NIGERIA - The Oil Refining Sector.

Nigeria's four major oil refineries, with a combined nominal capacity of 438,750 b/d, can only run at 214,000 b/d and their proposed privatisation - they have been on offer for several years - has been the subject of serious controversy since the presidency of Olusegun Obasanjo which ended in late May 2007. Since early 2005, the federal government in Abuja has pursued a new approach, offering 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 have been developed. Abuja has issued almost 20private refinery licences after opening up the country's downstream sector to local and foreign investors.

Apart from the four major refineries, there are three petrochemical plants in Warri and Kaduna. The Eleme petrochemical plant is currently in Phase I of a three-phase development programme (see DT No. 7). There are various gas projects encompassing downstream operations.

Labour unions in the petroleum sector staged a strike in May and threatened to target crude oil exports in hopes of reversing the controversial sale of two important refining units. There and other opponents of the privatisation process compelled new President Umaru Yar'Adua in July to hint that he may review the privatisations, which are being investigated by the Senate.

The local consortium Blue Star Oil Services controlled by influential Nigerian tycoon Alhaji Aliko Dangote in May acquired 51% stakes in Nigeria's biggest refining complex at Port Harcourt (210,000 b/d) for $561m and the Kaduna refinery (110,000 b/d) for $160m, thus hoping to consolidate its grip on the nation's refining sector. Dangote is a major financier of the ruling People's Democratic Party (PDP) and ally of Obasanjo, who had hand-picked Yar'Adua as a presidential candidate for the April 21, 2007, elections. A spokesman for the privatisation agency, the Bureau for Public Enterprises, on May 28 was quoted as saying: "We are handing over Port Harcourt and Kaduna refineries to Dangote today".

That was on the eve of new President Yar'Adua's swearing in ceremony, as Obasanjo stepped down after eight years in the presidency. In the weeks leading up to Obasanjo's departure, Dangote's privately held company had scooped up a cement plant, a telecoms licence and mining concessions in a rush of privatisations which triggered accusations of cronyism by opposition parties.

Dangote got the Kaduna plant after the government rejected as too low a $102m bid by China National Petroleum Corp. (CNPC) at an auction held on May 17 auction. In that auction, Dangote's Blue Star quickly pledged to pay $561m for the Port Harcourt stake, thus outbidding the Indian company, Refinee Petroplus.

Blue Star includes Nigerian conglomerate Transcorp and its unit Transnational, local fuel retailer Zenon Oil and Gas, and Sinopec of China. Transcorp and Zenon have had close ties to Obasanjo. The government had been trying to privatise the refineries since 2002, but many potential buyers had been scared off by uncertainty over environmental and labour liabilities, and fuel prices which are fixed by the government.

In an unexpected move on May 27, two days before leaving office, Obasanjo raised the government-regulated pump price of fuel by 15% to 75 naira per litre. None of the refineries was then working because of mismanagement and sabotage, and Africa's largest producer of crude oil was entirely reliant on imports to supply its fuel needs, worth more than $6 billion a year.

However, Yar'Adua faced a major strike by the oil unions against both the fuel price rise and the privatizations. He had to freeze the price hyke in June and the Senate ordered a probe into the sale of controlling stakes in the two refineries. It is not clear how all this will affect Blue Star.

Abuja awarded CNPC four oil exploration licences last year in exchange for a promise to invest $2 bn in the Kaduna refinery, the government said at the time of the award. It was unclear whether CNPC would still be able to keep those licences.

In June Blue Star affiliate Transcorp said the group was to invest heavily in the Port Harcourt and Kaduna refineries and aimed to have them operating at full capacity within a year. Transcorp said: "We intend to have a second look at the refineries with a view not only to having them produce at their installed capacity". Blue Star is also planning to build a 300,000 b/d refinery in Lagos. But it said in June that the rehabilitation of the Port Harcourt and Kaduna refineries was a priority over the Lagos project.

The four refineries - Port Harcourt I and II, Warri, and Kaduna - have for years faced a number of problems including sabotage, fire, poor management and a lack of regular maintenance. Apart from the four refineries, Abuja has been trying to privatise state entities by selling petrochemicals plants and the Pipelines and Products Marketing Co. (PPMC), a unit of government-owned NNPC in charge of the fuels market.

If Blue Star manages to get its acquisitions ratified by the new Yar'Adua government, its restart of the two refineries' operations would take pressure off PPMC whose parent NNPC is effectively the sole importer of gasoline and kerosene. PPMC has to sell these high-cost imports locally at state-subsidised prices.

To increase refining capacity, the government has been granting permits to build several independently-owned plants. Oando, a leading fuels marketing company in Nigeria, is considering building a refinery in Lagos. The plant would be built in two phases, with each phase providing 180,000 b/d of capacity.

In early June 2007 the US company Amakpe International was re-issued a licence by Abuja's regulatory body to have a 120,000 b/d export refinery at Eket in Akwa Ibom state, with the plant to start up in September 2008.

The Chairman of the Oando Group of companies, Wale Tinubu, in March 2007 raised the issue of liberalisation as the way to go in lifting the downstream petroleum sector from the morass of incessant scarcity. His argument was that if the federal government had spent the money it had poured into fuel subsidies in the past eight years on construction of refineries, it would have made a lot of difference in improving fuel supply.

Tinubu said the issue of deregulation of the downstream sector continued to be "germane even sometimes when it seems to have been laid to rest; it has a way of rising up again". He said Nigeria was a massive 30m litres/day market that should ordinarily attract investors. He said the market still had potentials of growth. But then, he said, the poor situation in the sector was only symptomatic of the failure of leadership and the dependence on foreign-imposed economic reforms. He said when the Obasanjo government assumed authority in 1999, it faced a fuels market in shambles and in urgent need of rejuvenation.

That government decided to place the burden of the sector's development on the private sector. Much focus was placed on "appropriate pricing of products" and privatisation of the refineries rather than a gradual deregulation plan which would have led to expansion of the nation's refining capacity to a surplus level. But, he said, after the award of 18 licences and a long wait, it was obvious that private refineries would be long in coming. Thus, the government used the issue of strategic linkage by attracting investment into the downstream sector through the upstream.

However, Tinubu said, the Obasanjo initiative failed to improve the sector as the country continued to depend on importing petroleum products to run its economy when it was one of the biggest producers of crude oil in the world. He said the Obasanjo government neither achieved an increase in the Nation's refining capacity nor its goal of deregulation.

Awash with oil, Port Harcourt, the capital city of Rivers State, should be a boom town. Instead, it has turning out to be one of the most volatile cities in West Africa. Set in lush swamps with palm trees on every street corner, the southern Nigerian port town was once known as the Garden City. But security has sharply deteriorated in recent years amid escalating militant attacks on oil installations, kidnappings and general lawlessness.

The kidnapping of a three-year-old daughter of an expatriate worker in July 2007 was just the latest in a long line of abductions by gunmen in the region. Although the girl was released eventually, Port Harcourt remains the scene of turf wars between political gangs.

Port Harcourt is the operational base for the international oil companies (IOCs). But the dismal security situation has reduced oil production and left foreign investors wary of doing business there. The UK Foreign Office in July advised against all travel to Port Harcourt. Port Harcourt used to be a flourishing manufacturing centre for industries such as plastics and textiles.

In March 2007 more than 90 people were burned to death in a fire caused by gasoline, which spilled from a tanker in an accident in Gadoko local government area of Kaduna State. The victims were scooping fuel from the scene of the accident before they were engulfed in a ball of fire.

The driver of the gasoline tanker was said to have lost control over the vehicle, which fell across the road, before its contents were spilled. Then people in the village rushed to the scene and started scooping gasoline gushing out of the tanker. Just two hours after the accident, the tanker went up in flames and all those in the area who did not escape were burned to death. That was one of the tragedies faced by the country because of the bad situation in the petroleum sector.

NNPC in late 2006 announced that it was to start replacing the country's gasoline pipeline network. NNPC spokesman Levi Ajuonuma said President Obsanjo had given approval for the replacement, adding: "He said the entire pipeline structure should be replaced".

The pipeline network, covering about 6,000 km, belongs to PPMC. Ajuonuma said NNPC was in the process of determining the scope of the project, pointing out the replacement would take about a year to complete. He spoke against a background of recurring pipeline vandalism in Nigeria, often leading to high tolls of human casualty though fire explosions, and the disruption of domestic supply of gasoline. The pipelines were laid mostly in the 1980s, as NNPC then sought to link the refineries and depots for product storage. As part of the replacement projects, the government wants the pipes buried deeper than they are now, to reduce vandals' access to them. A pipeline blast then occurred in a Lagos suburb, killing hundreds of people.

Ajuonuma said pipeline vandalism was the greatest recurring cause of gasoline shortage in Nigeria, as it disrupted distribution of imported products and forces local refineries to shut down. Two of the refineries - in Kaduna in the north and Warri in the Niger Delta - had been shut down since the beginning of 2006, following the vandalism of a "strategic" pipeline which supplied crude oil to them from fields in the Niger Delta. The other two refineries were operating at a fraction of their capacity.

NNPC has said that, during the first quarter 2007, its retail network operated with 14 "mega stations effectively". The un-audited results for the quarter indicated a national market share of white products of about 5% with a turnover of N7.8 bn and a net profit of N590m. This was generated mainly from the sales of white products (premium gasoline, gasoil, and kerosine), sourced solely from PPMC.

Current expansion plans are guided by an on-going NNPC Transformation Project (PACE), to reposition and re-align NNPC for greater competitiveness and profitability. NNPC Retail will engage in "strategic repositioning", to enable it to emerge as one of the three major marketers by December 2008, holding a minimum share of 15% of the Nigerian market.

Currently, NNPC has a combined sales capacity of 2m litres/day of white products. NNPC plans to expand its network to 37 land-based mega stations, 15 standard stations and 12 water-based floating mega stations in the Niger Delta by 2008.