On 17 March, the federal government of Nigeria approved $1.5bn for the rehabilitation of the Port Harcourt oil refinery.
The project, with Italian contractor Tecnimont, will be completed in three phases. The first, within 18 months, will take the refinery to 90% production capacity, with the second and final phases carried out within 24 months and 44 months respectively, petroleum minister Timipre Sylva told reporters.
The state-owned Nigerian National Petroleum Corporation (NNPC) will take a minority stake in the refinery, but will gradually step away from operating Port Harcourt after the rehabilitation project, managing director Mele Kyari said in an interview with Channels TV.
“We bring in the private sector to take equity in this refinery and then we continue to grow that business from that perspective,” he said.
Nigeria has four government-owned refineries with a combined capacity of 445,000 barrels per day (bpd): one in Kaduna and three in the oil-rich Niger Delta region of Warri and Port Harcourt. The Port Harcourt complex consists of two plants with a combined capacity of 210,000 bpd.
However, the refineries have only been operating at a fraction of their capacity for decades, thereby making Africa’s largest producer of crude dependent on the importation of refined petroleum products for 70-80% of domestic consumption.
In 2020, the NNPC published an audited financial report for the first time in its 43 years of operation. The statements, which were for the year ending 31 December 2018, revealed that the refineries incurred a total loss of N154bn ($404m at the current exchange rate).
The Port Harcourt refinery lost N45.59bn, the Warri refinery lost N44.44bn, and the Kaduna refinery lost N64.34bn. The audit revealed that Kaduna owed the NNPC about N424bn while the Port Harcourt refinery and Warri refineries owed N372bn and N157bn respectively.
A 2019 study by the Nigeria Natural Resource Charter (NNRC) found the operational costs of the refineries to be among the highest in the world.
“Inefficient downstream activities – like Nigeria’s refineries – are less likely to help countries diversify,” says a report from the Natural Resource Governance Institute, a New York-based think-tank.
“They often fail to deliver low-cost inputs to the wider economy. In addition, where downstream activities are inefficient, governments often use fiscal incentives to encourage in-country processing to take place anyway, which impacts public finances and can reduce countries’ ability to support diversification in other sectors.”
Should the refinery be privatised?
Given the parlous state of the infrastructure, some oil and gas experts support the federal government’s move to rehabilitate the Port Harcourt refinery. Zakka Bala, an oil and gas expert, says the plan offers a chance to fix a vital national asset.
“I am supporting the fixing of the refineries because they are national assets,” says Bala.
“All the OPEC countries have state refineries. If other OPEC countries have a functional refinery, there is no reason why Nigeria should not have a functional refinery.
“I do not have a problem doing away with national assets if they are not performing. But when you look at the current state of Nigeria, why should its refineries be handed over to a full-blown capitalist?
“If they genuinely want to go into refining, they should use their financial and technical competence to construct refineries.”
However, others express concerns over the plan to spend funds on a refinery that has haemorrhaged money for decades. They believe the best thing the government can do is to privatise the refineries as soon as possible.
Joe Nwakwue, an oil and gas expert and former chair of the Society of Petroleum Engineers, says the Nigerian government took the wrong step when it approved the rehabilitation of the refinery.
“The Nigerian state has not run any commercial ventures profitably. Why do we think the refineries will be run differently if retained by the government? The state-owned refineries should be privatised using the most appropriate models. We need to get the refineries to work. Private sector capital and operational control is the most promising option.”
Liberalisation of the tightly-controlled downstream sector could offer an opportunity for both state and private-owned refineries to compete. But there are worries that the government-owned refineries could struggle against private competition.
Bala says that corruption and mismanagement hamper refinery performance, and argues that a management overhaul is necessary if political leaders want the refineries to start functioning on a competitive basis in a liberalised market.
“All we need is effective management. Selling a national asset is not the key. The moment we remove or control corruption in Nigeria, the refinery will become functional. All we need to do is to do away with nepotism, political affiliation, sectarianism, and sectionalism. We can do this through sincerity on the part of the government.”
Dangote waits in the wings
The Port Harcourt refinery is likely to face at least one major private sector competitor. The Dangote Group is constructing a 650,000 bpd integrated refinery and petrochemical project in Lagos, which is expected to be Africa’s largest oil refinery and the world’s biggest single-train facility. However, the facility has been delayed owing to an inability to source construction materials and the effects of coronavirus.
When the refinery commences production in 2022, it will be able to refine Nigeria’s crude oil and meet internal demand of 471,500 bpd. Where that leaves a rehabilitated Port Harcourt facility – and its chances of attracting private sector capital after the rehabilitation project – remains to be seen.
“The Dangote refinery project is a major boost to domestic value capture and utilisation of our oil and gas primary product,” says Nwakwue.
“It will make Nigeria a refining hub for Africa. It is commendable and will hopefully have a significant GDP impact because Dangote refinery’s vision is aligned with the re-industrialisation and domestic value capture/maximisation objective of the government.”