Demand for refined petroleum products pushes capacity expansion in Nigeria's energy sector

Given the scale of demand for petroleum products in both Nigeria and the broader ECOWAS region, the country stands to gain significant export revenues if it increases downstream production. Nigeria’s four refineries, though they raised their capacity utilisation rate somewhat in 2014, remain low at around the 30% mark overall, despite being allocated their full capacity of 445,000 barrels per day (bpd) in crude. “The Nigerian National Petroleum Corporation (NNPC) allocations of crude to the refineries are based on installed capacity, not operational throughput,” Idris Yusuf, head of refineries at the NNPC, told OBG. Were they to run at 80% of installed capacity, the output would be enough to meet domestic demand, according to investment firm BGL. Yet the country still relies on imports for some 86% of its aggregate consumption of over 50m litres a day.

Low Efficiency

Of the four existing refineries, the two in Port Harcourt operate at the lowest efficiency. With respective capacities of 60,000 bpd and 150,000 bpd, both refine crude from the Bonny terminal into premium motor spirit (PMS), liquefied petroleum gas (LPG), dual-purpose kerosene (DPK), and automotive gas and oil (AGO). Their combined capacity utilisation of 2.07% in the fourth quarter of 2013 improved only slightly to 4.48% in December, according to BGL research, as they gradually recovered from shut-ins caused by vandalism. “The main cause of lower output in 2013 was problems in sourcing crude to the Port Harcourt refinery,” Yusuf told OBG. “This has now been resolved and we expect higher output in 2014.”

The other two performed comparatively better. The 125,000-bpd refinery in Warri, which produces PMS alongside polypropylene and carbon black petrochemicals, supplied by Chevron’s Escravos terminal and to a lesser extent (some 20,000 bpd) from Shell Petroleum Development Company’s Ughelli field, operated at 28.03% of installed capacity in the fourth quarter of 2013, rising to 40.41% by December of that year. The only refinery in the north, in Kaduna, meanwhile, operated at 29.59% of capacity in the fourth quarter of 2013, rising to 32.96% by December. The Kaduna unit, with a 110,000-bpd capacity and supplied through a 600-km pipeline from the south, is designed to handle imported heavy crudes. In total, Nigeria’s refineries received 24% of their installed capacity in crude in 2013, according to BGL. Yet out of the country’s 2013 daily consumption of 32m litres of PMS, 10m litres of AGO and 8m litres of DPK (alongside lesser amounts of LPG and other fuels), combined output from the four refineries equalled only 9% of the PMS, 24% of the DPK and 28% of the AGO, according to the NNPC.

Refining for Export

The spate of greenfield refinery projects currently on the table, though they may not much reduce the country’s import bill for refined fuel, will nonetheless help to increase Nigeria’s export revenues. In late 2013 Dangote closed the financing on a $9bn refinery project with planned capacity of 400,000 bpd. The complex refinery would also produce 2.75m tonnes of urea and ammonia fertiliser, as well 60,000 tonnes of polypropylene a year under an affiliated project estimated at $1.9bn and part of the total $9bn project cost. Originally planned for the Olokola Free Trade Zone, which Dangote purchased for the project, the refinery was relocated to the Lekki Free Trade Zone in 2013. In September 2013 Dangote closed a $3.3bn syndicated loan deal with First Bank of Nigeria, United Bank for Africa, Guaranty Trust Bank, Standard Chartered, Stanbic IBTC, Zenith Bank, Access Bank, Ecobank, Fidelity Bank and Rand Merchant Bank, with plans to finance the rest through equity. The company contracted Engineers India to provide engineering, procurement and contracting services. Once completed in 2016, the refinery will have annual production capacity of 7.68m tonnes of PMS, 5.3m tonnes of diesel, 3.74m tonnes of jet fuel and kerosene, 210,000 tonnes of LPG and 630,000 tonnes of slurry oil.

The Euro V quality of petrol produced, with lower nitrogen oxides and other pollutants, is of a far higher quality than the Euro III fuel currently sold on the Nigerian market. The refined product will likely be sold on foreign markets, since selling higher-grade petrol on the local market would require a much higher subsidy to be competitive with current supplies. The NNPC itself is focusing on rehabilitating its existing refineries rather than upgrading their output. “We are looking at improving the quality of refined output in the long run, but the immediate challenge is to get the refineries running again, and more efficiently,” Yusuf told OBG.

The same is true of the Escravos gas-to-liquids project developed by Chevron, the NNPC and South Africa’s Sasol. Commercialised in June 2014 after several delays, the 33,000-bpd facility uses 320m standard cu feet of natural gas per day to produce high-quality diesel, kerosene, naphtha and LPG. With 0% sulphur content, these refined products are Euro V compliant and all destined for export, mostly to Europe, even when the facility is eventually expanded to 120,000 bpd in the long term.

Import Substitution

These export-oriented refineries are not the only ones on the table. Several smaller greenfield projects could help make a dent in Nigeria’s large fuel imports, which carried an associated subsidy of over $6bn in 2013, according to the Petroleum Product Pricing Regulatory Agency. In November 2012 the NRSTF found some 19 refinery licences approved by the Department of Petroleum Resources (DPR), of which seven were deemed feasible. In the first quarter of 2014 two more refinery projects, each with a planned capacity of 100,000 bpd and both in Lagos State, were given licences by the DPR. The first, backed by the Mid Oil Refining and Petrochemical Company, would be based at Ejinrin in Ikorodu and the second, by South Atlantic Petroleum, would be at Badagry. The environmental impact assessments for both are ongoing.

Both projects, as well as any others targeting the domestic market, would require enactment of the Petroleum Refineries Act, which has been under National Assembly consideration since 2012 and is detached from the broader Petroleum Industry Bill also pending. The act would establish a legal basis for private investors to build refineries, according to BGL, thereby breaking the NNPC’s monopoly on domestic refining. It would include new local content requirements, such at least 75% Nigerian refinery staff. Though progress in rehabilitating Nigeria’s existing refineries has been uneven, Dangote’s high-profile initiative to establish a greenfield refinery could provide the much-needed impetus for change, opening the doors to smaller private refineries that could bridge the domestic refining gap. It will also establish Nigeria as a regional refining centre, with strong impact on the country’s balance of payments.