Another Wasteful Venture

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The Port Harcourt refinery

The federal government has earmarked $1.6 billion for turn-around-maintenance of the three government-owned refineries but many Nigerians see the allocation as reckless and misdirected

|  By Pita Ochai  |  Feb. 4, 2013 @ 01:00 GMT

IF there is anything that Nigerians wish that the Nigerian National Petroleum Corporation, NNPC, should accomplish quickly without much ado, it is getting the refineries to function optimally. This will help to limit the importation of petroleum products and fuel subsidy paid to importers. The three government-owned refineries in the country have not been able to function at full capacity for a myriad of reasons. They include corruption, vandalisation of pipelines, and the inability of the federal government to budget funds for the Turn Around Maintenance, TAM, which is supposed to be done every two years.

Even when the government makes such budget available, corrupt NNPC officials connive with other government officials and contractors to divert the fund. Consequently, when the TAM of the refineries are eventually done years after they are due, it is done haphazardly and in a most inefficient manner because all the equipment that have corroded over the years are not replaced in an effective way by contractors who know little or nothing about how the refineries were built in the first place.

Allison-Madueke
Allison-Madueke

This is why the country welcomed the idea espoused last year by Diezani Alison-Madueke, minister of petroleum resources, when she said that the original builders will be engaged to do the TAM of refineries. But Nigerians are worried about the whopping sum allocated for the exercise after the Kalu Idika Kalu Presidential Committee which investigated the problems of the refineries recommended their outright privatisation. Most people are not convinced that the N251 billion ($1.6 billion) budget for the TAM will revamp the refineries to the extent that they will start meetinglocal demand for petroleum products in the nearest future. They base their argument on previous experiences where nothing much came out of the previous TAM of the refineries. Successive governments had sunk billions of naira in the TAM of the refineries without achieving much. There was the recent case of $17 million siphoned by the late President Umaru Yar Adua’s family, which was meant for the TAM of the Kaduna refinery.

This notwithstanding, every other successive governments in the country has had its share of the juicy TAM contracts, most of them in a dubious manner. In 1997, the government of General Sani Abacha, awarded a $215 million contract for the TAM of the Kaduna refinery. The administration of Abdulsalami Abubakar in 1998 set aside $92 million for the refineries without achieving any result. Between 1999 and 2003, during the first term of President Olusegun Obasanjo, it was estimated that between $254 million and $400.4 million was wasted on the TAM of the refineries and repairs of vandalised pipelines. In 2007, the TAM contract for Kaduna alone cost about $24 million in cash and materials worth $30 million, bringing the total to about $54 million. To most analysts, the amount of money wasted so far would have solved the problem of fuel importation by investing in new refineries.

The fear of Nigerians is that the government might have embarked on another of such wasteful projects. “Nothing will come out of it, except opening up another avenue for graft. That the original firms which built the refineries have been contracted by the ministry for the purpose, as repeatedly emphasised by Alison-Madueke, is immaterial. It is more like an old wife’s tale,” said Manger Maduka, a petroleum engineer, adding that the experience since 1999, with hundreds of millions of dollars appropriated yearly for TAM but without results, is enough to establish the futility of further cash injections.

Another reason the refineries are not working effectively even when the TAM of the refineries are completed is pipeline vandalisation. Austen Oniwon, former group managing director of the NNPC, described pipeline vandalism as a “big threat to the comprehensive capacity utilisation of the nation’s refineries.” Pipeline vandalism has also hampered efficient distribution of petroleum products. In December 2011, the Port Harcourt Refinery was shut down because the pipeline supplying crude to it was severely vandalised. According to Oniwon, “if the pipelines are made to work, the bridging cost of N5.80 will not be borne by Nigerians and will go a long way in revamping the Pipeline Product Marketing Company, PPMC, depots across the country”. At a time Warri refinery was down because the chanomi creek pipeline was also vandalised. The government has also spent huge amounts of money in protecting the pipeline using the repentant militants in the Niger-Delta, but that has not stopped the vandalisation of the refineries.

Last year, amidst the allegation that the federal government was losing N700 billion annually in projected revenue through the Kaduna refinery as well as N12 billion on remuneration of staff who were idle because the refinery was not functioning, the late Levi Ajuonuma, former group general manager, Public Affairs Division, NNPC, said it was not true that the refinery was idle because it was operating at 60 percent installed production capacity amid artificially induced challenge of pipeline vandalism.

Idika Kalu
Idika Kalu

It should be noted that the Kaduna Refinery was privatised during the twilight of ex-president Olusegun Obasanjo’s administration and sold to Blue Star Consortium at about $720 million. But late President Umaru Musa Yar’Adua succumbed to popular demand of the workers and revoked the sale. Maybe, if the sale had remained, the refinery would have been better off for it.

Part of the problems of the refineries could also be attributed to internal sabotage from officials who stand to benefit from the inefficiency of the refineries. The recent N251 billion ($1.6 billion) budget for the TAM, of refineries have not raised the hope of meeting local demands from the refineries in the nearest future. Nigerians fear that the plan by the government to spend such a huge chunk of money in a TAM would be another fruitless step like other previous projects. While the government has failed to build new refineries, the existing four have been sink holes to the resources of the federal government.

Infact every successive administration has sunk millions of dollars in a TAM that never revived the four refineries. The four of them hardly operate above the average of their installed capacity. The new TAM which is expected to commence in the first quarter of this year, will be completed by October 2014. According to the schedule of the Nigerian National Petroleum Corporation, the TAM will commence with the refinery in Port Harcourt, before the first quarter of the year. The Warri refinery will be next after Port Harcourt, followed by that of Kaduna.

According to Diezani Alison-Madueke, minister of petroleum, the TAM is to improve the capacity of the refineries to meet local demands. She said that TAM of the refineries should be done every two years. The TAM of the Port Harcourt refinery was last done in 2000, while that of the Kaduna refinery was in 2008. The governments plan is to increase the local refining capacity of the three refineries being managed by NNPC to 90 per cent of their installed capacity by 2014. The four refineries in the country including the one managed by Indorama Petrochemicals, Port Harcourt, have a total production capacity of 445,000 barrels per day, bpd, but they are currently running at about 60 percent capacity.

The TAM of the Port Harcourt refinery was scheduled to have been done earlier. JGC, the original builder of the refinery, stopped its officials from coming for the upgrade and maintenance of the refinery after a negative travel advisory from the government of Japan. But now, JGC is ready to move its official to Nigeria to start work in the refinery.

According to the NNPC, final touches were being put on the bid process for the TAM. Single bids are expected for the repairs because only the original builders of each of the refineries have been commissioned to carry out the TAM unlike in the past where any company can bid for the maintenance of the refineries.

The present move to make the refineries work may not be unconnected with pressures mounted on the government of President Goodluck Jonathan, in January 2012. For six days, Nigerians took over the streets in the major towns of the country demanding for a re-structuring of the petroleum sector of the economy. The protests were caused by an increase in fuel price from N65 to N141 a litre. After six days of protest, the federal government pledged to embark on a total overhaul of the petroleum industry to enable it function efficiently and also reduce the current dependence on imported petroleum products. The refineries, when operating at installed capacity, would produce between 18 million and 22 million litres of the 35 million litres consumed daily in the country.

Ngozi Okonjo-Iweala
Ngozi Okonjo-Iweala

Some Nigerians do not see the rationale behind spending such a large amount of money for TAM of the refineries. Adegbe Oloja, an energy economist and Samuel Udoh, a legal practitioner, are some of the people who see the budget for TAM as wasteful. While Udoh described the action as scandalous, Oloja said it would be wasteful for the government to spend such a huge amount of money on TAM when new refineries could be built with that amount of money.  “The refineries should have been sold and the money used to build modern ones. Why should we spend so much in the TAM of refineries whose facilities and technology have gone obsolete?” he asked.

To Oloja, what former President Obasanjo did would have been best for this country: sell them off and invest the money in building one or two modern refineries. Because after this TAM, the management of the refineries will still not be as efficient compared to organisations managed by the private sector. He explained that if the government channels its resources into building one or two modern refineries, what they would be producing would be enough for the country to consume and may even leave some for export and that will permanently put an end to fuel import and subsidy.

Oloja does not believe that the October 2014 target date is achievable going by the contract terms with the companies that would carry out the TAM. “I understand that there is a clause which states that the contract will be on turnaround and operate for some time before handing over. During the period of operation by the contractors, any incident of vandalism on the infrastructure will be repaired by them, and not the government; this may be an issue in delaying the process,” he said.

Another reason that might delay the TAM which the government failed to consider is the availability of the materials for the maintenance work. According to Oloja, the materials needed for the maintenance of the refineries have to be manufactured abroad according to specification, and then shipped to Nigeria before being transported to site. All these processes take time and may delay the completion of the project.

Nonetheless, the federal government was applauded in June 2012, when it announced that it had entered into a Memorandum of Understanding, MoU, with a consortium of American investors, and Vulcan Petroleum Resources, for the building of six high-tech modular refineries at a cost of N697.5 billion. The six high-tech refineries would have a total of 180,000 barrels per day installed capacity. At that time, the modular refineries were believed to be a better option to the endless repairs of existing refineries. Under the agreement, two of the modular refineries ought to be completed within one year, each with a capacity to refine 30,000 bpd. But none of these refineries has materialised months after the announcement by the government.

The much-awaited Greenfield Refineries billed for Lagos, Bayelsa and Kogi States, also scheduled to come on stream by 2017 may not be realisable. Up till now, construction works have not started on the sites of the three refineries. This is because, the NNPC is yet to secure approval of the federal government to commence work on the refineries. The NNPC and the China State Construction Engineering Corporation, CSCEC, Limited had in 2010 signed an MoU for the joint sourcing of funds for the construction of the three new refineries and a petrochemical plant in Nigeria under a $28.5 billion deal. The project would have increased Nigeria’s refining capacity to more than one million barrels per day bpd from the current 445,000 bpd capacity and stem the flood of importation of refined products into the country.

Despite this, Alison-Madueke is now of the opinion that the N251 billion TAM of the old refineries is the ultimate solution to the recurring problem of scarcity of petroleum products in the country.

Obasanjo
Obasanjo

Apart from the fact that previous TAM of the existing refineries in the country did not yield the expected results, in spite of the huge capital sunk into them, the ministry of petroleum has also not convinced Nigerians that the current plan will make any difference. In the past, such repairs ended up creating a cartel of fuel importers, who feasted on the money voted for the exercise. This has resulted in loss of confidence of many Nigerians in the ability of the NNPC to keep the refineries in good shape to meet its installed production capacity. Udoh said Nigerians have been fooled too many times under the guise of maintenance of refineries. He also fears that the planned repair may be a smokescreen by government to complete the removal of subsidy on petroleum products, which it failed to actualise in January 2012 due to the nationwide strike that trailed partial withdrawal of the subsidy.

Udoh’s position may not be unfounded because Labaran Maku, minister of information, had hinted late last year that the repair of the old refineries and the establishment of three additional ones in Bayelsa, Lagos and Kogi states, would be part of the measures to address the lingering problems in the production and supply of petroleum products across the country, and possibly a prelude to a total deregulation of the downstream petroleum sector.

The skepticism over the TAM got a boost from the recommendations of Kalu Idika Kalu National Refineries Special Task Force, report which exposed the depth of corruption in the Nigerian oil and gas sector. The report, like such previous ones, revealed the dismal state of Nigeria’s four government-owned refineries, thus depicting how colossal funds spent on their TAM have gone down the drain. The report claimed that Nigeria had the third largest refining capacity on the continent with its  445,000 barrels per day installed capacity, but had 18 per cent capacity utilisation and efficiency, compared to South Africa with a capacity of 540,000bd and capacity utilisation of 85 per cent and Egypt with 774,900bd capacity and 81 per cent efficiency level.

The Kalu committee further revealed that of the 42 oil refineries operating in Africa, the three in Nigeria recorded the worst performance in terms of efficiency and capacity utilisation. By NNPC’s admission, the combined average refining capacity utilisation for 2010 was 21.53 per cent as against 10.90 per cent in the previous year. The figure for 2008 was 24.11 per cent, which is 51.34 per cent more than that of 2007. Even the marginal improvement in capacity utilisation was achieved at a huge cost.

Another question yet to be answered by the government and the NNPC is: “Why is it that oil firms operating in the country run oil refineries elsewhere and refuse to do so in Nigeria?” Singapore, with its total oil-refining capacity of 1.3 million bpd, is a major oil refining and trading hub in the region, but has no oil deposit. India imports 70 per cent of its crude oil requirements, mostly from the Middle East. However, the country is not only self-sufficient when it comes to refining the crude oil but is also able to export refined petroleum products.

This may not be why some people want the private sector to operate the refineries and has even argued that government should hands off the building of new refineries or the repair of existing ones. Ngozi Okonjo-Iweala, minister of finance, had suggested that private companies issued licences to build their refineries should be encouraged to do so. The Kalu committee recommended that the existing refineries should be sold within 18 months but the government has failed to implement that recommendation.

Perhaps, this is why Abraham Daudu, a petroleum marketer, said that all over the world, refineries are changing hands on a regular basis and the Nigerian government should learn from what is happening in other parts of the world. British Petroleum just recently sold its Texas City Refinery in the US to Marathon Petroleum Corporation for $2.5 billion. In April 2012, Delta Airlines started negotiation to buy Phillips Refinery in Philadelphia, US. The Phillips Refinery has a capacity of 185,000 bbl/day and worth $180 million. Delta Airlines will further spend $100 million to resuscitate the refinery. Daudu is of the view that the buyers of the Nigeria’s obsolete refineries should inject their private funds into the TAM. “This grand fraud must end.  The proposed $1.6 billion TAM for the refineries is uncalled-for and should be dropped. Billions of dollars earmarked for renovating refineries have vanished over the years.  This $1.6 billion is also up for grabs. Nigerians have had enough of the federal government’s insincerity and intrigues on the refineries,” he said.

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