Why Rehabilitation Of Port Harcourt Refinery Is Justified
On Wednesday, the Federal Government commenced a fresh drive to rehabilitate Nigeria’s ailing and under-performing refineries by approving the sum of $1.5bn for the rehabilitation of the Port Harcourt Refinery.
The contract which has been awarded to an Italian company, Technimount SPA, was approved at the 38th virtual FEC meeting presided over by President Muhammadu Buhari in Abuja.
The Minister of State for Petroleum Resources, Timipre Sylva at the meeting explained that the rehabilitation will be done in three phases of 18, 24 and 44 months.
The first phase is to be completed in 18 months, which will take the refinery to a production of 90 per cent of its nameplate capacity.
The second phase is expected to be completed in 24 months and all the final stage will be completed in 44 months.
The project would be jointly funded by the Nigerian National Petroleum Corporation Internally Generated Revenue, budgetary allocations provisions and Afreximbank, respectively.
The Group Managing Directed of the NNPC, Mele Kyari noted that the rehabilitation of the refineries were critical to ensuring that they can deliver beyond the 90 percent installed capacity.
Before the approval by FEC, the Group Managing Director of the Nigerian National Petroleum Corporation, Mele Kyari had hinted on efforts by the government to rehabilitate the national refineries.
According to the GMD, the refineries have only worked sporadically for years due to activities of vandals.
He said by every standard, a refinery is expected to operate at least 90 per cent of installed capacity but it was impossible to run any of these refineries before the shut down at that level.
Over the years, the Federal Government had made efforts to run the refineries at 60 per cent of the installed capacity but this had led to value destruction, where oil companies take $100 crude to the refinery and bring out only $70.
To say that Nigeria’s refineries have suffered years of neglect would be stating the obvious. In particular, the Port-Harcourt Refining Company has experienced decline in performance over the past two decades due to delays in conducting mandatory Turn Around Maintenance.
The last time a TAM was conducted on the Refinery was 21 years ago (2000). It is high time the nation’s refineries are brought back to their optimal capacities.
The non-performance of the nation’s refineries is one of the major reasons for the importation of petroleum products. Since Nigeria does not have control of the international price of crude oil, the government had been forced to pay huge amount to subsidize petrol.
Within a period of 13 years covering January 2006 and December 2019, the Federal Government spent a whopping sum of N10.413trn to subsidize the price of Premium Motor Spirit for Nigerians according to government records.
Within the 13 year period, the N10.413trn burden of subsidy payment for PMS translates into a yearly average payment of about N743.8bn.
Nigeria’s spending on oil subsidy is more than four times what the country spends on building schools and health centres in a country of over 200 million people.
The country has the world’s 10th largest crude reserves, yet spends at least N743.8bn on fuel subsidy annually.
By the Federal Government’s schedule, the Port Harcourt Refinery will refine crude oil at optimum capacity by 2024 and could save the nation billions of dollars, which could then be allocated to other sectors, such as health and education.
Critics often say it is more economical to build a new refinery than “just waste $1.5bn” to rehabilitate the PHRC, which holds 210,000bpd out of Nigeria’s 445,000bpd refining capacity.
But on the contrary, a cursory look at brand new refineries built across the world reveals how expensive it is to build a new refinery. For instance, the sum of $10bn was spent on building Aramco Oil Refinery (250,000-300,000 bpd) in Pakistan; $12bn was spent on building Abrue Lima Project (230,000) in Brazil; $27bn was spent on building Pengerang Refinery and Petrochemical Integrated Development, (300,000 b/d + 3 mtpa) naptha steam cracker) in Indonesia.
Closer home, the sum of $19bn was spent on building Dangote Refinery (650,000bpd) in Nigeria.
Also worthy of note is that in terms of the financing component, the African Export-Import Bank (Afreximbank) is the reliable lender that has raised $1bn towards the rehabilitation project. In the same vein, Government will raise the sum of $550m.
It is also instructive to state that a credible and capable lender like Afreximbank would never agree to put such huge amount of money where there will be no value. Similarly, Tecnimont SpA, the Original Refinery Builder which is also the Engineering, Procurement, Construction, Installation and Commissioning Contractor, is globally reputable and capable, with requisite experience of similar jobs across the globe.
There have also been arguments lately that the Refineries should be privatized to boost their level of efficiency. But one major factor that proponents of these arguments fail to realize is that strategic assets are never put for sale.
This is because despite the abundance of hydrocarbon resources, Nigeria is, sadly, the only oil producer in the world that does not refine petroleum products. Instead, the country relies heavily on importation for most of its Premium Motor Spirit needs locally. This is not a good record to be proud of.
There is also another shallow argument by Armchair that it is better to sell off these refineries since they can no longer meet up the nation’s refining needs. However, one thing they fail to understand is that no country sells off its strategic national assets, such as the refineries, to the highest bidder.
Just last Thursday, there were reports from a statement issued by former Vice President Atiku Abubakar that while the Nigerian government was spending the sum of $1.5bn to rehabilitate the Port Harcourt Refinery, Royal Dutch Shell last year sold Martinez Refinery in California to PBF Holding Company LLC (PBF), a subsidiary of PBF Energy, Inc. for $1.2bn. The sale was said to have included the refinery and inventory.
But what the proponents of Atiku’s argument fail to highlight is the fact that the deal is not an ordinary asset sale. This is because it also includes crude oil supply and product off-take agreements, and other adjustments. The implication of this is that shell would still be taking its crude to the plant and be off-taking products
Also, it is noteworthy to state that the plant is 105 years old and after over a century of being operated could still sell it for $1.2bn.This tends to show how valuable a refinery can be.
There is also the thinking by some critics that a mere mention of TAM means another round of business as usual, where resources are drained with nothing to show for it at the end of the day. While some of these arguments are genuine, it is instructive to note that this TAM is different because interested parties who benefit from the age-long importation largesse and fleece the nation dry will potentially be out of business.
These critics probably forgot that the administration of President Buhari had from inception, made clear its intention to bring back the refineries to their optimal capacities. The Buhari Presidency also threw its full weight and support behind the NNPC to execute the project.
The execution of the project would be done from an entirely different approach. The project consists of a governance structure that includes key independent external stakeholders such as the Ministry of Finance; Nigeria Extractive Industry Transparency Initiative; Infrastructure Concession Regulatory Commission; PENGASSAN and NUPENG.
It also involves significant replacement of key equipment within the refinery’s major units and components. It is also imperative to state that the rehabilitation project is funded through part-loan and part-government, with the financiers actively monitoring the execution of the project. KBR and NETCO are acting as NNPC Engineers who will be supervising the EPC contract to ensure the project is delivered in line on schedule, within budget and at the right quality.
At a time when the government is focusing on addressing the huge unemployment problems in the country, the Port Harcourt Refinery Rehabilitation project would help in the area of job creation across the value chain (crude supply, operating and maintaining the refinery, product supply etc) including several third party contractors that will supply outsourced services or goods.
The refined products are also feedstock for small scale local manufacturing. The most significant and visible benefit is energy security of the country. Let’s imagine that the COVID 19 lock down became global and Nigeria could not import refined petroleum products, it would have been a disaster as there was no capacity to refine crude in country and as such, there would have been no products.
These and many more are the reasons why even when countries don’t produce hydrocarbons, they build refineries.