 95% of engineering works and 90% of procurement had been completed. On September 25, 2018 the first ship docked at the refinery’s jetty, delivering equipment for installation.

When it does open, the project will be transformative for both Dangote and Nigeria. With a capacity of 650,000 bpd, the facility will be the largest in sub-Saharan Africa and should be able to satisfy all domestic consumer fuels demand, with more than half left over for export. The project is part of an broader industrial complex that will also produce fertilisers and petrochemicals. Total costs were initially estimated at $10bn, however, more recent forecasts put the figure at between $12bn and $14bn.

The refinery itself is a single-train facility, meaning it has one production line, and some critics have pointed out that unlike refineries with multiple trains, any interruption in operations would cut all output.

While it has long been assumed that Dangote would sign a long-term supply contract with the NNPC to buy domestic crude for the facility, the refinery could potentially also use imported feedstock. Refineries typically blend different types of crude in order to find the right technical fit for their facilities, and that could result in Dangote buying between 50,000 and 100,000 bpd of Nigerian crude to mix with imports – a typical use for Nigerian crude in global refineries.

Dangote is expected to contribute 60% of the cost from his own resources and secure the remaining balance from a mix of commercial loans, global credit agencies and development banks. The International Finance Corporation, the private sector arm of the World Bank, for example, is expected to lend $150m. As of July 2018 Dangote had reportedly raised $4.5bn.

Thinking Small

While the NNPC has issued a number of licences to investors to build smaller refineries, none have been at a large enough scale to make a significant dent in the fuels market. However, this looks set to change as recent proposals from private investors appear to be making progress for smaller facilities. Minister Kachikwu told local media in April 2018 that the government had issued 38 licences for modular refineries to operate in the Nigerian Delta region, of which 10 facilities were under construction.

One such project commissioned by Omsa Pillar Astex will see two modular refineries completed by December 2018. The facility will be shipped in parts and assembled on site, removing the need to design and build from scratch. The refineries aim to start with a capacity of 7000 bpd to be expanded to 61,000 bpd. Another small-scale project is the Azikel Petroleum hydro-skimming refinery in Bayelsa State in the country’s south-east. The refinery will have a capacity of 12,000 bpd and is scheduled to come on-line in 2019.

Sizing Up

Larger project proposals have tended to come from the state rather than private investors. In 2016, for example, the NNPC signed a memorandum of understanding with UK firm Savannah Petroleum to receive crude from its Agadem block in neighbouring Niger to be refined in a 150,000-bpd facility in Katsina in northern Nigeria. The idea to build in Katsina grew out of an original proposal to develop a pipeline from Niger’s fields to the existing NNPC refinery in Kaduna; however, that facility is geared to process different grades of crude. Savannah Petroleum is also in the process of completing an acquisition of Nigeria’s Seven Energy, an indigenous energy company with interests in oil, gas and midstream infrastructure.

Other state initiatives will see the NNPC is working with Italy’s Eni to develop a 150,000-bpd facility in the Niger Delta region, while feasibility studies were completed in early 2018 by the NNPC and UK-headquartered Wood Mackenzie for four greenfield refinery projects in Lagos, Bayelsa and Kogi.

With the number of projects under development, it is likely that Nigeria will be able to improve its capacity to refine petroleum products in the near to medium terms, reduce its dependency on expensive imports and improve the government’s overall fiscal position.

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The Report: Nigeria 2019

Energy chapter from The Report: Nigeria 2019

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