God Dey, No Condition Is Permanent
By Dr. Gary K. Busch, 3/8/23
Aug 3, 2023 - 3:25:09 PM
The Nigerian labour movement is leading the demonstrations in the country over the removal of the fuel subsidy by Tinubu's government. The fuel subsidy was instituted to preserve a fuel price in the domestic market when the refining capacity of Nigerian refiners could not produce sufficient fuel domestically. The government allocated 445,00 barrels a day of crude to be exported to external refineries and the returning refined products distributed domestically at a subsidised price (that is, below world market price). The failure of the Nigerian refineries to process Nigerian crude in volumes sufficient for the domestic market was a factor of poor design, poor maintenance and massive corruption. The export-import of the designated 445,000 barrels a day was riddled, from top to bottom, by cronyism and corruption.
Aliko Dangote built a new refinery for Nigeria, whose delayed completion was inaugurated on the 22nd of May 2023 in Lekki, Nigeria. When in full operation, it is supposed to process about 650,000 barrels per day of crude oil, making it the largest single-train refinery in the world. Its cost was around US$19 billion. Accordingly, the Nigerian government reallocated the 445,000 barrel a day fuel scheme to processing in Nigeria. This refinery may have been inaugurated but, as yet does not produce anything like the amounts agreed. However, because of the creation of the "internal refining option", the Nigerian government removed the fuel subsidy it had been established to correct. Now there is no subsidy and also no supply.
While the Dangote Refinery went through its costly and delayed construction, the Buhari Government had also been spending substantial sums on the repair of Nigeria's existing refineries. As Governor Abdullahi Sule of Nasarawa State testified in June 2023 "“Look at how much the President Buhari administration spent on fixing the refineries. In the eight years, he spent more money than the $19 billion that Dangote spent in building a refinery. That is one and half times the size of our three refineries combined. Our three refineries in Nigeria today have a total of 445,000 barrels per day, Dangote is 650,000. He spent $19 billion on building it. We spent, not building a new one, but in maintaining these refineries more than $19 billion in eight years, yet they have not been maintained.” The original TAM (Turnaround Maintenance) contract was given to Emeka Offor's Chrome Energy was unsuccessful in raising the production levels.
The whole fuel subsidy scheme was a rewards system for a small number of traders and the activities of the Nigerian National Petroleum Corporation (NNPC)
The root of Nigeria's problems can be found at the Nigerian National Petroleum Company. This is the most important constraint on Nigeria's economy and the mother lode of Nigeria's corruption.
Key among the problems of the NNPC is the question of imported refined products and the fact that Nigerian refineries are inadequate and ill-maintained.
Shortly before Obasanjo took office on May 29th, 1999, the country was importing petroleum products at the cost of $234.00 per ton during the Abacha and Abdulsalami Abubakar regimes, but shortly after Obasanjo assumed office, this was reviewed upward without rhyme or reason to $569.55 per ton, a whopping 143%. Statutorily, it is not the responsibility of the NNPC headquarters to import refined products; it is the responsibility of its subsidiary company, PPMC, a limited liability company with a bona fide Board. The PPMC should have been allowed to determine its market requirements, advertise for tender, select the competitive offer and, only when its board approved, a recommendation to the NNPC Board would be forwarded through the Managing Director of NNPC to the President for approval. However, this was never allowed to happen. The issue of fuel importation was personally handled by Obaseki and Obasanjo using the Central Bank of Nigeria (CBN) account at the inflated price of $569.55 per barrel when the on-going market landed price was less than $300 per barrel. The balance per barrel disappeared.
The major problem is the total failure of the refining capacity controlled by the outstandingly inefficient Nigerian National Petroleum Company (NNPC). Nigeria’s total name plate refining capacity is 445,000 barrels per day, installed in three stages between 1965 and 1989. A modest capacity of 35,000 bpd was installed in Port Harcourt in 1965 amid the political turmoil which led to the Biafran War in 1966. This was expanded to 60,000 bpd in 1971 preparing for the post-war oil-led economic boom. This was the period that saw an eight-fold crude production increase from 1969 to 1974.
It took another eight to nine years before the Warri and Kaduna Refineries were commissioned (within a year of each other) with capacities of 125,000 bpd and 110,000 bpd respectively, coinciding with the 1979/80 upstream production peak. Production was again on the upsurge when the most modern of the three refineries was commissioned in Port Harcourt in 1989 with a capacity of I50, 000 bpd. The timing of these investments was very significant as they coincided with major increases in crude oil revenue accruing to the Federation. It was the Government's intention to plough back revenue surpluses in order to further add value, cater for domestic needs and conserve foreign exchange.
In 1988 there was the addition of a polypropylene and carbon black unit in Warri and a linear Alkyl Benzene unit in Kaduna. The policy was definitely well intentioned, but the implementation has left much to be desired, especially in the area of maintenance. This disregard for maintenance prevails throughout the downstream sector. The Eleme Petrochemical Plant, a major downstream strategic investment, went the same way as the refineries. Streamed in 1994/95, with an installed capacity of 125,000mt/yr. of polyethylene and 80,000 mt/yr of polypropylene, this plant was intended to meet the needs of a wide range of industries and have plenty left for export. Unfortunately, slow policy implementation led to serious cost overruns and globally mistimed completion. The loans persist with huge accrued interest, while capacity utilization continued on a downward trend, occasioned by missed maintenance schedules as well as by knock-on effects from problems at Port Harcourt Refinery's Olefins Plant.
Port Harcourt Refinery: The last but one Turn Around Maintenance (TAM) carried out in 1994 was followed six long years later by another in 2000. The power unit remains its main problem. The premier unit was neglected until 1993/94 when it was rehabilitated, but ever since then, it has had to remain shut in favour of the main one because of power limitations, or because of crude allocation, which historically have sometimes proved inadequate.
Warri Refinery: Another example of inadequate maintenance led to catastrophic system failures such as the main Crude Heater blow up of 2000. The last full TAM was 1994. There has not been one since. Capacity utilization was a mere 37.4% in 1995 down from 72% in 1992. It has declined since then.
Kaduna Refinery: Inadequate maintenance, combined with internal staff relations (as in Warn) and a lack of resources for maintenance were a major factor in the poor refinery performance. Problems with the FCC (‘cracker'), water intake and cooler units are a regular occurrence. The 1992 TAM ran over budget and was never satisfactorily concluded, while the one started in 1998 has still to be concluded; there were two TAMs in between which were funded but never started
Capacity utilization dropped from 73.9% in 1988 to a mere 42.4% in 1995, with debilitating results on the economy and people's daily lives, especially in the northern part of the country where Kaduna is the only hub. These have declined further, year-by-year. The estimated remedial costs are monumental, especially for Warri Refinery (nearly N28 billion) and Kaduna (N2 billion). There is no way the government was willing to pump in these huge sums of money, and has sought any number of shortcuts to relieve itself of the responsibility.
Nigeria had already issued several licenses for the repair and maintenance of the refineries. A lot of money had been paid, but very little maintenance completed.
The NNPC decided to tender for new refineries. New refinery tenders were issued. The local Nigerian companies who won the tenders for this were not able to attract overseas firms willing to co-operate with them, nor were they able to raise the capital needed to perform these tasks.
Following the preliminary licence issued in May 2002, none of the 18 companies submitted any report on the progress of its work to the Petroleum Ministry. Finally, the NNPC withdrew the licenses it had awarded to 18 companies to set up oil refineries; five years after the companies failed to commence work. The companies, which were granted licences include Akwa Ibom Refinery and Petrochemicals Ltd, Badagry Petroleum Refinery Ltd; Clean Waters Refinery, Ilaje Refinery and Petrochemicals, Niger Delta Refinery and Petrochemicals Ltd, NSP refineries and oil Services Ltd, Ode-Aye Refinery Ltd, Orient Petroleum Resources Ltd, Owena Oil and Gas Ltd, as well as Rivgas Petroleum and Energy Ltd. Others are: Sapele Petroleum Ltd, Southland Associates Ltd, Southwest Refineries and Petrochemicals Ltd, Starex Petroleum Refinery Ltd, the Chasewood Consortium, Tonwei Refinery, Total Support Refineries, and Union Atlantic Petroleum Ltd. Each was associated with a leading politician-businessman.
These licenses have now expired, unused. Nigeria had attempted to get foreign investors to build new refineries but their attempts always failed. The primary reason for the failure in building new refineries was that the importation of fuels is a giant cash cow for Nigeria’s elite and they were unwilling to lose this revenue stream. Then, Dangote got permission to embark on his refinery.
Importation of Refined Products and the Fuel Subsidy:
In 2009 and some of 2010 these refineries operated at their lowest levels of between 0 and 30 per cent of capacity, and led to the country importing about 85 per cent of its fuel needs. By early 2011, operational capacity increased slightly but the country still required product imports to meet domestic demand. So, in its wisdom, the government said that they estimated the domestic market required the refining of 445,000 barrels a day of crude to supply the local market. They would deliver these barrels of oil at the domestic price for crude to major international companies like Trafigura and Glencore who would export the crude oil from Nigeria and import the refined products back to the country. This was arranged by the Oil Minister, President Obasanjo who was doubling up his roles in defiance of a Constitutional inhibition on holding two offices of state.
When these refined products returned from the overseas refineries to Nigeria they were handled by local oil traders. The list of these traders is very revealing; as a substantial number are linked to ex-Presidents Babangida and Obasanjo or their immediate circle. Obasanjo personally didn't waste his time in immersing himself in that part of the industry. His son and the sons of some of the other politicos operated the fuel import business into Nigeria. To assist them the government paid the local traders a subsidy, a ‘fuel subsidy’ to keep the market price down for local consumers. These were substantial sums. The fuel subsidy figures paid to the marketers were trillions of Naira. This was a high reward for keeping the price subsidised; in recent years the range has been 400% to 550% paid to the marketers who would then demand a lower price from the Nigerian public. In a parliamentary report they showed that in two years the oil traders had siphoned off US$6.8 billion for fuels they supplied and often didn’t supply to the market. They received the subsidy payment for the fuels they didn’t supply to the public in addition to the fuels they did supply.
It is important to understand how oil is processed to understand the value of this subsidy to the Nigerian traders.
How Oil Is Processed
In the oil industry one speaks of crude oil in terms of barrels, sulphur content (sweetness), viscosity (API gravity) etc. The international price is quoted in terms of ‘marker crudes (West Texas Intermediate, Brent, Bonny, Dubai and Isthmus). The crude oil price differs among them based on a variety of relatively stable factors. However, the market in refined products is very different. This is based on the ‘netback' of the crude being refined. That is the value of all the petroleum products which are produced in the refining process from each barrel of oil. To understand this, it might be useful to sketch out what happens when crude oil is refined.
The problem with crude oil is that it contains hundreds of different types of hydrocarbons all mixed together. One has to separate the different types of hydrocarbons to have anything useful. Fortunately, there is an easy way to separate things, and this is what oil refining is all about. Different hydrocarbon chain lengths all have progressively higher boiling points, so they can all be separated by distillation. This is what happens in an oil refinery - in one part of the process, crude oil is heated and the different chains are pulled out by their vaporization temperatures. Each different chain length has a different property that makes it useful in a different way. Most Nigerian crudes are refined in a ‘straight-run' fractioning of the oil content and do not require additional catalytic refining. A typical fractioning column looks like this:
The various components of crude oil have different sizes, weights and boiling temperatures; so, the first step is to separate these components. Because they have different boiling temperatures, they can be separated easily by a process called fractional distillation. The steps of fractional distillation are as follows:
1. You heat the mixture of two or more substances (liquids) with different boiling points to a high temperature. Heating is usually done with high pressure steam to temperatures of about 1112 degrees Fahrenheit / 600 degrees Celsius.
2. The mixture boils, forming vapour (gases); most substances go into the vapour phase.
3. The vapour enters the bottom of a long column (fractional distillation column) that is filled with trays or plates.
The trays have many holes or bubble caps (like a loosened cap on a soda bottle) in them to allow the vapour to pass through.
The trays increase the contact time between the vapour and the liquids in the column.
The trays help to collect liquids that form at various heights in the column.
There is a temperature difference across the column (hot at the bottom, cool at the top).
4. The vapour rises in the column.
5. As the vapour rises through the trays in the column, it cools.
6. When a substance in the vapour reaches a height where the temperature of the column is equal to that substance's boiling point, it will condense to form a liquid. (The substance with the lowest boiling point will condense at the highest point in the column; substances with higher boiling points will condense lower in the column.).
7. The trays collect the various liquid fractions. These fractions include:
Volatile gases – Propane, butane
Naphtha or Ligroin - intermediate that will be further processed to make gasoline
Gasoline - motor fuel
Kerosene - fuel for jet engines and tractors; starting material for making other products
Gas oil or Diesel distillate - used for diesel fuel and heating oil; starting material for making other products
Lubricating oil - used for motor oil, grease, other lubricants
Heavy gas or Fuel oil - used for industrial fuel; starting material for making other products
Residuals - coke, asphalt, tar, waxes; starting material for making other products
Each crude oil, because of the structure of its hydrocarbons, produces different quantities of each fraction. Sometimes the trays can be positioned to get a little more of one substance. In the winter, in North America, the ‘bottom end of the barrel' increases in value as cold weather requires heating oil. The ‘top end of the barrel' is better in summer because more gasoline is used.
However, the refining of oil is not additive in that you cannot get out of the barrel more than you put in. Therefore, when making a market in refined products the ‘net back' of the products becomes important. That is, each fraction has a variable price. So, if one can get 16% of the product as gasoline then that 16% quantity times the market value of the product gives you the value of the gasoline. If the residuals are 40% then the volume of the 40% times the price of the residuals gives you the value of the residuals, and so on. The sum of all the products of percentage volume times the current market price for those products gives you the net back value of the barrel of oil. From this one can deduct the cost of transport, the loss of volatiles during shipment and the insurance costs.
The Netback Value of Nigerian Crude
Nigerian oil is sold into the market based on the netback price. For example, an analysis of the netback on Bonny Light (from prices created in 2015) showed:
That meant that the pretax value of the sums of the various products produced in the processing of Bonny Light was $24.11 per barrel. There are 7.51 barrels of Bonny Light to the metric ton. It cost a flat $10.62 per each metric ton to produce. The shipping costs reduce the value of the netback by $1.78 per metric ton with a processing loss of value of $0.05 per metric ton. With insurance this meant that a $24.11 gross product worth for each barrel of oil will yield a netback value of $20.35.
The important point of all this netback example is, if the crude oil exports of the 445,000 barrels a day are only bringing back to Nigeria the PMS, kerosene and diesel, where is the value for the rest of the barrel? The netback value of the gasoline, kerosene and diesel is $14.33. Where has the remaining value of over $6.25 per barrel gone? Who has the money for the butane, propane, residual oils, asphaltenes, etc. which are an inevitable result of the refining process?
These favoured exporters of oil from Nigeria of 445,000 barrels per day which are not able to be refined in Nigeria have been getting the oil at source at a considerable discount. Including shipping costs to the US Gulf the net cost was under $18.00 a barrel. They were shipping back to Nigeria the PMS, kerosene and diesel which they sold to the NNPC at the world price for these products. They were not returning to the NNPC the netback value of the crude, but only the world price value for the parts of the refined barrels they brought back. Not only were they making a substantial profit on the difference between netback and market prices, they were also earning about $6.25 a barrel for all the products they did not return. That is a bonus of over $2.8 million a day in addition to the profits made on the differential between netback and world market prices. To compensate the importers for making such a profit the NNPC paid them an additional bonus, the “fuel subsidy” to reduce the market price in Nigeria to the customers.
The Fuel Subsidy Removal
Now that the fuel subsidy has been removed and the new refinery is not fully on stream, the price for fuel has rocketed. The Nigerian populace is paying an increasing share of their income to acquire fuel. The value of the Naira has dropped precipitously. The organised labour movement, who have taken the lead in the protests against this subsidy removal, are troubled by the decline in incomes and the increasing delays in paying the wages owed to their members. The burden of suffering increases as one moves down the economic ladder. The Nigerian people who are paying for this are not assisted by their governments; federal, state or local. The Nigerian banking system facilitates this as they are important cogs in the wheel of destruction by protecting the wealthy.
What cannot be calculated is the immense losses due to lost opportunity costs. Because there is no reliable and affordable energy there is no electric power. Shops and businesses cannot flourish, even with generators. All the potential of beneficiating ores and metals are lost because there is no reliable internal means of transport. Land lies fallow where it could provide crops and sustenance for want of fertilisers which are a by-product of petroleum processing. The aluminium smelter suffers from the lack of electricity. All of these, and many more lost opportunities, are the true curse of Nigeria. Small businesses cannot expand for want of credit from banks who are in the laundering business. The infrastructure is crumbling and not repaired. It is bad enough that Nigeria’s ogas and agbadas have stolen Nigeria’s money. It is worse that their actions have stolen the future for a new generation of Nigerians.
Source: Ocnus.net 2022