Amid perennial losses, scandals, the obvious lack of capacity to manage them and a cash squeeze, the Nigerian National Petroleum Corporation should drop all schemes to hold on any longer to its four moribund refineries. Among its stratagems, its managers, according to Reuters, hope to raise $1 billion in a prepayment plan with trading firms to refurbish the Port Harcourt complex as part of an overall scheme to rehabilitate all four. Any such plan is unnecessary and wasteful. The refineries have gulped far too much public funds, shut out competition and investment in the oil downstream and entrenched a culture of waste. They should be sold immediately.
As reported by Reuters, the sum would be spent to refurbish the two refineries in Port Harcourt and repaid over seven years through deliveries of crude and refined products. There are also plans to refurbish the other refineries.
The President, Major General Muhammadu Buhari (retd.), who directly supervises the petroleum ministry portfolio, should initiate the process to sell the refineries without further delay. This requires dropping his preference for state control of commercial ventures in favour of full privatisation and a private sector-led economy. Significantly, almost six years in office, his regime has not effected major privatisation or concession transactions despite repeatedly voiced lofty plans by the National Council on Privatisation and the Bureau of Public Enterprises. However, state-owned enterprises, said the UNDP, typically discourage investment and competition, “curtail job creation and deny the country of much needed Foreign Direct Investment.”
Nigeria’s misery confirms this. The NNPC continues to pile up losses, wasting resources on idle refining machinery and personnel. Its Group Managing Director, Mele Kyari, favours the failed rehabilitation route ahead of divestment. He should drop such notions. The interests of the country will be better served by immediate asset sale to end the string of losses. The NNPC admitted that for 12 straight months to June 2020, the refineries had been idle but incurred N142.07 billion, a depressingly familiar pattern. Combined, the PH (which has two) and Warri refineries incurred N99.2 billion losses in 2019, higher than the N89.2 billion losses they posted in 2018. Kaduna Refinery, which had bled by N64.5 billion in 2018, earned zero revenue! Warri earned only N921 million in 2019. All four have operated at between zero per cent and 25 per cent for years. Unable to meet domestic demand for refined products despite their combined 445,000 barrels per day nameplate capacity, the country depletes foreign reserves importing to fill the gap. According to the National Bureau of Statistics, N1.09 trillion was spent importing petrol in the first six months of 2020. In 2019, it said N1.71 trillion was spent, down from N2.95 trillion in 2018. In the 13 months to February 2020, petrol imports cost N2.5 trillion.
Nigeria’s experience in petroleum refining defies rationality. Its crude production of over 2.3 million barrels per day made it the world’s sixth largest producer until recently; production has since been just below 2.0m bpd, making it 11th in 2019, said the US Energy Information Administration. Although Nigeria is Africa’s largest crude producer, OPEC figures show that Algeria, with average output of 1.02m bpd, had refining capacity of 656,800 bpd; though producing only 136,517 bpd of crude, South Africa’s six refineries refine over 500,000 bpd. Singapore’s case is instructive; producing only 20,170 bpd, the city-state has refining capacity of 1.4m bpd and its export of over 1.0m bpd makes it the world’s third largest exporter of refined petroleum products.
No company continues to drop losses year after year and insists on keeping such assets. Successive governments and GMDs keep churning out doomed rehabilitation schemes instead of the sensible option of selling the refineries as they are. From a proposal to invite the original builders, opaque, scandal-ridden Turnaround Maintenance contracts to “co-location,” and in-house rehabilitation schemes, the NNPC has, with the backing of successive presidents, prevented their sale, inflicting thereby grievous harm on the economy. The delaying tactics have never succeeded in refurbishing the plants, significantly raised capacity or stopped the fiscal haemorrhage. The influential World Oil cited four failed rehabilitation attempts in the 12 years to 2019.
The current regime has also made repeated promises of restoring them to full capacity. Two former petroleum resources ministers, Diezani Alison-Madueke, and Ibe Kachikwu, however acknowledged the dilapidated state of the refineries. A presidential panel headed by a former Finance Minister, Idika Kalu, in 2012 recommended their sale within six months.
Buhari should order their immediate privatisation in a transparent auction, deliberately targeting competent operators and FDI. While some countries successfully run state-owned enterprises, corruption, politics, sectionalism, nepotism and even religion always interfere to make SOEs in Nigeria liabilities instead of assets. A corrupt country with weak institutions cannot run commercial enterprises profitably. The country’s dismal showing on Transparency International’s Corruption Perceptions Index proves how ineffective the “war on corruption” has been.
Kyari’s plan to borrow for rehabilitation and thereafter reduce the NNPC’s stake, along the line of the NLNG joint venture format, will only saddle it with more debt and going by precedent, may never even materialise. Just sell! And quickly too; let more investors come in to promote competition as the 650,000 bpd Dangote Refinery nears delivery. Nigeria has all it takes to be Africa’s refining hub. Others are active. Saudi Aramco, which raised an IPO in 2019, plans to invest $10 billion on a new 300,000 bpd capacity refinery in South Africa; Angola’s state-owned Sonangol and UK investment group, Gemcorp, are investing a three-phased refinery infrastructure project, while Ghana, says the Oxford Business Group, expects billions in FDI through an energy master plan designed to attract private investment.
Singapore’s and South Africa’s refining are spurred by private investment. Buhari and the NNPC should spare Nigerians further agony, stop any further expenditure on the moribund refineries and sell them off as they are. Buhari should implement the promised reform of the NNPC to get it out of the downstream sector entirely in a liberalised operating environment.
