Nigeria's downstream sees new dynamism

Nigeria aims to remove fuel subsidies by June, and has secured a USD 800-million relief package from the World Bank to soften the financial blow for citizens.

in figures

Nigeria’s crude production:1.63 million bopd

Planned capacity of the Dangote Refinery: 650,000 bpd

Nigeria’s downstream sees new dynamism

May 19, 2023

Although one of the largest crude producers worldwide, Nigeria has struggled to develop its downstream sector. A lack of refining capacity and heavy subsidies on refined fuels have led to significant fuel shortages. The country hopes that the Dangote Refinery and the removal of subsidies will finally solve its downstream issues.

With an average output of about 1.63 million bopd, Nigeria ranks among the largest oil producers. However, the country’s downstream sector has faced challenges that have hampered its development, namely a lack of refining capacity and subsidies on premium motor spirit (PMS). Most crude oil is exported and refined outside the country because the five State-owned refineries have not operated optimally for years. Meanwhile, subsidies have harmed the Nigerian economy and prevented growth in the sector. Creating further complications, NNPC is the only company in Nigeria authorised to import and distribute PMS. These challenges have subsequently led to fuel scarcity and market failures.
Nigeria is working to address both of these issues. Regarding refining capacity, the country has seen a rise in private-sector modular refineries, which include those of Waltersmith Petroman Oil, BUA, ND Western and Clairgold Oil and Gas Engineering. Moreover, the newly launched Dangote Refinery – with a total capacity of 650,000 bpd – will seriously increase the country’s  refining capacity and hopefully lead to a more independent economy.
Regarding subsidies, the government aims to remove them by June of this year, and has secured a USD 800-million relief package from the World Bank to soften the financial blow for citizens. Then-Minister of State for Petroleum Resources Chief Timipre Marlin Sylva told The Energy Year that the long-awaited policy change is expected to inaugurate a “golden age for the Nigerian downstream sector.”

Read our latest interview with ND Western here.

 

A LACK OF REFINING CAPACITY: Nigeria’s main downstream challenge is the lack of refining capacity, which pushes the State to rely heavily on imported products for domestic needs. As a result, the country has been unable to take full advantage of the current high oil prices.
The country has five public refineries, four of which are owned by the Nigerian government through NNPC, while the fifth is owned and operated by Niger Delta Petroleum Resources (NDPR).
1, 2. Port Harcourt Refineries: The two Port Harcourt Refineries have a total capacity of 210,000 bpd. They are operated by the Port Harcourt Refining Company (PHRC), a subsidiary of NNPC. The PHRC is made up of two refineries located at Alesa, Eleme, Rivers State. The old refinery has a refining nameplate capacity of 60,000 bpd and was commissioned in 1965, while the new plant, which has a nameplate capacity of 150,000 bpd, was commissioned in 1989. The plants utilise bonny light crude oil to produce LPG, PMS, dual purpose kerosene (DPK), automotive gas oil (AGO), low pour fuel oil and high pour fuel oil.
3. Warri Refinery: Established in 1978, the Warri Refinery has a capacity of 125,000 bpd. The refinery is located at Ekpan, Warri, Delta State and is operated by the Warri Refining & Petrochemicals Company (WRPC), an NNPC subsidiary. The refinery was installed as a complex conversion plant capable of producing LPG, PMS, DPK, AGO and fuel oil from a blend of Escravos and Ughelli crude oils. WRPC has a petrochemical plant complex that produces polypropylene and carbon black from the propylene-rich feedstock and decant oil from the fluid catalytic cracking unit.
4. Kaduna Refinery: The Kaduna Refinery has a capacity of 110,000 bpd and is located in Kaduna. The plant is run by Kaduna Refining and Petrochemicals (KRPC), a subsidiary of NNPC and has a complex conversion configuration. KRPC has a fuel plant that was commissioned in 1983 and a 30,000-tonne-per-year petrochemical plant that was commissioned in 1988. The refining plant has two distillation units that utilise Escravos and Ughelli crude oils for fuel production and imported heavy crude oil for lube base oil, asphalt and waxes. Products made by KRPC include LPG, PMS, household kerosene HHK, aviation turbine kerosene (ATK), AGO and fuel oil. The petrochemical plant produces linear alkyl benzene.
5. Ogbele Refinery: The Ogbele Refinery is owned and operated by the NDPR, produces more than 1,000 bopd and is located in Ogbele, Rivers State. The plant produces diesel for internal consumption, while excess fuel is sold. The plant receives crude oil from the flow station operated by its upstream affiliate, the Niger Delta Exploration & Production Company.
Although the government has these five refineries, they have not properly functioned in years. The group managing director of NNPC, Mele Kyari, said in May 2022 that 25 years of bad management have seriously affected these refineries. He said that the key priority now is to improve their operations and maintenance (O&M). The O&M issue is longstanding in Nigeria.
Each refinery will undergo a complete rehabilitation procedure to have them fully operational in the near future. The Port Harcourt Refinery has already started its rehabilitation. The refinery is expected to start partial operations before the end of Q1 2023 but will only reach its full capacity of 210,000 bopd by 2025. Rehabilitation is soon expected to start at the Kaduna and Warri facilities as well, but the timeframe for their rehabilitation is unclear.

THE SUBSIDY PROBLEM: The federal government established fuel subsidies in 1970 to make fuel affordable for all Nigerians. Over time, however, it has become clear that maintaining subsidies on petrol is not sustainable. No other product is so heavily subsidised in Nigeria, and fuel subsidies have increased by nearly 1,000% in the past seven years. Subsidies in 2022 are expected to reach an all-time high at USD 15.7 billion due to high oil prices.
Removing the subsidies is a necessity because Nigeria is spending most of its annual budget to cover these costs while disregarding other pivotal spheres of investment, such as infrastructure development, health and education.
Moreover, the revenues generated by the oil and gas sector are not great enough to pay back the costs of the subsidies. In short, the oil-producing areas have borne the brunt of the subsidies, as evidenced by how these areas score the lowest across all development aspects. This is the reality despite the oil and gas sector contributing almost 90% of the country’s foreign exchange earnings and 60% of its total income.
Once the subsidies are removed, players will be able to trade PMS in a deregulated sector where growth, competition and transparency are fostered.

FUEL SCARCITY: One serious issue has arisen because of the lack of refining capacity and because of refined products being mainly imported and solely distributed by NNPC: fuel scarcity. In short, the fuel market is severely underserved. Throughout 2022, Nigeria experienced a serious fuel scarcity crisis. Huge lines at the retail stations in Lagos and Abuja have seriously affected the country. This problem, above all, hinders the development of the Nigerian economy.
A parallel market has grown over time, selling PMS at NGN 300 [USD 0.65] instead of the authorised price of NGN 162.50–165 [USD 0.35-0.36] per litre. Moreover, there is a proliferation of illegal refineries across Nigeria who are selling off-spec PMS on the black market. Nigeria is seriously challenged by oil crude theft and pipeline vandalism, both of which are undermining its oil and gas production. Illegal refineries are supplied with stolen products, and more than 200 of them are currently operating. The federal government has announced countermeasures, but no significant results have yet resulted from their efforts.

NIGERIA’S SOLUTION – THE DANGOTE REFINERY: The Dangote Refinery, which came on line in May 2023, is Nigeria’s long-proposed solution to its refining capacity woes. The refinery is owned by the Dangote Group conglomerate, which has an annual group turnover in excess of USD 4 billion. The group is based in Lagos and operates in Nigeria and other countries in Africa, with operations across a wide range of sectors, including cement, sugar, salt, condiments, packaging, energy, port operations, fertilisers and petrochemicals. It focuses on building local manufacturing capacity to generate employment, reduce capital flight and increase local added value. With the Dangote Refinery, the group is looking to both significantly increase its revenues (which it forecasts will rise dramatically to USD 30 billion) and make Nigeria self-sufficient in the downstream sector.
The Dangote Refinery has been under development since 2012 and was originally expected to be commissioned by Q4 2022. The plant will have a capacity to process 650,000 bpd, making it Africa’s largest oil refinery and the world’s largest single-train facility.
The Dangote Refinery could solve the issue of refining capacity, but without deregulation, the downstream petroleum sector will remain inefficient. Deregulation will entail a petrol price determined by market forces which, at least for now, will be higher than the current price of NGN 165 (USD 0.36) per litre. Persistent fuel subsidies, increasing military spending for security purposes and rising debt servicing costs weigh heavily on Nigeria’s public finances.
The government has committed itself to removing the subsidies. However, this plan has been delayed due to the inflation that has been experienced in Nigeria, as well as elsewhere, over the course of 2022. Nevertheless, President Buhari has announced that the subsidies will end in June 2023. Ending this subsidy won’t be easy and may lead to a potential shortage again, as people rush to buy fuel before prices increase. However, the end of the subsidies is needed if the country is to take full advantage of the new Dangote Refinery and finally have the revenue to develop other vital sectors of the economy.

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