omonbude - oil refining in nigeria (myths and truths) revised
TRANSCRIPT
Oil Refining in Nigeria Myths and Truths
Paper prepared by Dr. Ekpen J. Omonbude1
for
The Nigerian Association for Energy Economics Conference
Abuja, Nigeria
April 2011
1 Economic Adviser (Natural Resources), Economic and Legal Section, Special Advisory Services Division, The
Commonwealth Secretariat, Marlborough House, Pall Mall, London, UK SW1Y 5HX. Dr Omonbude can be reached by e-mail: [email protected].
Oil Refining in Nigeria: Myths and Truths
Ekpen J. Omonbude, PhD i NAEE, April 2011
Table of Contents
1. Introduction ................................................................................................. 1
1.1. Background .................................................................................................................. 1
1.2. Objective of the paper ................................................................................................ 3
1.3. Methodology and structure of the paper ................................................................... 3
1.4. Limitations ................................................................................................................... 4
2. Brief Background to Refining in Nigeria ....................................................... 5
2.1. Global perspective ....................................................................................................... 6
2.2. Regional perspective ................................................................................................... 7
3. Myths about Oil Refining In Nigeria ............................................................. 9
3.1. Backdrop...................................................................................................................... 9
3.2. Myth #1: there is sufficient domestic demand ........................................................... 9
3.3. Myth #2: no over-supply of domestic market .......................................................... 10
3.4. Myth #3: resolution of security of supply concerns ................................................. 11
4. Truths about Oil Refining in Nigeria ........................................................... 13
4.1. Truth #1: on petroleum products consumption ....................................................... 14
4.2. Truth #2: on refining capacity ................................................................................... 16
4.3. Truth #3: on refinery profitability ............................................................................. 19
4.4. Truth #4: on petroleum product specification and quality ....................................... 21
5. Concluding Remarks and Recommendations ............................................. 23
6. References ................................................................................................. 25
Oil Refining in Nigeria: Myths and Truths
Ekpen J. Omonbude, PhD ii NAEE, April 2011
Table of Abbreviations
AGO Automotive Gas Oil
ATK Aviation Turbine Kerosene
DPR Department of Petroleum Resources
GDP Gross Domestic Product
HFO Heavy Fuel Oil
IEA International Energy Agency
IMF International Monetary Fund
IOC International Oil Company
Kb/d Thousand Barrels a Day
LPFO Low Pour Fuel Oil
LPG Liquefied Petroleum Gas
Mb/d Million Barrels a Day
NNPC Nigerian National Petroleum Corporation
NOC National Oil Company
OPEC Organisation of Petroleum Exporting Countries
PMS Premium Motor Spirit
Conversion Factors
In the course of the preparation of this paper, the standard unit of measurement used
throughout this analysis has been presented in barrels per day. Data gathered for this
analysis have come in other units. The table below presents the conversion factors that
have been used for this analysis.
1 Kilolitre
6.2898 Barrels
0.8581 Tonnes (MT)
264.17 US Gallons
Oil Refining in Nigeria: Myths and Truths
Ekpen J. Omonbude, PhD iii NAEE, April 2011
Disclaimer
The findings, interpretations, and conclusions expressed in this paper are those of the
author and do not necessarily reflect the views of the Commonwealth Secretariat and its
affiliated organisations, or those of the executive leadership of the Commonwealth
Secretariat or the Commonwealth member governments. The Commonwealth Secretariat
does not guarantee the accuracy of the data included in this work.
Oil Refining in Nigeria: Myths and Truths
Ekpen J. Omonbude, PhD 1 NAEE, April 2011
1. Introduction
1.1. Background
All things held equal, private petroleum refining in a market with sufficient demand and
potential for growth should ideally mean well for the domestic downstream sector. It is a
commonly held view that there are a number of arguments which support this position,
some of which include efficiency gains, enhanced price competition, and in the case of the
Nigerian Government and people at least, security of supply.
The recent removal of the US$1 million non-refundable deposit requirement of potential
private refiners can be said to demonstrate a degree of determination on the part of the
Nigerian Government to attract investment into the domestic petroleum downstream
sector. The result has been an increase in the level of private investor interest in refining
petroleum products in Nigeria. Media reports suggest that some of such investors have
progressed as far as having made (or are close to making) final investment decisions on the
construction or installation of petroleum refineries in Nigeria. While such media reports
carry varying degrees of validity, they can be said to point at what can be argued as a
potential emergence of a ‘refining boom’ which, coming at a time when the Government-
run domestic refineries have not met the country’s market demand, can easily be
interpreted as a welcome development.
This development has been linked to three points of view being generally held in discussions
of the Nigerian domestic market for petroleum products, namely that:
a. there is sufficient demand, both domestically and regionally;
Oil Refining in Nigeria: Myths and Truths
Ekpen J. Omonbude, PhD 2 NAEE, April 2011
b. the market will not be oversupplied, and if it does become oversupplied, excess
product can be easily exported; and
c. security of supply issues will be resolved once and for all.
As far as the drive towards the establishment of private refineries in Nigeria is concerned,
two issues emerge as obvious causes for consideration. First, there is the question of
refining capacity and the implications on downstream market fundamentals. While the
existing refineries currently operate far below capacity, their combined nameplate
capacities at 445,000 barrels per day (b/d) are in excess of Nigeria’s domestic petroleum
consumption of approximately 215,000 b/d (based on available information on total
petroleum products consumption for 2009, from the NNPC, although the US Department of
Energy’s EIA puts the figure closer to 280,000 b/d). New capacity additions by way of other
refineries being established could therefore increase the risk of over-supplying the domestic
market. The question therefore arises as to whether the outlook for domestic and regional
demand growth has been thoroughly assessed.
Second, there is the question concerning sustainability of the smaller refineries expected to
come on stream in the medium term, mainly in terms of their level of complexity and thus
the make-up of petroleum products available both locally and for export. Based on available
data from the Department for Petroleum Resources (DPR), the majority of the refinery
projects which currently look more likely to go ahead (or which have commenced
construction/installation) are of much smaller capacity and significantly lesser complexity
than typical large scale full conversion refineries. It is argued that these smaller projects –
with capacities ranging from 1,000 b/d to 30,000 b/d – have been able to secure funding
primarily because of their lower establishment costs, and this has increased their
Oil Refining in Nigeria: Myths and Truths
Ekpen J. Omonbude, PhD 3 NAEE, April 2011
attractiveness to investors. Given that capacity-upgrading costs are very high and rely on
economies of scale for a chance of profitability, it is important to raise questions about the
long-term prospects of such modular refineries considering that inevitable market dynamics
would test their adaptability.
1.2. Objective of the paper
It is important therefore to ensure that the right fundamental and practical questions are
being asked on a continuous basis, both in terms of Government policy and private investor
strategy, with regard to the feasibility and sustainability of additional private refineries in
Nigeria. This is especially important considering how complex the business and governance
of petroleum refining can be, as developments in global refining over the last decade have
demonstrated.
This paper attempts to address some of such questions which are pertinent to testing the
robustness of plans for the establishment of domestic private petroleum refineries in
Nigeria. The paper discusses the three generally held views as identified in 1.1 in the context
of fundamental truths concerning petroleum products demand in Nigeria, refining
economics, and refining profitability.
1.3. Methodology and structure of the paper
The approach taken in this exercise has been an analysis of market fundamentals (demand,
supply and pricing of refined petroleum products) in the context of the technical aspects of
refining economics, as well as the strategy and policy implications.
Oil Refining in Nigeria: Myths and Truths
Ekpen J. Omonbude, PhD 4 NAEE, April 2011
This paper is structured into five sections. Following this Introduction, Section two provides
a brief background to petroleum refining in Nigeria. The discussion considers the potential
for, and implications of, petroleum refining in a global and regional context. Section three
argues the generally held views concerning the future of refining in Nigeria as myths, while
section four presents and analyses facts about refining in Nigeria. Section five concludes the
report.
1.4. Limitations
It is important to bear in mind that this paper does not exhaust what is an extensive list of
fundamental and technical factors which pertain to the development of petroleum
refineries in developing countries. For example, the analysis in this paper is constrained by
insufficient transportation data (vehicle fleet, highways), as well as insufficient data on
petroleum products consumption by country in the West African region in order to conduct
a forecast of demand to 2015.
The paper has also not considered other refining investments in the region which could also
serve to test the competitive position of local refineries, nor has it raised questions on
potential environmental issues resulting from refineries which may be forced to shut down
in the long term as a result of poor economic sustainability.
Oil Refining in Nigeria: Myths and Truths
Ekpen J. Omonbude, PhD 5 NAEE, April 2011
2. Brief Background to Refining in Nigeria
The decision to invest in the construction of a refinery, especially in the wake of global
economic recession and more restricted access to capital, can be a difficult one to make. It
requires an understanding of the development, successes and failures of other refineries in
addition to the more technical factors, in order to provide a holistic assessment of the
investment decision process. This section provides a brief and general background to
petroleum refining as it affects Nigeria from a global and regional perspective, and thus sets
the scene for the analysis to follow in the rest of the paper.
Refining in Sub-Saharan Africa is at an interesting period. On one hand are plans for such
reforms as outlined in the collaborative effort of the World Bank and the African Refiners
Association (see World Bank, 2009), as well as private and Government plans to construct
new refineries such as in Nigeria and Uganda. On the other hand is the status quo, in which
many of the current refineries face extinction due to such considerable challenges as
obsolete processing units, high turnaround maintenance costs, and competition from
imported petroleum products.
The following discussion demonstrates that the decision on building a new refinery must
therefore be the result of a carefully planned process which would have taken into account
such crucial factors as the market for local and regional demand for petroleum products,
design specifications, construction costs, as well as environmental costs.
Oil Refining in Nigeria: Myths and Truths
Ekpen J. Omonbude, PhD 6 NAEE, April 2011
2.1. Global perspective
The experience of petroleum refining from a global perspective over the past 30 years
illustrated the complexity of the refining business. Refining business models have transited
from an era of continuous construction of new facilities in order to keep up with growing
demand in the boom years, to reduction of plant units and even shut-downs due to such
factors as tighter margins, a recession-led decline in demand for petroleum products,
changes in gasoline and diesel specification requirements, and eventual outright loss-
making operations (Leffler, 2008). For example, industry majors Shell announced in 2010
that they would shut down 6 refineries in order to stem losses from their Global refining
operation (The Times Online, 2010).
Most of the refinery disposals in the Atlantic Basin region have been a result of growing
competition from refiners in other regions such as Asia. Many of these refineries operate
under protected conditions compared to the free market conditions faced by a majority of
the Western refineries. Such refineries enjoy the benefit of a protective structure of import
duties and subsidies on crude oil and petroleum products. Therefore even while the free
market operators may suffer negative refining margins, they can still enjoy positive margins.
The fundamental point with regard to such refineries is that so long as the government
imposes caps on domestic petroleum product prices, the government will cover the losses
incurred by the refiners.
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Ekpen J. Omonbude, PhD 7 NAEE, April 2011
2.2. Regional perspective
The situation in Africa has not been considerably different from the global experience,
having witnessed a significant growth in new plant construction from the 1950s and later
experiencing plant capacity reduction and shut-downs in the last two decades. Many of
these cases of shut-downs and plants operating below capacity have resulted mainly from
poor management, although factors similar to those discussed in Section 2.1 have also
played a part in the history and development of African refining.
The table below provides a breakdown of petroleum refineries in Sub-Saharan Africa and
their nameplate capacities. It shows Nigeria and South Africa as the major refining centres,
accounting for about 70% of the region’s refining capacity. Another notable feature which
the table illustrates is the ownership of refineries in the region. Of the 17 refineries selected,
government ownership (including joint venture participation between private companies
and national oil companies) amounts to well over 60%. The ownership structure of
refineries in Sub-Saharan Africa has played a key role in keeping many of these facilities
operational, despite huge costs and losses.
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Ekpen J. Omonbude, PhD 8 NAEE, April 2011
Table 1 – Selected Petroleum Refineries in Sub-Saharan Africa
Source: adapted from Oil and Gas Journal, various
The situation in Sub-Saharan African refining is characterised by refineries operating very
much below their nameplate capacities, and as such unable to meet local demand for
petroleum products despite the growth in crude oil exports from the sub-region. The cost of
importing refined petroleum products to augment domestic demand has proved a huge
burden for governments in the region, especially taking into consideration the cost of price
subsidies for petroleum products.
COUNTRY NAME TYPE OWNER/OPERATOR
Capacity ('000
barrels/day)
ANGOLA Total Fina Petroleos de
Angola
Simple TOTAL, Fina Petroleos de
Angola S.A.R.L.,
SONANGOL
45
CAMEROON SoNaRa (Société
Nationale de Raffinage)
Simple Total, ExxonMobil, Shell,
Government of
Cameroon, Burkina Govt
45
CONGO Coraf Refinery Simple Government of Congo 21
COTE D'IVOIRE SIR Refinery Complex Total, Shell, ExxonMobil,
ChevronTexaco, PETROCI
60
GABON Sogara Refinery - Gabon Simple TOTAL, ExxonMobil, Shell,
Agip, Government of
Gabon
21
GHANA Tema Refinery Complex Ghana National
Petroleum Corporation
43
KENYA* Kenya Petroleum
Refinery Ltd
Simple Government of Kenya,
Shell International,
Chevron, BP
80
NIGERIA Kaduna Refinery Complex Nigerian National
Petroleum Company
110
Port Harcourt I & II Complex Nigerian National
Petroleum Company
210
Warri Refinery Complex Nigerian National
Petroleum Company
125
SOUTH AFRICA Calref Complex Chevron - Texaco 110
Engen Refinery Complex Petronas, Worldwide
African Investment
Holdings (Pty) Ltd
105
Natref Complex Sasol Ltd, TOTAL South
Africa (Pty) Ltd
109
Sapref Complex Shell and BP South African
Petroleum Refineries
(Pty) Ltd
165
SUDAN Sudan Khartoum Refinery
Co Ltd
Complex Government of Sudan,
China National Petroleum
& Gas Corp.
50
SENEGAL Société Africaine de
Raffinage (SAR)
Simple Total, Shell, ExxonMobil,
Government of Senegal
23
ZAMBIA Indeni Refinery Simple Government of Zambia,
TOTAL
23
* KPRL recently sold 50% equity to Essar
Oil Refining in Nigeria: Myths and Truths
Ekpen J. Omonbude, PhD 9 NAEE, April 2011
3. Myths about Oil Refining In Nigeria
3.1. Backdrop
As discussed in the introduction to this paper, there are three generally held views
concerning the prospects of additional petroleum refineries in Nigeria, namely: that there is
sufficient domestic and regional demand, excess supply can easily be exported, and security
of supply issues will be permanently resolved by the addition of new private refineries. This
section questions the reality of these views using available statistical data, and the
fundamentals of refining economics.
3.2. Myth #1: there is sufficient domestic demand
Available data from the NNPC on the total domestic distribution of petroleum products for
2009 shows an average annual consumption of about 215,000 b/d (NNPC, Annual Statistical
Bulletin, 20092). While economic growth is a key determining factor in oil consumption, as is
the case with most developing economies, Nigeria’s experience over the past decade has
been one of restricted development influenced by a number of constraining factors other
than movements in real GDP. Some of such constraints have included weakening demand
from the manufacturing sector, problems with the importation of petroleum products,
logistics problems with the distribution of the products to market, industrial action in the
downstream sector, and an apparent degree of product hoarding to raise prices on the black
market (Omonbude, 2009). One or all of these factors would explain for example, why
despite an annual average real GDP growth of about 6% between 2005 and 2009 (Source:
2 Note: converted from kilolitres to barrels of oil equivalent
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Ekpen J. Omonbude, PhD 10 NAEE, April 2011
IMF World Economic Outlook), total petroleum products consumption fell by an average of
1%.
The growth spike in petroleum products consumption between 2007 and 2008 (a significant
20.4% from the 2007 figure of about 196,000 b/d; source: NNPC) points to – among other
factors – the possibility of a degree of suppressed demand in the domestic market. Growth
spurts such as this (or the 21.2% growth between 2001 and 2002) tend to lend support to
the view that significant latent demand does exist, enough to warrant considerable investor
interest in supply and distribution infrastructure. It has been suggested in some discussions
that petroleum products demand could reach as high as 400,000 b/d if issues pertaining to
access are addressed.
3.3. Myth #2: no over-supply of domestic market
A useful approach to determining what refining capacity would be available and when it is
expected to come on stream would be to class each reported project according to an
assessment of what is firm, likely or not feasible. This would depend on a number of criteria
ranging from licence acquisition, through securing investment capital, to actual construction
work on the site. Based on available information on the DPR website, of the nine licences
granted to investors for the construction refineries between 2007 and now, only three
appear to have taken tangible steps towards their establishment.
It would be useful to find out if the DPR has defined long term refining capacity targets or
limits, which would have an impact on the manner and frequency in the granting of licenses
to potential investors. This point is made because of a likelihood of excess refining capacity
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Ekpen J. Omonbude, PhD 11 NAEE, April 2011
in the medium term at least, based on an estimation of the potential refining capacity to
come on stream using available data.
Assuming there are no capacity utilisation improvements in NNPC's existing refineries in the
next five years (i.e. capacity utilisation remains at 25-30%), and taking into consideration the
reported refinery plans which have a likelihood of coming on stream (see Table 2, Section
4.2), there is a possibility that about 375,000 b/d of refining capacity could be in place by
2015. This has been calculated based on the 2009 average refinery capacity utilisation for
the existent refineries of 25%, and the proposed refining capacities of the refinery projects
listed in Table 2 below (assuming they all come on stream by 2015). Assuming 90% capacity
utilisation of the existent refineries, there is then a possibility of nearly 665,000 b/d of
refining capacity which could come on stream in the mid-term. To put such a figure into
context, this would imply that in the next 5 or so years, Nigeria's current consumption
would have to achieve an annual growth of nearly 3 times more than it has grown over any
5-year period since 1980.
3.4. Myth #3: resolution of security of supply concerns
There are two perspectives that lend support to the view that an increase in the number of
domestic refineries would resolve security of supply concerns. First is the domestic view
concerning the growing and arguably unsustainable cost of subsidising petroleum product
imports on the part of the Government; a situation that may be resolved if the existing
NNPC refineries were operating at full capacity. Second is international benefit, wherein
countries such as China and South Korea are looking to diversify their sources of crude
Oil Refining in Nigeria: Myths and Truths
Ekpen J. Omonbude, PhD 12 NAEE, April 2011
imports and are prepared to invest in hardware and infrastructure in countries overseas
such as Nigeria.
To sufficiently address any security of supply concerns however, a key requirement would
be availability of a wide spectrum of petroleum products at competitive prices. The
information in Table 2 (See Section 4.2) suggests that the more likely refinery additions are
simple refineries, implying that they would only yield a small product spectrum namely
gasoline, kerosene, diesel and residual fuel oil (which typically would constitute 60% or
more of the spectrum). If the refineries are intended for export, they would need to be
complex in order to stay competitive, as the following section demonstrates.
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4. Truths about Oil Refining in Nigeria
Generally, there are five broad criteria that determine the economic feasibility of a
petroleum refinery. These are summarised below as follows (adapted from Leffner, 2008;
Fahim et al, 2009):
Crude oil feedstock availability and quality: The simple requirement is of a reliable,
commercially viable, long term source of crude oil, preferably of lighter
specification, which would have significant impact on processing costs.
Structure and outlook for petroleum products demand: The quantity and structure
of products demand in the market determine the configuration of the refinery
especially in terms of capacity size, refining complexity, and crude oil feedstock.
Potential refinery capacity and complexity: This decision is also affected by the
existent supply infrastructure in the market in question, mainly by way of source
and import cost of refined products.
Location of refinery: The location of the refinery is dependent on factors such as
proximity of a crude oil storage facility for daily operational and inventory control
purposes, proximity to product markets and, if possible, an already established
distribution network.
Competitive position of refinery: This factor mainly concerns the geographic
location of the refinery in a domestic and regional product market context, and the
implication of competition on refining margins.
This section considers the above criteria in the context of four identified facts (or ‘truths’)
about refining as they pertain to Nigeria. These ‘truths’ are summarised below as follows:
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Ekpen J. Omonbude, PhD 14 NAEE, April 2011
There is insufficient evidence to ascertain the degree of suppressed demand.
Available data does however suggest that any big growth in demand will be
constrained by a number of other factors such as poor infrastructure.
The impact of the recession on oil and oil products demand has had a knock-on
effect on global refining capacity. It is more likely that there will be excess refining
capacity in the medium term.
Refining business models operate with thin margins and rely heavily on economies of
scale to remain profitable.
Competition in the international market requires refineries to increase complexity in
order to provide a wider spectrum of finished products. This has significant cost
implications.
4.1. Truth #1: on petroleum products consumption
Given the structure of oil consumption in the country, access requirements which would
need to be met, and the necessary demand drivers, it is difficult to fathom the practicality of
an additional 100-200,000 b/d of demand in the medium term at least. Structurally,
transport fuels constitute the bulk of oil consumption in Nigeria, with motor gasoline
(petrol/PMS/super gasoline), automotive gas oil (diesel/AGO) and aviation turbine kerosene
(ATK) accounting for nearly 90% of total petroleum products use in 2009.
Based on data from the NNPC and the International Energy Agency (IEA), this structure has
not changed significantly over the last two decades. Any significant growth in demand is
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Ekpen J. Omonbude, PhD 15 NAEE, April 2011
most likely to come from the transport sector; mainly from petrol use (motor gasoline alone
accounts for over 70% of the petroleum products demand spectrum. See Figure 1).
Figure 1 – Structure of Petroleum Products Consumption in Nigeria, 2009
Total Consumption: 215,000 kb/d
Source: Adapted from NNPC Annual Statistical Bulletin, 2009
The question therefore arises as to what practical factors would influence growth in petrol
demand. Some of the key drivers are as listed below as follows (Omonbude, 2009):
economic growth (real GDP growth as a useful indicator);
measurable and significant growth in motor vehicle acquisitions;
the price of petrol;
the population reaching driving age;
changes in fuel efficiency levels of the motor vehicle fleet; and
the quality and capacity of distribution infrastructure.
LPG0%
PMS76%
HHK6%
ATK6%
AGO9%
LPFO2%
Others1%
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In order for significant upward pressure on demand growth to be applied, there would need
to be remarkable upward trends in these respects, with the exception of changes in fuel
efficiency of the motor vehicle fleet (the more efficient the vehicle fleet, the less
consumption growth is expected). While the National Bureau of statistics shows significant
growth in vehicle registrations for Lagos and Kano States (Annual Abstract of Statistics,
2009), overall increase in the national vehicle fleet would need to be far more substantial.
Assuming a direct impact of an increase in real GDP on the propensity to spend on motor
vehicle acquisitions, the turnover rate of imported vehicles at the ports would have to
increase considerably for example. If this were feasible, there would then be extensive
pressure on the pace of development in distribution infrastructure (e.g. capacity of road
networks, vehicle population density in cities) to keep up with such an expansion.
4.2. Truth #2: on refining capacity
The growth in energy demand between 2003 and 2008 encouraged significant investment in
production capacity, both at the upstream and downstream ends of the oil and gas sector.
These investments in capacity upgrades were however negatively affected by the global
financial crisis and eventual economic recession between 2008 and 2009, during which
global demand growth fell by about 1.2 mb/d (Source: BP Statistical Review of World Energy
2010). This led to an increase in the refining capacity overhang in the industry, resulting in a
significant number of confirmed closures and sales of refineries by independent operators in
the Atlantic Basin region, IOCs, and a number of NOCs (Source: FACTS Global Energy). Figure
2 illustrates this.
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Figure 2 – Refining & acquisition trends since the economic downturn
Source: FACTS Global Energy
The following table shows the number of private refinery projects licensed by the DPR. The
table is categorised by plant type, capacity and status of progress.
Table 2 – Private Refineries and Petrochemical Plants Status at August 2010 – Licensed
Refiners
OWNERSHIP PLANT TYPE CAPACITY
(kb/d)
STATUS
Amakpe Topping plant 12 Kick-off 2007
Rehoboth Topping plant 12 Receiving commitment deposit
Amexum Complex 100 Kick-off stalled. Lack of finance
Antonio Conversion 27 Structural work commenced
Gasoline Associates Complex 100 Kick-off stalled
Ologbo Topping 12 Engineering package completed
Niger Delta Petroleum Resources Diesel extraction 1 Units installation commenced
TOTAL 264
Source: adapted from DPR Official Website. Note: excludes projects classified by DPR as “yet to be ascertained”.
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As discussed in Section 3.3 of this paper, the successful completion of each of these projects
would easily pose an excess refining capacity risk. This risk can however be managed
through such mitigating measures as a clear policy position on strategic stockpiling on the
part of the DPR (or the relevant regulatory body), and identifiable potential product export
markets on the part of the refiners.
A useful question to ask in this respect therefore is what the position of the Government is
pertaining to strategic stockpiling, which carries its own technical limitations. Another
question to ask is if thorough assessments of the structure and outlook for petroleum
products demand in such target international markets have been duly and diligently
conducted. A cursory look at petroleum products demand and supply in the Gulf-of-Guinea
region (and further along the West African coast) in the context of installed and utilised
refining capacity, would also suggest a likelihood of excess capacity if all of the planned
projects were to materialise (See Table 3).
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Table 3 – Oil Consumption: West Africa (Selection), Gulf of Guinea
Country Oil Consumption (Kb/d)
Benin 23
Cameroon 26
Cote d’Ivoire 24
Equatorial Guinea 1
Gabon 14
Gambia 2
Ghana 57
Guinea 9
Liberia 4
Nigeria 215
Sierra Leone 9
Togo 21
TOTAL 405
Source: adapted from CIA World Factbook; NNPC
4.3. Truth #3: on refinery profitability
Ensuring and sustaining positive refining margins throughout the life of the plant requires a
great degree of fluidity in adjusting crude oil feedstock, plant processes and transportation
logistics to enhance gross product worth. If the refiners are going to operate under free
market conditions, the larger and more complex plants will most likely fare better than the
skimming/modular refineries simply because they have the scale and flexibility to make
adjustments as market or regulatory forces change over time. The table below illustrates
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Ekpen J. Omonbude, PhD 20 NAEE, April 2011
typical yields from crude oil feedstock of similar sulphur content and weight to West Texas
Sour or Arab Light.
Table 4 – Percent Refinery Yields from Medium Crude
Simple Complex Very Complex
Gasoline 30 50 60
Jet Fuel 10 10 10
Distillate Fuel 20 25 25
Residual Fuel 35 10 -
LPG - 3 4
Coke - - 3
Refinery Fuel 8 12 13
Gain (3) (10) (15)
Source: Leffler, 2008
The question of the extent of regulatory protection, or what market conditions under which
the proposed refineries would operate is thus raised. This is because the profitability of the
projects will depend significantly on the ability of the refinery to maximise refining margins.
Will there be any form of protection or will refiners be exposed to free market conditions?
The implication of operating under some form of subsidy is that the refiners can still enjoy
healthy refining margins even while free market operators suffer losses. The implication for
Government would therefore be a reversal (or adjustment) of policy with regard to
deregulating the downstream sector.
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4.4. Truth #4: on petroleum product specification and quality
If it is established that there is a likelihood of excess domestic and regional refining capacity,
a practical solution would be to consider exporting product further across the Atlantic (for
the sake of argument). In addition to an available market, the success of such products on
the international market will depend significantly on meeting international product
specification requirements, mainly in terms of sulphur content in the transport fuels. Unless
the assay of the crude oil feedstock contains comparatively remarkable properties (such as
low sulphur content, and which would as such not necessarily require further processing),
the obvious implication would be that the refineries would need to be complex conversion
refineries (i.e. include cracking, flashing and possibly coking processes) not only to enhance
product yield, but also to improve product quality and thus enhance competitiveness.
This has huge cost implications, and would require significant scaling-up of plant capacity in
order to remain economically viable. Considering that nearly all of the refineries reportedly
planned are simple (or topping) plants, there are questions which would therefore need to
be addressed. For example, there will be need to reconcile the sulphur content limits on
gasoline and diesel in Nigeria and potential export markets with international standards.
Assuming all the proposed refineries use Agbami light sweet crude as their primary crude oil
feedstock for example, an argument could be made for the simple refineries on the basis of
the low-sulphur-content characteristic of this crude type (Note: the Agbami assay shows
0.05% sulphur content, and is produced about 70 miles offshore. The refinery will therefore
have to be located at the coast in order to enhance margins, if this is its main crude oil
feedstock. Also, the author acknowledges the vast array of other crudes whose assays may
Oil Refining in Nigeria: Myths and Truths
Ekpen J. Omonbude, PhD 22 NAEE, April 2011
bear similar – or better – qualities). Depending on the extent of excess capacity as well as
the extent of regulatory requirements for sulphur content in the petroleum products, there
could well be no need for simple refineries to upgrade. However, the likelihood of
undefined quality specification requirements for petroleum products in the wider
international market is very low. This would create difficulty for such products from straight-
run refineries to find markets.
Oil Refining in Nigeria: Myths and Truths
Ekpen J. Omonbude, PhD 23 NAEE, April 2011
5. Concluding Remarks and Recommendations
The analysis presented has shown a potential for excess supply of refined petroleum
products both in Nigeria and the wider market, with long term implications for security of
supply. It has demonstrated the importance of ensuring that the right practical questions
are continually asked, both in terms of Government policy and private investor strategy,
with regard to the feasibility and sustainability of private refineries in Nigeria. This is
especially important considering how complex the business and governance of petroleum
refining can be, as developments in global refining over the last decade have demonstrated.
This paper shows that there is need for rigorous due diligence regarding the drive to
develop the Nigerian petroleum downstream sector. For example, a clear plan for refining
capacity targets, both in a domestic and international context, will need to be set out. This
would require a medium to long-term analysis of market fundamentals, both domestically
and in the global context.
From a policy stand-point, it would be unwise to consider the development of petroleum
refining in isolation. A thorough understanding of the direct and indirect linkages to
transport and industry for example, would serve to enhance the robustness of decision
making with regards to defining the course of development in the sector.
Finally, it is important also to point out that a more thorough investigation could well
identify clear and significant latent demand both domestically and in the regional markets,
which would be sufficient enough to accommodate any growth in domestic petroleum
Oil Refining in Nigeria: Myths and Truths
Ekpen J. Omonbude, PhD 24 NAEE, April 2011
products supply. This could be the case, for example, considering differences in figures
suggested as Nigeria’s total petroleum products consumption. While some observers put
this figure at over 300,000 b/d (e.g. Nigeria Energy Intelligence, 5 October 2009 edition), the
NNPC’s statistical data suggest total delivered petroleum products to be about 215,000 b/d.
Whichever the case, a clear definitional framework explaining what constitutes total
consumption should serve to resolve such discrepancies.
Oil Refining in Nigeria: Myths and Truths
Ekpen J. Omonbude, PhD 25 NAEE, April 2011
6. References
BP Statistical Review of World Energy, 2010, available online via
http://www.bp.com/productlanding.do?categoryId=6929&contentId=7044622
Department of Petroleum Resources, Official Website, http://www.dprnigeria.com/
Fahim et al, (2009), Fundamentals of Petroleum Refining, Elsevier Science
International Monetary Fund, World Economic Outlook, 2010
Leffler, W., (2008) Petroleum Refining in Nontechnical Language, Pennwell
National Bureau of Statistics, (2009), Annual Abstract of Statistics, Available online via
http://www.nigerianstat.gov.ng/
Nigerian National Petroleum Corporation, Official Website, http://www.nnpcgroup.com/
Omonbude, E.J., (2009), “Prospects for Domestic Petroleum Refining in Nigeria: a note of
caution”, Nigeria Energy Intelligence, Nov. 23 Edition
OPEC, World Energy Outlook, 2010
The Times Newspaper, (2010), “Shell to cut 1,000 jobs and close six refineries”, Feb 5
Edition, accessed online via
http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article7
015767.ece