Refinery Rehab: NNPC satisfies all stakeholder demands

The eventual activation of processes for rehabilitation of the nation’s three refineries by the Nigerian National Petroleum Corporation (NNPC) has proven to be one of the most transparent and credible contracting process on the facilities since 1999.

However, despite crossing on the conditions laid by industry and social stakeholders in the process, the $1.5 billion initial contracts for rehabilitation and upgrade of the Port Harcourt Refinery did not escape public analyses, especially given the corporation’s legend of turn-around maintenance programmes and the associated controversies about poor outcomes.

A source at the refinery told Oracle Intelligence on phone that the work is designed to entail a default upgrade, explaining that new spare parts expected from the original plant manufacturers would mean that the old plants would undergo significant modernization.

The 24 month rehabilitation programme which begins with the double plant 210,000 barrels per day Port Harcourt Refinery is scheduled in phases that include subsequent revamp of the 125,000 barrels per day Warri Refinery and the 110, 000 barrels per day Kaduna Refinery.

An NNPC spokesman said the initial work to clean up and assess component integrity at the Port Harcourt Refinery would begin before the Easter holidays. He said the engineering, procurement, and construction (EPC) contractors are being mobilized to site and that delivery of the job is expected as early as 2023.

NNPC said that the refineries, when restreamed, would achieve 90 percent nameplate processing capacity. This indicates that the plants would then process some 400,500 barrels of crude oil to produce 46.8 million liters of refined products by 2023. Average peak demand for petroleum products in the country is difficult to determine due to smuggling leakages into the entire West and Central Africa countries.

The smuggling activities, according to Group Managing Director of NNPC, Mallam Mele Kyari, feeds on internal fuel subsidies that place local prices in Nigeria some 300 percent below average retail prices in the region. Thus, rehabilitation of the three refineries holds potential to significantly displace imports volumes, cut associated costs and pressure on foreign exchange and solidify public sector dominance of the domestic fuel market at a time new-build private refineries threaten to install commercial supply monopoly.

But many prominent political figures in the country, who are distant from the industry but enjoy wide public audience, play to the gallery with sordid and destructive analyses.

Among prominent Nigerians that that took a swipe on the approval by the Federal Executive Council to for $1.5 billion rehabilitation programme Former Vice President Atiku Abubakar, Governor Nyesom Wike of Rivers State, Activist Aisha Yesufu, former Senator Dino Melaye, and Former Governor Peter Obi of Anambra State.

Their doubts fall into pattern and tradition of similar contracts in the past which ended up as drains on the purse of the government.

However, the story of refinery maintenance is not different from the way other government’s rehabilitation contracts were run during the past military administrations in the country.  The refineries fill into the list of key government entities that were neglected to collapse during the period of protracted military administrations of the government: including roads, airports, Ajaokuta steel mills, Aluminum Smelter Company, Newsprint Manufacturing plants and many more.

Previous programmes to recover production capacity at the companies and associated financial infusions become sad references used frequently by critics to amplify their doubts over viability of prevailing propositions that target recovery and reapplication of these critical economic assets in confronting Nigeria’s current development challenges.

However, whereas the spate of public commentary over the necessity of the refinery rehab programme try to stir past sentiments over graft and financial drain, the prevailing context of reforms in the petroleum industry, cost reduction mandates, Nigerian content development policy, domestic fuel diversification programme, market deregulation and gas expansion programmes and others lay new contexts for refining value proposition.

First is the compelling need to salvage huge national investments in downstream fuel production and distributions infrastructure and facilities that depend on the refineries.

Oracle Intelligence reports that NNPC, created to represent government’s interests and drive realization of policy objectives in the full petroleum industry value chain, has the primary mandate to guarantee the nation’s energy security.

The corporation owns and operates massive domestic fuel supply facilities and infrastructure that include four refining plants with combined processing capacity for 445,000 barrels of crude oil per day.  Total plant output nameplates are put at about 52 million liters of refined products per production day. The corporation also operated some 5001 kilometers of fuel distribution pipelines that provide flow conduits for rapid supply to all parts of the country. These are in addition to strategically spread storage facilities, pumping stations, import jetties and coastal depots.

Following protracted military regimes of the government in the 1980s and 1990s, the operations of the corporation came under interference and outright hijack, which resulted in weak operating capital and consequent loss of capacity to maintain operated fuel production and distribution grids.

Within the period, the refineries, pipelines, depots and other facilities in the infrastructure suffered dilapidation and obsolescence. Activity uptime and capacity optimization plummeted as the refineries went through series of failed maintenance and rehabilitation attempts. And acute supply shortages that followed rendered the flow conduits vulnerable to economic sabotage by fuel thieving vandals.

Thus, the nation which is Africa’s biggest oil exporter gradually descended to net importer of petroleum products under the watch and absolute powers of the military regimes.

A document presented by industry trade groups at conference in Lagos showed that the Nigerian domestic economy has been fired with imported fuel since past 23 years. And some of the nation’s products imports come from refineries at countries that import Nigerian crude oil.

The paradox of net exporter and net importer has raised competence appraisal on managers of the nation’s petroleum refineries; and the ongoing rehabilitation processes proposes to be the long awaited and vehemently canvassed resolution of decade long capacity impasse in the nation’s midstream oil industry.

Some official say that NNPC has battled frequent political interferences in its struggle to revamp and reactivate the refineries. The position of the Minister of Petroleum Resources is usually occupied by the President since 1999; the Minister of State for Petroleum Resources, the Group Managing Director of NNPC, and other heads of agencies in the ministry are all appointed by the president.

Besides, various interest holders in the local economy also continue to impinge on the operations of the NNPC with demands and threats about activities of the corporation that affect them. The situations have made it difficult for the corporation to make independent business decisions on the national and public assets under its operations.

Fortunately, the corporation is currently in agreement with the key stakeholders not only on the criticality of the rehabilitation programme but also on the strategies for the project implementation.

Thus, the Group Managing Director of NNPC, Mallam Mele Kyari; Chairman of the Major Oil Marketers Association of Nigeria (MOMAN), Mr Tunji Oyebanji; and the NLC President, Comrade Ayubba Wabba; agree that the rehabilitation programme is crucial for keeping retail prices low in the domestic fuel market.

Pointing at the moribund NNPC’s refineries in Port Harcourt, Warri and Kaduna, Mr Oyebanjo had consistently called for investments in bringing the plants back to production in line with the value delivery proposition of MOMAN.

“If need be, private investment should be brought in to facilitate the rehabilitation and upgrade of the NNPC refineries for the efficient growth of Nigeria’s internal refining capacity and to ensure energy sufficiency for the Country,” he declared in a recent forum with the media.

Nigerian labour leaders have also been angry that government had persistently failed to revamp the nation’s midstream and downstream facilities, leading to Nigeria’s dependence on imported refined petroleum products. They argued that the situation has broadened supply cost templates with sea freight charges, international price of crude oil, cost of demurrage, numerous import taxes. They also blamed massive imports for persistent volatility in foreign exchange rates as a result of forex demand for fuel import.

President and General Secretary of NLC, Messrs Ayubba Wabba and Emmanuel Ugboaja respectively, stated that “the government should rehabilitate and revamp Nigeria’s local refineries;” adding that “Nigeria’s refineries can be made to work in a short time once the government asserts the political will to do so.”

The stakeholders consider that local refining would weed out all costs associated with importation, retain jobs and spur ancillary businesses that grow domestic productivity. Arguments have been that the midstream petroleum industry activities hold the full economic value for the nation’s vast resources.

Therefore refineries and the businesses that they incubate offer greater economic value than the revenues crude oil and gas export returns from the international market.

Apart from maintaining firm control on supply systems that enable it discharge the primary role of energy security for the country, the refineries which remain the only full composite processing plants in the country also form the basis for thriving petrochemical industry necessary for local manufacturing of sundry goods.

The Warri Refinery and Petrochemical Company (WRPC) is a full composite midstream complex that holds potentials for full range fuel and industrial products for local utilization and export. The Port Harcourt Refining Company Limited is the basis for the contiguous Eleme Petrochemical Company Limited which is one of the biggest African exporters of feedstock for manufacturing of industrial products. And the Kaduna Refining Company is configured to be one of the few African sources of the bitumen used in road construction.

The value proposition of the refinery rehabilitation project to the global environmental and funding agencies strikes a chord. The complex processing capacity and configuration of the refineries make it easier for lenders to accept a case for conversion of petroleum to chemicals. The full viability profile of the project made lending convenient for the African Export-Import Bank (Afreximbank) which has agreed to provide up to a billion dollars. Remaining $550 million which will be sourced by NNPC is also expected to ride on the value potentials of the project.

For the local economy, all the refineries have high capacity for production of key fuels that fire transportation and light engines in the country, including micro-electricity generating sets and other plants used in micro-businesses.

Managing Director of ANOH Gas Processing Company (AGPC), Mr Okechukwu Mba, stated at an industry conference earlier in the month that micro-electricity generating plants fired with petrol and diesel produce over 25 megawatts of electricity used by homes and businesses in the country. This is greater than 200 percent of the 12 MW total installed power plants in the country, and 600 percent of the 4000 MW available gas fired generation in the country.

Therefore, local production of full range of petroleum products in the country has potential to crash cost input across all commercial activities in the economy. And the NNPC refineries have output capacity for about 52 million liters of various fuel products per production day.

Despite all stakeholders being convincingly sold on the necessity to have a functional midstream petroleum industry, some arguments including the opinions of the founder of Stanbic IBTC, Atedo Peterside, still contend that the refineries should be sold to avert cost burden on government.

Peterside is quoted as saying that Nigerians should be given a choice to decide or debate on whether the refinery should be repaired, and calling for sale of the refining companies to private core investors with proven capacity to repair it with their own funds.

But the proposition by Mr Peterside conflicts with the position of the organized labour and other stakeholders in the local petroleum industry who point at government’s divestments in the electric power sector as a horrible error that must not be repeated.

Other opponents of the rehabilitation programme also point at the cost of the project as prohibitive. But the economics of the refining projects follow global templates. And rehabilitation of old refineries has remained the best cost effective option among investors as new build plants are capital intensive.

The $1.5 billion cost profile for the recovery of the 210,000 barrels per day Port Harcourt refinery is considered very efficient when compared with the $10 billion 250,000 barrels per day Aramco Refinery in Pakistan; $12 billion for the 230,000 barrels per day Abrue Lima refinery project in Brazil;  the $27 billion budget for Indonesian 300,000 barrels per day refinery and 3.0 million tons per annum Pengerang Refinery and Petrochemical Integrated Development (RAPID); and the $19 billion 650, 000 barrels per day Dangote Refinery.

In developing a global template from the new refinery projects cited above, Oracle Intelligence reports that the four projects with combined capacity for processing 1.43 million barrels per day come with cost profile of $68 billion. That bring unit refining capacity development for new plants at $47, 552 per barrel.

Thus, full rehabilitation and upgrade of the Port Harcourt Refinery could be valued at $9.99 billion on the global new build template since, according to NNPC; the programme would restore the plants to 90 percent capacity.

In ensuring that the full targets of the programme are met, NNPC had experimented with several bidding processes for the job until Maire Tecnimont Units won the job for PHRC rehabilitation. Maire Tecnimont SPA stated that the job package includes a 60,000 barrels per day hydroskimming refinery and a 150,000 bpd full-conversion refinery.

Tecnimont  SpA is the representative of the original refinery builder, the Japanese Gas Company. Tecnimont has reputation as one of the top ten global Engineering, Procurement, Construction, Installation and Commissioning (EPCIC) Contractor in refineries, is globally reputable and capable, with requisite experience of similar jobs across the globe.

The Maire Tecnimont SPA subsidiaries, Tecnimont SPA and Tecnimont Nigeria Ltd. (TNL), are to carry out a complete integrity check and equipment inspections of the complex.The first phase of the program would involve assessment at site, relevant engineering and planning activities.

It added that Tecnimont and TNL would further collaborate with another partner to execute the engineering, procurement and construction (EPC) works at the end of successful integrity check.

Maire Tecnimont SPA stated in response to our enquiries that the second phase of the refinery modernization project entails full rehabilitation of the complex aimed at restoring the refining capacity to a minimum 90% of capacity utilization.

One critical change in the current NNPC’s refinery rehabilitation process is transparency, a feature which makes it difficult for backstage deals to derail the programme. Key stakeholder groups are said to be involved in monitoring the process.

In the monitoring group are petroleum industry labour leaders, Nigerian Extractive Industry Transparency Initiative (NEITI), AfreximBank, local lenders, and industry business groups. These groups push counter narratives against perceived business interests in the massive trillion Naira import business.

Former Minister of State for Petroleum Resources, Dr Ibe Kachikwu, had declared just before the 2019 general elections that government spent annual N1.4 trillion on domestic petrol subsidy.

And the current Group Managing Director of NNPC, Mallam Mele Kyari declared in recent media forum in Abuja that the 2020 and 2021 federal budgets did not make provisions for domestic fuel subsidy, warning that NNPC which is the supplier of last resort was bleeding to insolvency if it is forced to continue running huge losses to sustain market supplies.

Managing Director of Rainoil Limited, Dr Gabriel Ogbechie, stated in a media chat that marketing companies in the country abandoned importation to NNPC due to fixed prices and volatile foreign exchange rate.

But beyond fuel supply, many stakeholders point at other critical growth drivers that come with internal refining of petroleum in the country.

Prominent members of the Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN), Mr Anietie Udo, stated in a radio programme that apart from retaining the jobs of thousands of workers at the three refining companies and spurring businesses that flourish around the full supply chain, rehabilitation of the refineries would also reduce demand pressure on the country’s lean foreign exchange reserves by totally displacing fuel importation.

It would be recalled that refineries are also the traditional sources of liquefied petroleum gas (LPG), also called cooking gas. Collapse of the refining plants left the challenge to the Nigerian Liquefied Natural Gas (NLNG) Limited which is actually an export oriented company.

Dr Ogbechie had told journalists in the country that Nigeria should not export LPG until internal demand of over 1.0 million tons per annum is satisfied. His call infers that NLNG should be made to meet all local supply orders before exporting.

He said the LPG imports also complicate the challenge of the local foreign exchange market.

Mr Anietie Udo said activities that would return with the full refining operations in Nigeria would also deliver significant growth in the nation’s gross domestic product and also retain considerable industry budget in the local economy through enhanced local content absorption.

Oracle Intelligence reports that there was massive panic in the industry during the global supply chain disconnect imposed by the covid-19 lockdowns of 2020 as Nigeria’s economy would have collapsed if fuel could not be imported.

On sustainability, Mallam Kyari explained to stakeholders that the refineries, when revamped, would still be in efficient hands of experts under operations and maintenance contract as required by lenders.

With the operations and maintenance model, the contractor is expected among other things assume full responsibility for running the plants efficiently, especially with expert experience for fluid catalytic cracking.

The services of the contractor which necessarily involve management of local and specialized sub-contractors should be commercially rewarding enough to enable defrayment of rehabilitation loans and guarantee profit, NNPC explained.

The operations and maintenance contract also requires the operator to retain current NNPC staff, and actively support employee development to prepare for the transfer of the refinery management back to NNPC within a timeline yet to be defined.

The services contract arrangement, according to the terms, does not compromise the ownership of the corporation to the refineries nor does it authorize the contractor to make significant capital projects including upgrades, debottlenecking and other plant reconfigurations during the contract tenure.

Outside the operations and maintenance contract, NNPC stated, the corporation’s group business structure remains unaltered within the period of the refinery’s service contract.

What most analysts appear to overlook in the prevailing revolution is that future demand outlook for both crude oil and products is shifting from the international developed markets to emerging markets dominated by developing countries.

Experts point out that the rising pace of global transition from petroleum to greener energy options would cause geographical oil demand movements towards developing countries where there are little or no infrastructure to support switch to new energy. That means that Africa would soon become the world’s major demand center for oil and gas energy. Forecasts project that Nigeria’s rising population will put the country at the center of energy demand.

In terms of trade advantage, a robust refining industry holds potential to confer Nigeria with great opportunity under the prevailing African Continental Free Trade Agreement (ACFTA).

Mr Tunji Oyebanji, whose group controls key investments in the downstream petroleum industry, said that investment in refineries, cost optimization initiatives, competitive market environment and sustainable petroleum sector remain the most visible means of growing the economy in the medium to long term, and make Nigeria Africa’s refining hub.

“These actions would lead to increased employment, reduced poverty and reduced social inequity. We must take advantage of the opportunities brought by the African Continental Free Trade Area agreement (AfCFTA) and fully benefit from our barrels of crude, getting the maximum value it can bring Nigeria,” he pointed out.

In driving home his point, Mr Oyebanji stressed that reliance on importation as primary source of market feed is inefficient, costly and wasteful; and does not serve the interest of the people.

He called on the government to lay a solid policy and regulatory framework to guarantee investor confidence in displacing imports with local refining.

“It is necessary that we as a country have some clarity as to when optimal internal refining capacity will return to Nigeria.”

With the refinery programme, one outstanding demand by all interest groups in the nation’s downstream petroleum industry appears to have been served. The demand for contracting transparency has also been delivered. Efficient hands of global refining contractors have been deployed. Service agreements for efficient and commercially viable operations have also been secured. Grounds for local content absorption have been laid. Timelines for phased restoration of activities have been set. And most importantly, funding challenges confronting petroleum industry projects have also been overcome.

Oracle Intelligence can confirm that processes followed to harness full industry involvement in the rehabilitation of the refineries are new, open and collaborative; leaving no interest behind. It is therefore expected that the common position among stakeholders on rebuilding local refining capacity would earn the rehab programme full stakeholder support.