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Nigeria’s downstream chaos could sink planned refinery sale

The country's four struggling refineries are to be privatised

Nigeria’s four troubled oil refineries are to be sold to the private sector, according to the petroleum minister, Diezani Alison-Madueke. She told a news agency that the process to privatise the four facilities, owned by the state’s Nigerian National Petroleum Corporation (NNPC), will start before the end of the first quarter of 2014, saying that the government does not want to be “in the business of running major infrastructure entities”.

The refineries, which have been beset with operational problems for decades, are undergoing maintenance at present, with work on the two Port Harcourt facilities due to be completed by the end of 2013 and projects at the Warri and Kaduna facilities due for completion in 2014. Nameplate capacities of the four refineries add up to 445,000 barrels a day (b/d), but annual production has rarely exceeded 25% of that figure.

Governments have made moves to sell the refineries in the past, and there have been plans for private-sector facilities to be built, but prospective private operators have always been defeated by Nigeria’s low, government-controlled, fuel prices. Even after a sharp rise last year, gasoline sells at an official price of 97 naira per litre (l) – equivalent to $2.29/US gallon, or two-thirds of the price on the US east coast.

Fuel prices are due to be deregulated under the government’s long-delayed Petroleum Industry Bill – and in November Alison-Madueke said she wanted the bill to be passed before the end of the year. However, the all-encompassing bill continues to attract opposition from interests including oil companies, local communities and political factions, and some suggest the government will not have the will to tackle it until after the elections due in 2015.

In any event, Nigerians – most of whom do not see much benefit from their country’s oil wealth – are fiercely defensive of low fuel prices. In January 2012 the government removed the subsidy on gasoline, allowing the price to rise from 65 naira/l to 141 naira/l – but was forced by riots and strikes to reinstate most of the subsidy. The official prices has stayed at 97 naira/l since then. 

Yet the subsidy, for which the government has budgeted 971bn naira ($6.1bn) for 2013, supports large-scale illegal exports of gasoline to neighbouring countries. Consequently, Nigeria’s gasoline imports are vast – probably in excess of 300,000 b/d – while gasoline consumption, partly covered by the volume produced from the refineries, is estimated at 180,000 b/d.

More than 40 companies – some are established trading firms but many are little-known entities – import gasoline, under the supervision of the government’s Petroleum Product Pricing Regulatory Agency. Most of the product is sourced from European refiners and blenders, and it is sometimes of poor quality. About half of the imports are sold to the NNPC subsidiary, Pipelines and Product Marketing Company (PPMC), and half to private suppliers.

The gasoline import trade is highly profitable. The subsidy of 40.69 naira/l and official price of 97 naira/l point to a gross price of 137.69 naira/l – equivalent to $1,170 a tonne (t). But the price of gasoline in northwest Europe is generally below $1,000/t, giving a substantial margin after shipping and distribution costs. In November, the spot price was under $925/t.

In addition to purchases, Nigeria obtains gasoline through swap deals with traders under which NNPC supplies consignments of crude. The scheme is attractive to traders because it is cashless, and crude volumes can be generous. It was expanded recently, after a government inquiry in 2012 found extensive fraud in the payment of the gasoline subsidy.

But swaps appear to have escalated out of control, with PPMC reported as cancelling all gasoline delivery-slots in November because of a surplus. Towards the end of November, a shipping traffic website showed seven large tankers moored off Lagos, where gasoline is delivered, with a combined capacity of over 4m barrels. There were reports of many more tankers waiting the previous month, before the cancellations.

Nigeria’s refinery problems centre on improper operation and inadequate maintenance, leading to damage, fires and poor product quality. There are also shut-downs resulting from the theft of products from facilities and pipelines, and from deliberate damage. Capacities of the facilities are: 150,000 b/d at the newer Port Harcourt refinery, which came on stream in 1989; 60,000 b/d at the older facility nearby, built in the 1960s; 125,000 b/d at Warri, on stream in 1978; and 110,000 b/d at Kaduna, on stream in 1980.

Various plans for new refineries have come to nothing, but a promising proposal emerged in September when Aliko Dangote – said to be the country’s wealthiest businessman – signed a loan agreement towards a 400,000 b/d facility. The $9bn project, to be financed with $6bn of lending and $3bn of equity, will comprise a refinery together with a petrochemicals and fertiliser complex, to be constructed in a free-trade zone at Olokola. Paying the fuel subsidy to a refinery in the country will save on foreign exchange, supporters say, and eventually the subsidy will not be necessary.

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