By Adewole Kehinde
Nigeria, Africa’s most populous country, has four refineries with a combined capacity of 445,000 barrels per day (bpd): one in the north at Kaduna and three in the oil-rich Niger delta region at Warri and Port Harcourt.
The Port Harcourt complex consists of two plants with a combined capacity of 210,000 bpd.
In 2019, the refineries lost some 167billion Naira and only Warri processed any oil. In April 2020, they were all shut pending rehabilitation.
Nigeria has struggled with the poorly maintained units for decades. Successive NNPC Group Managing Director have announced a series of unsuccessful plans to revamp, privatise or expand the refineries.
In 2019, the Nigerian National Petroleum Corporation abandoned a similar attempt to partner with oil traders, producers and engineering firms to fund refinery revamps after more than a year of talks, saying it would fund the projects itself.
The barely functional plants leave country completely dependent on imports and subsidy schemes also cost the Government billions of Naira. The Federal Government says it eliminated subsidies, but the NNPC is effectively the sole Fuel importer, using some 300,000 barrels per day of oil to swap for fuel.
In December, 2020, the Nigerian National Petroleum Corporation opened a bid round for a contract to rehabilitate the Port Harcourt Refinery which will be private companies once they were rehabilitated.
The decline in the performance of Nigeria’s refineries started in the early 1990s after the military Government ordered Nigerian National Petroleum Corporation to close its accounts in commercial banks and transfer them to the Central Bank. Nigerian National Petroleum Corporation lost its autonomy.
It became increasingly subjected to interference and directives by politicians. It could no longer ensure prompt maintenance of the refineries; most importantly, decisions on when to carry out Turnaround Maintenance and which contractor to execute it came under the influence of the Government rather than by the professionals within the corporation. Things very quickly went downhill thereafter as a result. The figure that follows illustrates the decline in capacity utilization that resulted.
The construction of New Port Harcourt Refinery was completed in 1989. The first year operation covered only about 7 months. The decline from 1997 onwards is evident.
The low capacity utilization which developed and still exists today is due to the following reasons:
1. Poor governance.
2. No major Turnaround Maintenance has been carried out in any of these refineries since 2008.
The last TAM in PHRC was carried out in 2000. This should be viewed against the established best practice worldwide that TAM should be conducted by refineries every two or maximum 3 years.
3. Pipelines supplying crude oil to the refineries and those conveying products from them are routinely vandalized. This leads to massive loss of revenue and worsens the problem of under-recovery of crude cost.
4. Even if the refineries were able to operate consistently, the price of Premium Motor Spirit (PMS) is regulated by Government, leading to serious under-recovery of crude cost.
Also, the problem of poor governance has been recognized as a key factor that has affected the performance of the refineries.
The refineries are 100% owned by the Government and have no independent control of or access to their funds. All requests for funds to carry out maintenance are subject to multilayer bureaucratic processes.
Approvals for any meaningful maintenance are subjected to considerations first by the refinery management committee, thereafter by the corporate refineries directorate, then by the corporate management committee, followed by the corporate board and finally by the Federal Executive Council chaired by the President, depending on the amounts required.
These processes often require months to go through the various stages. Refineries cannot run reliably in this manner.
Outright commercialization or outright divestment of significant equity has been promoted as a solution to this malaise. The Petroleum Industry Bill which was first presented to the National Assembly in 2007 was intended to introduce better governance along these lines. Unfortunately, the bill has been considered by successive assemblies, but is yet to be passed nor signed into law.
A petroleum refinery is a complex manufacturing plant designed to convert crude oil feedstock into a definite number and types of petroleum products. The types of products fall into two major categories, namely fuel products and lubricating products.
The fuel refinery is designed to produce five types of products namely:
LPG (Liquefied Petroleum Gas or Cooking Gas)
PMS (Premium Motor Spirit or petrol)
DPK (Dual Purpose Kerosene)
AGO (Automotive Gas Oil or Diesel)
Best practice is that a Refinery is designed and built to produce defined quantities and specifications of each of these products operating in a continuous manner without interruption for 2 – 3 years based on proper maintenance culture, before it is systematically shut down for a period, to carry out Turn Around Maintenance (TAM).
When TAM is unduly delayed, performance of the refinery declines. Non-performance of TAM of the Port Harcourt Refinery has resulted in average capacity utilization declining to 20–25%. A more serious consequence is that the country is forced to resort to importation of petroleum products, and massive waste of scarce foreign exchange.
Machines and other service facilities are subject to deterioration due to their use and exposure to process and environmental conditions.
This deterioration requires to be duly taken care of by various maintenance interventions, techniques and at certain pre-determined intervals so that the required use of facilities can be continued and service life extended until the point where maintenance costs become prohibitive and replacement action becomes inevitable. Our own car periodic service maintenance is an example.
Turnaround Maintenance is a periodic shutdown (total or partial) of a refinery process unit or plant to perform maintenance, overhaul and repair operations and to inspect, test and replace process materials and equipment.
Turnarounds are critical for the health of a refinery and are the single most costly part of a plant or process plants maintenance budget.
The refineries were designed to receive crude oil feedstock by pipeline. In like fashion, they were designed to have products evacuated mainly also by pipeline. Lifting of products from depots immediately contiguous to the refineries was intended mainly to supply the towns and cities nearby.
Two major reasons for Vandalization of crude and product pipelines have been attributed to the agitation for resource control and the attendant rise of militancy in the Niger Delta region.
In summary, the Niger Delta area of Nigeria where oil is principally produced has been a hotbed of agitation for resource control. This has arisen from the perceived injustice felt by the people on the assertion that the region has not significantly benefited from the oil wealth, while it has borne the brunt of resultant environmental degradation and pollution.
Suffice it to say that the attacks on the pipelines made it difficult to consistently supply crude oil to the refineries. The poor state of maintenance of the refineries worsened the situation.
An extract from the PHRC Annual report for 2013 highlights the negative impact of pipeline vandalization on crude delivery to the refinery.
An average of 23.46 % and 37.58% capacity utilization and on-stream efficiency were attained, respectively, as at end of June 2013 for NPHR. Performance of the plant was impeded mainly by inadequate supply of bonny light crude oil.
In Q2 2012, the average capacity utilization and on-stream efficiency of New Port Harcourt Refinery (NPHR) were 3.92% and 6.12%, respectively. This low performance was largely due to low feedstock within the quarter under review. This improved to 12.48% and 20.43%, respectively, in Q2 2013 when crude oil supply improved slightly.
The average capacity utilization and on-stream efficiency of FCCU within the period under review were 12.84% and 16.73%. This low performance was as a result of insufficient feedstock from the upstream vacuum distillation unit, which itself was starved by poor supply to the Crude Unit.
Thus, the problem of pipeline vandalization warrants special treatment. The security and safety of the pipeline infrastructure are imperative for the viability of the Downstream Oil and Gas sector.
The frequency of insertions of valves, outright stealing of crude and refined products, bombing of the pipeline by aggrieved and criminal elements have contributed significantly to worsening the on-stream time efficiency of the refineries. These activities have resulted in huge losses to the country as well as degraded the Crude Oil supply and product facilities. Other associated problems include pollution of the environment, fire outbreak, loss of insurance for downstream assets, and shut down of Refineries due to supply chain-related issues.
Evolving a sustainable strategy and approach which includes incorporating additional safety and security features for the pipelines shall minimize and deter this nefarious activity which has significant negative consequences on revenues of the companies and the country at large.
Nigerian National Petroleum Corporation through its Pipelines and Products Marketing Company (PPMC) manages the facilities and infrastructure for the supply and distribution of crude oil and refined petroleum products (PMS/DPK/AGO). These consist of: 5 Terminals, 21 Petroleum Depots, 750 km of Crude Oil Pipelines and 4400 km of Products Pipeline Networks.
The crude lines are linked to the export terminals of the major Oil Producing Companies such as Shell Petroleum Development Company (SPDC) and Chevron Nigeria Limited (CNL) which provide the main feedstock for the Refineries totaling 445,000 bpsd capacity.
SPDC is estimated to have over 6000 km of pipelines and flow lines, 87 flow stations, eight gas plants, two export terminals and more than 1000 producing wells. Chevron on the other hand manages nine Oil mining Leases (OMLs) and one export terminal. The two operating companies provide a large percentage of the crude oil requirement for the Refineries.
Unplanned shut down of any of the crude oil pipelines to these terminals has an immediate impact on the refineries overall performance for that period. A McKinsey report in 2009 provided a correlation between the impact of lack of feedstock and the poor state of reliable operation of the refineries. Supply Chain Issues accounted for 53% of the unplanned shut downs while equipment failure made up 47%. Matters have been worsened by sabotage of the crude oil pipelines which feed the refineries, and the product evacuation pipelines.
In December 2009, the then Group Managing Director of NNPC, in a two-day series of presentations made separately to the Inspector General of Police, and the Chief of Defence Staff in Abuja elucidated that the advent of illegal bunkering, pipeline vandalism and product theft has massively impacted on the capacity of Nigeria’s oil and gas assets to function optimally. He stated that a total of 16,083 pipeline breaks were recorded within the previous 10 years. While 398 pipeline breaks representing 2.4% were due to ruptures, the remaining 15,685 breaks which translate to about 97.5% of the total number of cases resulted from the activities of vandals.
Within the same period of 2009, 8105 breaks were recorded along the system 2E representing about 50.3% of the total number of petroleum products pipeline breaks in the country. The attacks left the NNPC with a cost of N78.15 billion in product loses and pipeline repairs. (The Port Harcourt to Aba segment only came back in service in 2012 after being out for 7 years due to vandalism).
The System 2A product pipeline which conveys products from Warri–Benin–Suleja/Ore depots ranked second on the scale of pipeline break points with 3259 cases representing about 20.2% of the total. Here again NNPC lost over N20.39 billion in products and pipeline repairs. (The line also was brought back into service in 2012).
System 2B which carries products from the Atlas Cove facility to Mosimi–Satelite–Ibadan–Ilorin depots recorded 2440 breaks leading to a loss of over N73.6 billion in products and pipeline repairs. This zone was the most notorious. In the year 2012 alone, the activities of criminal syndicates caused massive fuel shortages within this axis by shutting off 11 million litres per day of PMS due to the fire outbreak at the Arepo vandalized point. Three NNPC pipeline maintenance staff were murdered while trying to plug the vandalized point. Over 774 line break points were identified and repaired before re-streaming of the line in December 01, 2012. Miscreants again repeatedly damaged the pipeline in January 2013 resulting in two (2) separate fire outbreaks.
On gas, the incessant attacks on the Trans-Forcados Pipeline rendered it out of service in May 2009, thus making it impossible to evacuate crude oil/condensate from some Shell operated facilities in 2010 with over 300,000 bpd and 140mscfd production shut-in. About 55 vandalized points were repaired at a cost of N11 billion. In the year 2011 alone, a total of N105 billion was lost due to crude and product theft from pipelines associated with the refineries, from PPMC records.
Due to repeated vandalism of the Escravos-Warri line, NNPC has had to resort to the alternative means of transporting crude oil to WRPC by vessel at an additional cost of $4.2 per barrel. Over each month, the cost of transporting the contract quantity of crude oil in this manner amounts to $7million; an added burden to the operating costs of the refinery.
While stealing products from pipelines at the Port Harcourt Refinery Jetty, a fire resulted and completely destroyed Jetty B. Jetty A was partially affected. Cost to NNPC for the reconstruction of the Jetty at Okrika is over $66 million.
The combined impact of these avoidable costs is that the economics of downstream operations is becoming increasingly unattractive and investors are being affected.
The incessant attacks have greatly compromised the integrity of the crude and product pipelines because of the constant replacement and repair of the segment.
This development is responsible for the non-attainment of the effective pumping rate of liquids in order to prevent pipeline rupture and consequent environment pollution.
The Energy Information Administration (EIA) Report on Nigeria updated on October 16, 2012, attributes oil theft, commonly referred to as “bunkering”, as being responsible for pipeline damage that is often severe, causing loss of production, pollution, and forcing companies to shut in production. Protests from local groups over environmental damages from oil spills and flaring undermined relations between local communities and international oil companies (IOCs). The industry has been unfairly blamed for pollution that has damaged air, soil, and water, leading to losses in arable land and decreasing fish stocks, whereas a significant percentage of the damage is due to activity of vandals.
The report estimates that the theft and trade in stolen oil has recently surged according to NNPC data, by 224% in 2011 over the previous year. The EIA report quotes Nigeria’s Ministry of Finance that about 400,000 bbl/day of oil was stolen in April 2012, which led to a fall of about 17% in official oil sales. The EIA reports quotes Royal Dutch Shell, Nigeria’s largest producer, recently estimated that 150,000–180,000 bbl/day or 6% of the country’s total production, on average is lost to oil bunkering and spills.
Using Shell’s figure of approximately (150,000 bbl per day) translates to an average loss in the upstream of $5.475 billion per annum. Additionally, Nigeria also lost over N105 billion as theft in the downstream according to PPMC in year 2011 exclusive of pipeline repair cost.
It is, therefore, imperative, given the quantum of financial losses, loss of lives, destruction of property, and environmental degradation that the Country must evolve a strategy to commit about 25% of the $5.475 billion annually over a 10-year period as pipeline replacement, upgrade, and relocation from ROW, and installation of security surveillance in order to arrest this ugly trend. This should be funded via appropriation by the JVs, PSCs and NNPC under a National Energy Critical Infrastructure Protection and Restoration fund.
NNPC in collaboration with relevant stakeholders organized a security workshop in October 2012 to discuss and proffer strategies for improving the security of crude supply and evacuation of refined products to and from the Refineries.
The workshop aimed at complementing ongoing Joint Oil and Gas pipeline security committee efforts inaugurated by the Honorable Minister of Petroleum Resources (HMPR) and the Chief of Defense staff to minimize and eradicate crude theft in the oil pipeline. Various interventions, such as engaging communities, Police and Armed Forces for pipeline surveillance, had not stemmed the tide of vandalism. This made it necessary to consider other options, including use of technology to minimize and combat this menace.
The objectives of the workshop among others were to:
Facilitate the creation of the required synergy among different stakeholders in implementing the new business objective of profitability.
Explore options available for addressing the problems created through pipelines vandalism;
Evaluate various technologies that may be applicable in the deployment of the solutions;
Evaluate the impact of collateral damage to the environment from deploying some of the technologies.
Far reaching solutions and combination of strategies were adopted and recommended to the Federal Government.
Unfortunately, there is evidence that several international syndicates are involved in this nefarious activity. Foreign flagged vessels have been arrested in the Nigerian coastal waters engaged in buying stolen crude oil and products. To do nothing means to mortgage the future of Nigeria to continued importation of petroleum products at huge cost and drain of scarce foreign exchange.
A careful review of the Oil Pipelines Act, Cap 338 of 1990 (and the Oil Pipelines Regulations which are made pursuant to the Act) does not establish sanctions for the violation of Pipelines or disruption of the distribution of crude oil or refined petroleum products.
However, the Miscellaneous Offences Act Sect. 1 provides that any person, who willfully or maliciously breaks, damages, disconnects, tampers with, obstructs, destroys pipelines or interferes with the free flow of crude oil or refined product through pipelines shall be guilty of an offence and liable upon conviction to imprisonment for life.
However, the offences under this Act can only be prosecuted at the Federal High Court.
On the other hand, Petroleum Production & Distribution (Anti-Sabotage Act) Sect. 1 provides that any person who willfully does anything with intent to obstruct or prevent the procurement of petroleum products in any part of Nigeria shall be guilty of an offence of sabotage.
Section 2 states that the persons shall be liable upon conviction to a maximum of 21 years of imprisonment or a Death sentence.
Section 3, however, vests exclusive jurisdiction in the Federal High Court.
The sanctions provided in the relevant laws are severe but the lack of diligent prosecution of offences has rendered the letters of the law ineffective and fueled the impunity with which vandals still operate.
There is a need for Government to enforce the existing sanctions to breeches in illegal act on Pipeline Vandalism and Economic Sabotage and for the National Assembly to harmonize the Oil Pipeline Act to conform to Miscellaneous Act as well as Petroleum Distribution act in order to engender growth in the downstream sector. Furthermore, the Federal Ministry of Justice must as a matter of urgency cooperate on the granting of Fiat to enable private prosecution of offenders.
The respective operators should embark on a deliberate program to replace aged or compromised pipelines. It is important that Nigeria elevates the issue of pipeline vandalism to the same level as terrorism in order to adequately situate the focus on pipeline safety and security. The pipelines should be declared National Assets and treated as such.
Funds should be appropriated and deployed for securing the assets under a Federal Government cum Industry joint initiative applying appropriate technology and a rapid deployment task force.
The major challenge is the continued regulation of the downstream sector by Government through price control of PMS which accounts for more than 70% of fuel consumption in Nigeria.
It makes the economics of refining unprofitable.
It scares investors.
It creates an inefficient marketplace.
It creates an incentive for rent seeking.
It creates an incentive for smuggling.
It is an unnecessary drain on national resources through subsidies.
It does not actually benefit the common man contrary to propaganda.
In spite of the above, opportunities exist for interested investors to go into refining of petroleum products in Nigeria.
Even if all the existing refineries were operating at maximum capacity, there still exists a robust demand for petroleum products in Nigeria. Current aggregate product demand is put at equivalent refining capacity of 800,000 bpsd.
Hence at least additional 300,000 bpsd capacity is required as at 2018. By 2028, the shortfall in refinery capacity would rise to about 550,000 bpsd assuming a growth rate of 3% per annum. Furthermore, Nigeria actually supplies petroleum products to neighboring African countries through informal channels. An investor could target to formalize this.
This has informed the decision by the Dangote Group to invest in the construction of a 650,000 bpsd refinery which is expected to come into operation by end of 2020 or 2021.
The actual conventional refinery capacity is 450,000 bpsd, with the other 200,000 bpsd being reserved for petrochemicals feedstock. Thus, there would still be scope for another Greenfield plant of at least 250,000 bpsd capacity, simply to meet Nigeria’s needs. A higher capacity would be justified if the intention is to supply the West and Central African regions.
1. The existing refineries should be rehabilitated and brought back into operation to least at 80–90% capacity utilization. This is actually a least cost option compared with building Greenfield refineries of equivalent capacities. This can be achieved either through a private sector led financing and rehabilitation initiative as is currently being pursued by NNPC, or through outright divestment of majority equity shareholding to the private sector from the current 100% ownership by Govt.
2. The refineries should be managed on a fully commercial governance structure in which decision making should rest with the Board of Governors of the Plants, with full control of their funds.
3. The refineries should market their products directly to off-takers, so as to recover maximum value.
4. For the above to succeed, the downstream sector should be freed from government control. Full deregulation will make it attractive for private investors to build refineries to target meeting Nigeria’s needs and also that of West and Central Africa. This will also create jobs and grow GDP.
5. Government should create an enabling environment with fiscal incentives to attract investments into refining in Nigeria and make this happen.
6. Those interested in going into modular refining should carry out feasibility studies. The Department of Petroleum Resources should issue licenses and facilitating discussions for access to crude oil feedstock from upstream companies. Modular refineries should be treated as business ventures, not social services.
References: Refining in Nigeria: history, challenges and prospects by Anthony Ogbuigwe
Adewole Kehinde is the publisher of Swift Reporters and can be reached via 08166240846, 0812308662