Bridging the refining gap: Increasing the country’s domestic production capacity

Although it is Africa’s largest crude exporter, Nigeria remains dependent on imports for some 86% of its refined fuel needs of 35m litres daily, equivalent to 279,000 barrels per day (bpd). Successive rounds of turnaround maintenance (TAM) have failed to expand domestic refining capacity, while the subsidy structure of fuel sales incentivises the import of premium motor spirit (PMS) from EU refineries, which oversupply the European market. A new round of TAM at existing refineries, starting in 2013, may boost local refining capacity, but a number of greenfield projects stand a better chance of bridging the refining gap, and may even allow Nigeria to export refined fuel regionally.

EXISTING CAPACITY: Nigeria’s four refineries, with a combined capacity of 445,000 bpd, are in various states of disrepair. Port Harcourt’s two refineries – the oldest, 60,000-bpd one was built in 1965 and the newest, 150,000-bpd one in 1989 – produce a combination of PMS and light products like liquefied petroleum gas (LPG), automotive gas and oil (AGO), dual-purpose kerosene (DPK) and fuel oil from Bonny Island supply. With the last TAM completed in 2000, these facilities officially run at 65% capacity, according to the Nigerian National Petroleum Corporation (NNPC), although unofficial estimates from contractors run as low as 5%.

The second refinery complex in Warri, built in 1978 to handle 125,000 bpd, is a complex refinery with an associated petrochemicals plant producing polypropylene and carbon black, supplied by Chevron’s Escravos terminal and Shell Petroleum Development Corporation’s (SPDC) Ughelli centre. With the latest TAM in 2008, it runs at roughly 25% capacity, according to NNPC. The third site in northern Kaduna, commissioned in 1980, can process 110,000 bpd supplied by a 600-km pipeline from the Delta and is designed to handle imported heavy crudes. The plant produces fuels, lubes and linear alkyl benzene, but the last TAM in 2008 failed to boost production beyond 25% of capacity.

Operating at an average of 20% installed capacity of 52m litres a day, according to the National Refineries Special Task Force’s (NRSTF), which published its findings in late 2012, the refineries only supply 14% of daily PMS consumption, 45% of DPK (for cooking fuel and aviation) and 69% of AGO (diesel fuel).

NEW TAM ROUND: While a TAM cycle, which takes six to 10 weeks, is usually only required every three to five years, contractors estimate it is necessary every two years in Nigeria due to operational deficiencies and sabotage to pipelines, which introduces impurities to the crude oil. The NRSTF, which advised privatising the plants by November 2014, recommended TAM and rehabilitation of the refineries as a prerequisite. NNPC reviewed the state of the three southern refineries with France’s Technip in 2012. It earmarked N251bn ($1.6bn) for the four TAMs, to be completed by late 2014 and conducted by the original contractors.

The first round at the two Port Harcourt refineries is due to start in 2013, while the Warri and Kaduna plants are expected to begin in early 2014. Japan Gas Company (JGC) contracted its original partner on the Port Harcourt refineries, Italy’s Tecnimont, to conduct the TAM, but the work was then sub-contracted to three contractors, including DBN and Ponticelli. NNPC said it would contract ENI subsidiary Saipem to handle the Warri refinery repairs as well as those for the Kaduna facility. While the work is expected to boost output to 90% of nameplate capacity, according to the Federal Ministry of Petroleum Resources (FMPR), independent observers are sceptical. “We don’t expect the planned TAM on the existing refineries will yield more results than previous maintenance,” Niyi Yusuf, country managing director of global consultancy Accenture, told OBG.

Privatisation plans may help, however, with Diezani Alison Madueke, the minister of petroleum resources, telling Bloomberg in mid-November 2013 that the government plans to begin privatising the country’s four refineries before the end of the first quarter of 2014.

GREENFIELD ANNOUNCEMENTS: While razor-thin margins hinder the feasibility of most new refinery projects in more developed markets, the logic of a new greenfield facility in Nigeria, and in West Africa more generally, is more conducive. “The economics of developing a refinery along the Gulf of Guinea, a region that is in deficit of petrol consumption by 260,000 bpd, are more compelling than in a more developed market like the US,” Tunde Akinpelu, executive director at local energy firm Aiteo Group, told OBG. “For instance, the price of shipping refined products from the EU to meet this regional demand is the equivalent of over 800,000 bpd a year, or more than $1bn.”

MORE REFINED: Assuming refining margins of $10 per barrel and NNPC crude allocations of 445,000 bpd, boosting local refining to meet domestic consumption would cost $1.6bn. This has led to a slew of announcements by investors. The NRSTF examined 35 private refinery applications and by early 2013 19 licences had been awarded. However, progress on fundraising and feasibility studies remains uneven.

The largest deal announced to date is extremely ambitious. In June 2010 the China State Construction Engineering Corporation (CSCEC) signed a framework memorandum of understanding with NNPC to invest $23bn in three new refinery sites with a combined capacity of 750,000 bpd in the states of Lagos (two facilities with capacities of 350,000 bpd and 200,000 bpd, respectively), Bayelsa (100,000 bpd) and Kogi (100,000 bpd). While NNPC’s stake was set at 20%, CSCEC’s 80% stake was to be funded by China Export Credit Insurance (SINOSURE) and a consortium of Chinese banks. In November 2012 the NRSTF found the facility planned in Lagos to be the most likely, although there has been only limited progress thus far.

A second landmark announcement came in July 2012 when US-based private equity firm Vulcan Petroleum Resources stated its intention to invest $4.5bn in six new 30,000-bpd refineries. But while it estimated it could build each in a year, progress seemed to have stalled by mid-2013 pending any new developments. A third announcement came in September 2012 when indigenous firm EPIC Refinery & Petrochemical Industries unveiled plans to build a new 107,000-bpd refinery complex in Bayelsa State, in partnership with Hong Kong-based Sino Asia Energy. The facility would produce a full range of refined fuels alongside petrochemicals, powered by a planned 200-MW gas-fired plant. Although the plant was meant to come on-line in the second half of 2014 following two years of construction, work had yet to commence as of July 2013.

SMALL-SCALE DEVELOPMENTS: While illegal small-scale refineries have long operated as a by-product of oil bunkering in the Delta region, local firms have developed formal refineries to handle production that is not connected to the existing export infrastructure. One example comes from Niger Delta Petroleum Resources (a subsidiary of Niger Delta Exploration and Production), which opened its 1000-bpd refinery producing AGO in Rivers State in late 2011. A second refinery by Amakpe International Refineries in Akwa Ibom State is expected to come on-line in late 2013, refining 12,000 bpd. A third, larger refinery developed by local operator Orient Petroleum is due to open in Anambra State in 2013, with an initial throughput of 20,000 bpd that is expected to increase to 55,000 bpd over the medium term. “The downstream industry in Nigeria hasn’t yet been fully tapped,” Peter Mbah, CEO of Pinnacle Oil & Gas, told OBG. “These days modular refineries make more sense than large-scale refineries given their cost scale, which makes more sense in a business environment where many banks would be wary to invest,” he added.

GAME CHANGER: One of the largest announcements thus far comes from the Dangote Group, which has made public plans to develop a 450,000-bpd refinery at a cost of $8bn. The project was in its feasibility study and fundraising stages in mid-2013. “The real game-changer would be [Nigerian cement tycoon] Aliko Dangote’s refinery, which seems more likely to succeed since he could fund it entirely himself,” Yusuf told OBG.

The plant is to be built in the Olokola Free Trade Zone, in an area overlapping Ogun and Ondo States and adjacent to Dangote’s planned $1.9bn urea fertiliser plant, allowing the refinery to purchase crude from either domestic sources or internationally. Refined fuel could then be sold either locally or throughout the region.