Petroleum Products: A Poor Use of Limited Resources Highlights Nigeria’s Failure to Refine Domestically

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The fuel shortages highlight Nigeria’s failure to refine domestically the petroleum products it requires for its own consumption. The scarcity has been attributed variously to: flaws in distribution; upward movement in the international price necessitating subsidy payments under another name (absorbed by the NNPC); hoarding; and the fact that the set retail price of N145/litre (l) for premium motor spirit (PMS, or gasoline/petrol) is far below that in the countries of the sub-region.

The FGN’s response to the periodic shortages is to commit public monies to another programme of turn around maintenance (TAM) for the corporation’s refineries, cost at US$1.1bn and said to be achievable over 18 months. An earlier investment in TAM in 2013 made little if any impact. In September 2017 the refineries achieved a combined capacity utilization rate of 6.1%, compared with 9.5% the previous month.

We all know that the combined capacity amounts to 445,000 b/d crude but very few of us can say when, if ever, the refineries produced at this level. Such low rates tend to result in losses. According to the NNPC’s Financial and Operations Report for September, the refinery companies have reported operating losses for four of the past 12 months.

We cannot say for sure that the latest programme of TAM will not be a success. However, the age of the refineries suggests not: Port Harcourt (commissioned in 1965), Warri (1978) and Kaduna (1980).

Our message is “Local refining, the obvious solution” (Good Morning Nigeria, 21 December 2017). By local, we mean private sector. The corporation’s refineries should be allowed to wither away in our view. The game-changer is the Dangote refinery under construction in Lagos State, which over time is scheduled to process 650,000 b/d crude.

It is said that the Dangote plant will start processing some crude in 2019. There are other projects further down the line. To give a topical example, Petrolex plans to invest US$3.5bn in a refinery with the capacity of 250,000 b/d in Ogun State and is talking of completion within five years. We would expect several more projects if the retail price of PMS was genuinely deregulated.

An ideological battle has to be won, and the combination of the corporation, organized labor and some elements in the FGN defeated. The gains from victory would include job creation, fx savings, the prospect of regular supply and, at some stage, exports to the sub-region even. Imports of crude oil and gas totaled US$8.5bn in the 12 months to September, a large part of which would be saved under a market-based solution.

 

FBN Research

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