Government might finally sell off our refineries as scrap

Today, Nigeria is one month away from an imminent recession. Except a miracle happens, we might have another negative growth because when the recent fall in the production of crude oil is factored into the second quarter’s GDP, it would likely move south.

The likely response of government could be to speed-up some privatization processes, like the sale of our refineries, in order to raise cash to reflate the economy – this could be seen as a low hanging fruit for government. But, with the way things are today, it doesn’t seem any serious investor would want to buy our assets, especially our refineries.

The Minister of State for Petroleum, Ibe Kachikwu, says that the government would need $700 million to get our three major refineries back on track. Because we don’t have such kind of money, at the moment, he has started discussing with some IOCs on the privatization of these refineries. However, from the minister’s comments, government is looking for an investor with skills to upgrade these refineries, and provide technical support, while government still takes ownership.

To get a glimpse on what investors are thinking at the moment, let’s take a look at the recent privatization process just conducted by the NCC. NCC had set out to raise a minimum of $224 million from the auctioning of 14 slots of its 2.6GHz frequency band – each slot was expected to bring in $16 million, at least.  Surprisingly, only one bidder turned up for the auction. The bidder bid for six slots, and because the bidder had no competitor the commission is on the verge of accepting $96 million from this bidder for these six licenses.

The Punch newspaper reported that other investors were obviously concerned about the country’s lack of forex supply, which might make it difficult for investors to source for forex for equipment maintenance. Some, as reported, were concerned about the cost of this spectrum.

With the dollar selling at N197 at the official window, N285 at the interbank and N340 at the black market, it is obvious that any investor coming into Nigeria would have to be very careful. For example, if an investor brings in his dollar at N197 would he have to buy it at N285 when he wants to repatriate his profit back home? We hope the CBN addresses this as soon as possible.

The exchange rate debacle is not the only problem with the privatization of state assets. Let’s now take a look at the refineries. The installed capacity of our three refineries is 445,000 barrel of crude per day. Their optimum production of PMS, which is the product of crude that is mostly demanded, is 20 million litres per day – these refineries would reach this capacity after $700 million is pumped into them, to upgrade them. This means for every barrel of crude, our refineries produce about 45 litres of PMS.

If you compare this production with modern refineries, you would observe that even if our refineries are working at full efficiency, with their current technology, they could be loss-making ventures. The losses would become more pronounced when the Dangote refinery comes onboard.

Today, using existing technology, modern refineries produce at least 19 gallons (71 litres) of PMS for every barrel of crude you pass through them. They also produce 12 gallons of diesel, 2 gallons of LPG, 4 gallons of jet fuel and 7 gallons of other products for every barrel.

Suppose investors were to take over our refineries, they would obviously know that Dangote refinery would come on stream soon and that they would have to compete with it. Though Dangote has not really told us how many litres of PMS his refinery would produce for every barrel of crude, we know his refinery has a daily capacity of 650,000 barrel of crude oil. Dangote refinery would obviously produce more than 71 litres of PMS per barrel, since it is a new refinery, apparently built with new technology.

Of course, Dangote would produce other products from its refinery, but PMS seems to be the most important to Nigeria today, hence this discourse. In simple terms: the economics of PMS would determine the profitability of these refineries.

If Dangote and the operators of our refineries buy crude from the same market, it is obvious that the operators of our refineries would go out of business in no time – one refinery cannot be producing 45 litres of petrol/barrel and another 71 litres of petrol/barrel, and you expect them to compete in the same market.

Today, government continues to manage these refineries, even though it is bound to keep making losses. Government actually wants to keep running these refineries, but it wants investors to come in as technical partners. This will still be a loss-making venture – because after putting about $700 million in these plants, they would still not be able to compete with Dangote in terms of efficiency.

It is important to bear in mind that apart from the $700 million the minister is talking about, tons of money have already been pumped into these refineries.

Note that in developed countries, refineries never really get old. In the US, for example, there are refineries that are over 50 years old that are still firing on all cylinders. The difference between these refineries and ours is that while those refineries were routinely maintained and upgraded, ours were abandoned for a long time. We cannot do a one-off upgrade, today, to catch up with modern technology – the cost of this could be equal to building brand new ones.

We are not even talking about the reoccurring vandalism on pipelines that would transmit crude to these refineries. Force Majeure will still be a repeating decimal in our lexicon. Constant shutdowns will affect the ability of our potential technical partners to recoup their money.

What, then, is going to happen? The government would likely sell these refineries off as scrap in the long term. Investors will be willing to buy these refineries only and only if the security of our pipeline substantially improves.

In any case, Nigeria’s 20-million-litres capacity refineries cannot meet the nation’s 45 million litre daily requirement. Nigerians should, thus, look up to Dangote’s refinery for succour.

Views expressed by contributors are strictly personal and not of TheCable.