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NIGERIA - Privatising of The Oil Refining Sector.

Nigeria's four state-owned refineries, with a total capacity of 445,000 b/d, are to be privatized. They have been on offer for several years. But now the federal government in Abuja has a new approach, offering upstream upstream E&P advantages to companies investing in the oil refining and electric power generation sectors. In parallel, plans for several private oil refining projects are being developed. Abuja has issued 18 private refinery licences after opening up the country's downstream sector to local and foreign investors.

President Olusegun Obasanjo on June 13 ordered security forces to destroy illegal oil refineries which he said had been operating in the country's south. The decision was made at a meeting with governors of the turbulent southern Niger Delta, where most of the country's crude oil is produced. It added that the destruction should take place immediately. The Niger Delta has been the scene of tension since March 2003, when an uprising cut off 40% of Nigeria's oil output.

Total on Aug. 5 said oil output at its onshore Obagi field had been stopped since Aug. 1 due to local unrest. The French major said it was negotiating with local communities to solve the problem and resume operations at Obagi, which produces 35,000 b/d of crude oil equivalent and 6 MCM/d of natural gas. Nigeria's oil production is frequently slowed by ethnic violence and labour unrest. Total's oil and gas production in 2004 averaged 271,000 b/d of oil equivalent, mostly from offshore fields. Obagi, in the OML-58 block, is Total's only onshore field in operation in Nigeria since the company shut down its Upomami, in OML-57, where five workers were killed in 2003.

Downstream-Linked E&P Offering: The Department of Petroleum Resources (DPR) will award licences for about 47 oil E&P blocks on Aug. 26 under the 2005 bid round linking them to downstream investments in the oil refining and power generation sectors. The DPR on Aug. 1 began issuing bid certificates to the qualified firms, including local and foreign companies, to an Aug. 26 bid conference. All 12 blocks put on offer in the deep offshore will be awarded, and six on the continental shelf will be given, together with six onshore blocks in the Niger Delta.

The DPR said 13 of the 14 fields being offered were dedicated to downstream investors. Eight companies competing for six of the latter blocks had indicated interest in the Port Harcourt and Kaduna refineries as core investors. Six companies will complete for another four oil blocks designated to promote independent power projects (IPPs). The 2005 bid round represents a major platform for Abuja to realise its ambition of raising the nation's crude oil reserves to 40 bn barrels by 2010.

In October 2002, President Obasanjo laid the foundation stone of a $1.5 bn refining project at Tonwei. That was to be Nigeria's first private refinery. It was said the plant would have an initial capacity of 100,000 b/d and could be expanded later on to 200,000 b/d. But no progress on this has been indicated since then.

The government of Lagos state has been studying the possibility of establishing a refinery. Lagos, Nigeria's biggest city with a population of about 13m, consumes more than 50% of the country's petroleum products. The refinery, if built, will serve Lagos and Nigeria's other south-western states.

The Akwa Ibom state government has announced plans to build a 12,000 b/d refinery. Ventech of the US has done the designs for this. It was said in 2003 that the refinery would be built in prefabricated modules in the US and then shipped to Nigeria for assembly. The facility was to be located in Eket, adjacent to the Qua Iboe crude oil terminal.

The Edo state government has obtained approval from the federal government to build a refinery with a capacity of 50,000 b/d. It was said in 2003 this would be owned by a consortium of local petroleum marketers. The plant was to be built within the Abuja region.

In the summer of 2003, only one of the four state refineries, the 150,000 b/d plant at Port Harcourt, was in operation at about 60% of its capacity. This was a key factor to a serious fuel crisis, which began in late June and lasted until July 7, 2003, caused by a general strike. There was a similar crisis in February 2003 which coincided with a strike by oil workers; panic-buying from that strike increased demand at a time when the refineries at Port Harcourt were offline, and the country was unable to import fuel in order to cover the shortfall.

The federal government in early 2002 began inviting private companies, foreign and local, to apply for oil refining ventures. Operators were to pay a non-refundable $50,000 as an application fee, followed by a $50,000 preliminary licence fee, and then a $100,000 fee for an operating licence.

In considering applications, the then presidential advisor for petroleum Rilwanu Lukman told a news conference at Abuja that the government was to look at the location, size and type of the proposed refineries as well as the operators' sources of crude oil.

Based on the 445,000 b/d capacity of state's four plants and the way they were built, Nigeria should have had the most sophisticated oil refining sector in West Africa. But decades of mismanagement, labour unrest, ethnic violence and sabotage have turned this sector into one of the least efficient in the OPEC world. Combined with a poor distribution system, the result is a frequent shortage of fuels in the country, compelling the government to import refined products.

In March 2003, Chevron signed an agreement with the state-owned Nigerian National Petroleum Corp. (NNPC) to take over the management of the Warri and Kaduna refineries and its crude oil tanks in Delta state. NNPC was to retain ownership of the refineries. But no progress has been reported since then.

On May 19, 2003 the federal government announced plans to sell 51% in the four refineries to major oil companies operating in Nigeria. Companies said to be interested included Shell, ExxonMobil, Chevron, Total and Agip - which are the main oil producers in the country (see OMT & Gas Market Trends of this week). The Abuja government said it will hold on to a minority interest of 49% in the four plants.

The privatisation arrangement, agreed to by the Bureau of Public Enterprises (BPE) and NNPC, had been endorsed in the previous week by the National Council on Privatisation (NCP). President Obasanjo then ordered the sale to be commenced immediately. But subsequently the blue-collar National Union of Petroleum and Natural Gas (Nupeng) and the white-collar Petroleum and Natural Gas Senior Staff Association of Nigeria (Pengassan) stated they were opposed to the privatisation as this was to cause a loss of many jobs. Union representatives said an immediate sale of the refineries was at odds with the ongoing work of a committee set up by Vice-President and Chairman of the NCP, Atiku Abubakar, to study the problems of the downstream sector. The unions staged nationwide protests against the privatisation in September 2002.

In late June 2003 a products pipeline explosion in a rural part of the south-eastern state of Abia killed at least 105 people. The blast occurred when gasoline leaking from the damaged pipeline was ignited by a spark as locals attempted to scoop it up. Locals claimed that the pipeline, transporting fuels from Port Harcourt to the domestic market, had been leaking for up to eight months. NNPC officials said they had no knowledge of any earlier complaint, and that the explosion had been caused by thieves who had deliberately pierced the pipe.

Thieves seeking to syphon off fuel often attack oil pipelines in Nigeria. In recent years explosions have killed hundreds of looters and bystanders. When the Abia pipe began to leak it was carrying kerosine. But shortly before the blast, NNPC had begun pumping gasoline - more volatile. A paralysing general strike over fuel prices took hold across Nigeria on June 30, 2003. Stores and offices in Lagos were shut for fear of looting. International and domestic airline flights were stopped later as air traffic controllers joined the protest. Government offices and businesses in the capital, Abuja, the northern cities of Kano and Kaduna and the south-eastern oil city of Port Harcourt were also closed. The protest came after the government raised gasoline, kerosine and diesel prices by more than 50% on June 20. Officials said the hike was necessary to end shortages and curb smuggling of cheap fuel to neighbouring countries. Union leaders said the hike was causing great hardship for millions of Nigerians earning a dollar a day or less. Many people had died by July 7, 2003, when the strike ended and the government reduced fuel prices.

There have been several attempts to privatise the refining sector, along with the state gas utility Nigerian Gas Co. (NGC) and other public enterprises. But before putting the plants up for sale, Abuja needs to invest more than $1.5 bn (mostly in foreign exchange) just to improve the refining sector. Experts have estimated that Nigeria could save more than $100m per annum by shutting its refineries and importing all of its product needs.

The Pipeline and Products Marketing Co. (PPMC), an inefficient unit of NNPC, is in charge of the local market and acts as a monopoly. It is frequently compelled to import fuels to meet local needs. With the advent of private refining ventures and a further privatisation of the retail business, PPMC's monopoly will end and gradually the market will be deregulated.

Under normal conditions, Nigeria's oil products demand exceeds 350,000 b/d. But continued refinery problems has brought actual fuel consumption down to about 330,000 b/d in the past seven years.

All fluid catalytic crackers were repaired early this year. They produce 100,000 b/d of gasoline, reducing gasoline imports to 90,000 b/d. With the market partly deregulated, diesel, jet kerosine and gasoil now are on a par with international prices; shortfalls are mainly imported by private retail firms. Union opposition prevents NNPC from phasing out gasoline subsidies, which cost the state about $1 bn per annum (see Vol. 61, No. 6).
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Publication:APS Review Downstream Trends
Geographic Code:6NIGR
Date:Aug 8, 2005
Previous Article:NIGERIA - The Economic Base.
Next Article:NIGERIA - The Refineries.

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