EL-RUFAI ON FRIDAY
Oil & Gas (3) - The Downstream Dilemma
The downstream parts of
the oil and gas sector include all activities following the delivery
of crude oil to processing plants for refining, conversion and value
addition into gasoline, diesel, kerosene and petrochemicals, including
transportation, storage, marketing of the finished products and
associated services. The value chain entails the supply of crude oil
to the refineries, primary distribution from refineries to terminals,
secondary distribution to depots and distribution to retail outlets
for marketing. In a country where nearly 80 percent of urban family
incomes go towards food, rent and transportation costs, the prices of
cooking gas, kerosene and gasoline constitute a lion share of the cost
of living.
Unlike the upstream
parts which are considered successful and relatively efficient,
dominated by IOCs and private sector operations and mindset, the
downstream sub-sector of the Nigerian oil industry is unanimously
perceived to be unsuccessful, inefficient, and corrupt. Downstream
operations also in sharp contrast with the upstream sub-sector are
dominated by state-owned enterprises, government regulation and price
control. On the whole, Nigeria has been the worse for it. It has not
always been this way.
How did we get to where
we are? Why are we not refining 2 million bpd of our production and
creating refining 25,000 jobs? Should the world's 14th largest
producer of crude oil be one of its largest importers of refined
products? Is there a subsidy in the pricing of gasoline? Let us take a
trip down memory lane and suggest some answers now and going forward.
Until 1966, the Nigerian
economy was supplied with petroleum products through private sector
imports by multinationals like Shell, Esso, BP and Total. Shell, BP
and the three regional governments sponsored the first Port Harcourt
refinery. It was commissioned in 1966 with a capacity of 35,000
barrels per day (bpd). This domestic production supplemented by
imports served the nation until the early 1970s when demand
outstripped supply and nationwide shortages developed.
In 1975, the Federal
Military Government appointed the Oputa Panel of Inquiry to examine
the root causes of the shortages of petroleum products. The panel’s
main findings, which were accepted by the government were (1) national
demand had outstripped domestic refining capability, and (2) local
marketing companies lacked the financial resources to undertake the
importation of substantial quantities of petroleum products required
to augment domestic production, construct infrastructure and
facilities to receive, market and distribute products to all
consumption centers in the hinterland, and construct large capacity
refineries to satisfy local demand.
The principal
recommendations of Justice Oputa's Panel, which were also accepted by
the government were that government should take over the importation
of petroleum products from the oil marketing companies, expand
domestic refining capacity and the product importation and reception
facilities as part of a nationwide system of pipelines to facilitate
petroleum products’ distribution in the long run.
The following policies
and actions were then implemented as a direct result of these
decisions: (a) Legislation: The Petroleum Control Decree was
passed to vest the Minister of Petroleum Resources the exclusive right
to import and fix the price of petroleum products. The Petroleum
Equalization Fund Decree was also enacted to ensure that prices of
petroleum products are the same throughout the country. (b) Oil
Marketers: The Government took over majority ownership of the
major petroleum marketing companies (Shell, BP, Esso, Mobil and Total)
during the implementation of the Indigenization programme of the
1970s. (c) Refineries: The Government through the NNPC then
under Muhammadu Buhari's leadership, expanded domestic refining
capacity by contracting the building refineries in Kaduna (completed
in 1980) and Warri (1978), and subsequently the expansion of Port
Harcourt (1989) to a total national refining capacity of 445,000 bpd,
spending about US$8 billion in the process.
A nationwide system of
over 5,000 kilometers of crude oil and refined products pipeline
transmission and distribution network and 23 depots were also
constructed during the Babangida administration, with the first
national fiber optic communications network laid contiguous with the
pipelines. The NNPC also owns 9 LPG depots, which have been largely
under-utilized since inception in 1995, due to the shortage of LPG
from the refineries and logistic problems in the supply of imported
LPG to the mostly upcountry depots.
The installed capacity
of these refineries by 1989 was equal to about 140% of domestic
demand. The intention of constructing the new Port Harcourt Refinery
was mainly to export its output. This was achieved for only a short
period. Thus, although Nigeria has an installed refining capacity of
445,000 bpd, only a maximum of about 240,000 bpd were being processed
for domestic consumption since 1990.
The pricing of petroleum
products moved from the market to the minister's office. In 1992, a
liter of petrol (PMS) cost just 70 kobo meaning the price has
increased nearly tenfold in less than 10 years. In 1994, the Abacha
regime increased the price of PMS to N11 per liter but set up the
Petroleum Special Trust Fund (PTF) to administer the proceeds under
General Muhammadu Buhari's chairmanship as its statement of sincerity.
This was raised to N20 in 1999, N22 in 2000, N26 in 2002, N39.50 in
2003, N49 in 2004 and N65 in 2007, all by the Obasanjo administration.
It is therefore understandable why Nigerians see the pricing of
petroleum products as a slippery slope from which they seem to lose
all the time.
The problem began when
our domestic refineries failed to produce at their design capacities -
at ex-refinery costs determinable within Nigeria. As demand increased,
we needed to import at import-parity costs determined outside our
control. Hundreds of millions of dollars spent on turnaround
maintenance between 1998 and 2006 have yielded no sustainable
improvements in their output. The refineries now need about $400
million for revamp and retrofit to work! Why?
It appears that there
are several built-in incentives to keep the refineries
under-performing because that is an opportunity to sell the allocated
but unprocessed crude for NNPC's account, and an opening to import
refined products to make up the shortfall in domestic production! Both
situations present multi-million dollar arbitrage, patronage and
pay-off opportunities for those in power. For instance in 2010, the
refineries received a total of 33,633,907 barrels of dry crude oil and
condensate and processed a bit more into various petroleum products.
The combined average refining capacity in 2010 was less than 22
percent - with Warri having the highest capacity utilization (43%),
Kaduna (20%) and Port Harcourt (9%). The highest capacity utilization
ever achieved was 64% in 1990, compared with 80-95% the world over!
This means out of the
445,000 bpd allocated to NNPC for domestic refining - about 162
million barrels in 2010, about 128 million were allocated to
privileged parties to sell on the open market. These privileged
parties, the World Bank found in 2000, pocketed about $75 million as
middlemen, marketing the most sought-after, light sweet crude oil in
the whole world! The third source of pay-offs and patronage is the
paperwork from marketers and NNPC to PPPRA and government to claim
'the fuel subsidy', or the price differential between what are
imported product prices and the approved selling prices for PMS and
Kerosene. The fourth and final source of pay-offs is the paperwork to
reimburse 'bridging costs' - the cost payable to transporters to
freight fuel from Atlas Cove, Mosimi, and the various depots to every
nook and cranny of the country to ensure that elusive price
equalization. The Nigerian citizen directly or indirectly bears the
burdens of all these consequential inefficiencies, and some fat cats
get paid for doing nothing even when the paperwork and audits show
otherwise.
In 2010, the total
production by the refineries was 4,404,360 tons of various petroleum
products - and PPMC itself distributed 6,353,517,990,000 liters of
PMS, 668,548,000 of kerosene (HHK), 205,546,720 of aviation fuel (ATK),
879,367,550 of diesel (AGO), and 272,699,100 of fuel oil (LPFO) -
0.747 million per day. This is inadequate to meet our national demand.
Comparatively, we imported 5,031,288 tons of PMS in 2010, compared
with the measly 747,776 tons our four refineries combined produced -
in effect we imported nearly 87 percent of our gasoline needs last
year.
The NNPC through its PPMC subsidiary
evacuated 4,508,4934 tons of petroleum products from the refineries
and received 6,639,752 tons of imported PMS and HHK for distribution.
The total quantity of PMS sold in 2010 by the PPMC, the sole importer
and distributor was 9,090,469,690 - about 25 million liters
daily. It is estimated that the
NNPC spent $5.5 billion
in 2010 to import refined products. PPMC also sold a total of 13.75
billion liters of various grades of petroleum products through depots,
bunkers and coastal lifting - about 38 million liters of various
products daily. Last year, 945 million liters of other petroleum
products - largely naphtha and LPFO - worth about N62 billion was
exported. If our four refineries can operate at or slightly above the
template capacity, we would not need to import more than a modest
shortfall and strategic reserve that most countries keep - just in
case.
Since the 1990s, what
should have become a temporary measure to import has remained a
permanent policy. With the continuous depreciation of our national
currency, the rising market price of crude oil, and consequential
escalation of refined products prices from the markets we import, the
shifting levels of imported fuel pricing has led to the contentious
issue of fuel subsidy. The declared intention of the Jonathan
administration to "withdraw the fuel subsidy" by decontrolling the
pricing of gasoline (PMS) is the downstream dilemma facing both the
citizens and the government that may have grave, even if unintended,
consequences.
The arguments for and
against subsidy have been well articulated by various commentators in
this medium and others. There is a lot of waste and corruption around
the current 'subsidy' system, and the Jonathan administration lacks
the political will, executive capacity and even legitimacy to confront
those benefitting from the patronage described above. After all, some
of them allegedly financed Jonathan's election. It is therefore easier
to eliminate the whole arrangement via 'deregulation' thereby
transferring the burden to every citizen through higher food,
transportation and other costs.
For me, the most
compelling case against the plan to take 'N1.2 trillion subsidy' from
all of us (each man, woman and child will pay about N7,150 as
contribution) next year is that the Federal Government in its medium
term economic plan, has promised to target between 70 and 75 percent
of the annual budget on recurrent expenditure till 2015 - that is more
spending on the government itself and its employees rather than build
more roads, power stations and enabling environment for job creation.
We must resist this new tax on the Nigerian people that will go the
way $200 billion was spent in the last 4 years - on nothing we can see
or feel.
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