proceedings of the nigerian refining...
TRANSCRIPT
PROCEEDINGS OF THE NIGERIAN REFINING CAPACITY SUMMIT
(UYO 2012)
ORGANISED BY:
THE HOUSE OF REPRESENTATIVES COMMITTEE ON PETROLEUM
RESOURCES (DOWNSTREAM)
THEME:
TOWARDS A FUNCTIONAL REFINING REGIME IN THE NIGERIAN
PETROLEUM INDUSTRY
MARCH 28TH
– 29TH
, 2012
Le MERIDIEN IBOM HOTEL AND GOLF RESORT,
UYO, AKWA IBOM STATE
REPORT
Table of Contents
1. EXECUTIVE SUMMARY............................................................................................................. 3
2. Introduction ..................................................................................................................................... 6
3. The State of Nigerian Refineries and the Challenge of Domestic Supply of Petroleum Products
by Engr. Austen Oniwon, Group Managing Director, Nigerian National Petroleum Corporation
(NNPC) ................................................................................................................................................... 8
4 Deregulation, Private Refineries and the Quest for Self-Sufficiency in Domestic Supply of
Petroleum Products in Nigeria by Mr. Ayo Ajose-Adeogun, CEO Oando Refinery and Terminals ..... 19
5 Establishing a Petroleum Refinery in Nigeria: Regulatory and Financial Challenges by Engr. Lai
Fatona, Managing Director Niger Delta Exploration and Production Plc. ......................................... 27
6 Challenges of Building a New Refinery in Nigeria: Licensees’ Experience So Far by Mr. Ubani
Nkaginieme PhD, President TotalSupport Energy ............................................................................... 34
7 Encouraging a Robust Development of the Downstream Sector of the Petroleum Industry in
Nigeria: The Role of the Legislature by Mr Tony Paul, Managing Director, Association of Caribbean
Energy Specialists Ltd. .......................................................................................................................... 42
8 Investing in Petroleum Refinery in Nigeria: Funding Options by Mr Yinka Odeleye, Senior Vice
President, Citibank Nigeria Ltd ............................................................................................................ 51
9 Communique Session .................................................................................................................... 71
1. EXECUTIVE SUMMARY
Background
On the 1st of January 2012, the Federal Governmentof Nigeria announced the removal of fuel
subsidy on petroleum products. As a result, the price of Petroleum Motor Spirit (PMS)
increased from N65 per litre to N140 naira per litre. This developmentwas received with
massive and widespread public agitations. A week long protest by labour unions and civil
society organisations nearly grounded socio-economic activities in the country. The Federal
Government consequently rescinded its decision of complete removal and agreed to retain
some of the subsidies. This reversal was sufficient to placate public agitations and returned
normalcy in the country.
Government has very often given reasons for the removal of fuel subsidy and the key concern
has been the negative effect on the economy. Critics however are wary that while the
maladministration of fuel subsidy has hindered its intended effects on the poor, its complete
removal would have far reaching repercussions on the poor, without adequate palliative
measures put in place. Nevertheless, the fuel subsidy crisis in January, 2012 once again raised
a number of key issues on the Nigerian petroleum downstream sector. Beyond the claims and
counter claims of corruption and mismanagement surrounding the administration of fuel
subsidy in Nigeria, there are yet the unresolved issues of: how much refined petroleum
productsthe country imports?Should the country import as much considering the high level of
crude oil production? Should improving local refining capacity be explored as an option?
And what are the challenges to improving local refining capacity?
However, it was apparent there was a shortage of facts concerning the questions above and
speculations were rife. The House of Representatives was determined to intervene in the
downstream sector in the discharge of its oversight functions but would require adequate
facts and figures to facilitate its deliberations.The House Committee on Petroleum Resources
(Downstream) therefore took up the responsibility to investigate the problems associated with
Nigeria’s low local refining capacity and how these problems could be addressed. The
Committee convened the Nigerian Refining Capacity Summit to provide a platform for
industry players and key stakeholders to discussthe issues pertaining toincreasing Nigeria’s
refining capacity.
The two-day Summit was held at the Le MeridienIbom Hotel in Uyo, AkwaIbom State. It
was organisedby Tandice-B Solutions Ltd, a renowned consulting firm with a special focus
on developing Nigerian Content in the oil and gas industry. The Summit was attended by
over two hundred (200)participants representing national and international companies,
government ministries, departments and agencies (MDAs), unions, civil society
organisations, donor agencies, the media, state governments, and both chambers of the
National Assembly. Six broad topics were covered over the two days of the Summit with
speakers and discussants drawn from various sectors of the industry, both public and private
sectors. There were six sessions, one each for the six topics. Each session had a chair, a
speaker and at least three discussants. Each session started with an opening remark by
thechairman who also moderated the session. The format for each session involved a
presentation by the speaker on the topic which was followed by contributions from the
discussants. The presentations and discussions were primarily focused on highlighting the
key issues and identifying specific roles and areas of intervention particularly for the House
of Representatives. A communique was drafted and shared to participants immediately after
the last session of the summit. The communique articulates the key issues discussed at the
summit and the agreed next steps.
Evaluation and Next Steps
The Summit was timely coming about two and half months after the fuel subsidy removal
crisis in January, 2012. The objective of the Summit was mainly to avail the House
Committee, and indeed the House of Representatives, an opportunity to interact with key
stakeholders and understand the issues and challenges involved in improving Nigeria’s
refining capacity. The objective of the Summit was considerably achieved. Speakers,
discussants, and all participants were openwith their opinions on the challenges to improving
refining capacity in Nigeria. The key discussions revolved around the following issues:
• The greatest challenge to increasing local refining capacity is the low margin involved
in refining globally;
• Establishing the existing installed refining capacity in Nigeria, the current output, and
the required installed capacitynecessary to sufficiently address current and future
consumption -both nationally and regionally;
• The need to address security and safety of refining infrastructure – recognising the
enormity of the challenge and possible options;
• How do modular refineries operate and what are the options that modular
refineriesoffer for increasing local refining capacity, and what are the challenges they
pose?
• Required regulatory framework – deregulation and the passage of the Petroleum
Industry Bill (PIB) could improve the policy environment necessary for increasing
refining capacity; and
• The need to improve access to funding/financing especially for local investors.
Majority of the solutions proffered at the Summit hinged on government’s determination and
political will to address the problems that were highlighted. The key role for the legislature
was identified as less to do with making new legislation than on providing greater oversight
towards implementing existing laws and policies. Some of the discussions highlighted
existing regulations (including those anticipated through the PIB) and established where there
are sufficient regulations and where there are gaps in regulation. Particularly, the passage of
the PIB was noted as key to addressing some of the problems. It was emphasized that the
problems within the petroleum downstream sector are not due to lack of laws and regulations
but rather due to the ill-application or complete lack of implementation of existing laws. The
Housewas generally urged to increase its oversight of the sector.
As a follow-up to the Summit it was agreed that the House Committee on the Petroleum
Resources (Downstream) should commission a study that would carry out deeper
investigations on the issues highlighted at the Summit. This would be necessary as the time
allowed by the Summit was limited and further consultation with some key stakeholder
would be required. Overall, the Summit was well-organised and majority of the participants
expressed satisfaction at the level of organisation and the quality of the discussions that took
place.
2. Introduction
The House of Representatives (HoR) recently declared its commitment towards stimulating
improved performance of the downstream sector of the Nigerianpetroleum industry. This
declaration was in response to widespread publicagitations against Government’s removal of
fuel subsidyin January, 2012.The crisis, among other things, highlighted Nigeria’s huge
reliance on importation of petroleum products to meet domestic consumption, and the need to
address the problems of the downstream sector of the petroleum industry.
The House Committee on Petroleum Resources(Downstream)therefore took the initiative to
convene the Nigerian Refining Capacity Summit. The Summit was designed to provide a
platform for industry experts and key stakeholders to dialogue and identify challenges and
articulate solutionstowardsincreasing local refining capacity and improving the overall
performance of the petroleum downstream sector.
The two-day Summit was arranged in six sessions. Each session involved a presentation by a
key speaker, contributions fromat least three discussants, and questions, comments and
suggestions from the floor. Each session was moderated by a chairman who was in charge of
proceedings specifically coordinatingthe open discussion sessions. This report outlines the
key highlights of the proceedings of the Summit.
The first day of the Summit kicked off with addresses and speeches to set out the objectives
of the Summit. Particularly, the Chairman of the HoR Committee on Petroleum Resources
(Downstream), Hon. DakukuPeterside, welcomed guests and participants and enumerated the
key objectives of the Summit as follows:
• To further the commitment of the House of Representatives to finding solutions to the
refining challenges faced by the country;
• To identify the reasons for the limited foreign direct investment (FDI) in the
downstream sector and the seeming lack of interest of International Oil Companies
(IOCs) operating in the country;
• To examine the effect of the country’s prevailing investment climate on the
development of the sector;
• To re-examine the deregulation argument and explore alternative models;
• To consider the possible regulatory reforms and legal framework required to stimulate
an improvement of Nigeria’s refining capacity and achieve self-sufficiency
• To explore the possibility of creating a Downstream Support Group
In his goodwill message, the Governor of AkwaIbom State, His Excellency Chief
GodswillAkpabio – who was represented by the deputy Governor of AkwaIbom State, His
ExcellencyNsimaEkere, also welcomed participants to the State and highlighted the
significance of the Summit venue to the country and to the Government and people of the
state. He reiterated the need for the deregulation of the downstream sector stating that “only
deregulation can attract the needed investment otherwise it will be motion without
movement”. He cited the Indian and South Korean examples in support of the arguments for
deregulation. He listed the expectations of the people of the State from the Summit as
follows:
• That the Summit should properly assess the strengths and weaknesses of the
Petroleum Sector;
• The Summit should investigate why there is neither a refinery nor a depot in
AkwaIbom State, despite the fact that the state has the highest crude oil production in
the country;
• The Summit should suggest a review of the processes for issuing refining licenses in
order to avoid the issuance of licensesto incapable and unqualified investors. For
instance, some licenses issued for refineries since 2000 are yet to be utilised.
• He reiterated the need for robust legislation that would create a favourable
environment for investment in the downstream sector.
The Summit was declared open by the Speaker of the House of Representatives, Rt. Hon.
AminuWaziriTambuwal,(CFR).In his speech, the Speaker emphasized the determination of
the House to work towards creating an enabling environment for the accelerated growth of
the petroleum sector. He reiterated the need for the Summit to address the challenges
inhibiting the establishment of new refineries and achieving effective turn around
maintenance (TAM) of existing refineries. The Speaker’s speech marked the end of the
opening ceremonies after which the Summit commenced the first session of Day 1.
DAY1 - SESSION 1
3. The State of Nigerian Refineries and the Challenge of Domestic Supply
of Petroleum ProductsbyEngr. Austen Oniwon, Group Managing Director,
Nigerian National Petroleum Corporation (NNPC)
Chairman: SenatorMagnus Abe
Speaker: Engr. Austen Oniwon, Group Managing Director (GMD), Nigerian National
Petroleum Corporation (NNPC)
Discussants: Mr.EmekaUgwu-Oju, President, South East South South Professionals of
Nigeria (SESSPN)
Engr. B.A. Onunwor, Managing Director/Chief Executive Officer Rotating
Machinery Company Limited
Mr.Humphrey Doody, General Manager, Community Interface, Shell
Exploration and Production Africa
3.1 Chairman’s Opening Remarks
The Chairman of the Session, Senator Magnus Abe, who is also the Chairman of the Senate
Committee on Petroleum Resources(Downstream), started the session with a brief opening
remark. On behalf of his Committee, he affirmed the cooperation of the Senatewith the House
on the issue at hand. He however advocated for a broaddiscussion of the problems facing the
sector – to cover the entire value chain of the downstream sector from refining to the
distribution of refined products including depots and pipeline infrastructure. He also laid the
ground rules for the session - regarding the amount of time allotted to the speaker,
discussants, and contributors from the floor.
3.2 The Presentation: The State of Nigerian Refineries and the Challenge of Domestic
Supply of Petroleum Products
The speaker, Engr. Austen Oniwon, started his presentation by identifying key events that
influence the performance of the overall oil and gas industry. He classified these events into
four broad categories thus:
i. Politics
ii. Security
iii. Environment, and
iv. Economics
He stressed that the above factors affect the oil and gas industry both globally and locally,
though in varying degrees. He specified that in recent years, security has become the greatest
challenge to the Nigerian oil and gas industry. The following are some of the key points made
by the NNPC GMD in his presentation:
• Compared to other OPEC countries, Nigeria’s significantly large population
contributes to lower revenue per capita and greater social challenges;
• Nigeria receives substantially less oil revenue per capita – again owing mainly to the
significantly large population;
• Nigeria cannot afford fuel subsidies like those provided in other OPEC countries;
• While Nigeria consumes less fuel per capita than other oil-producing economies, its
consumption exceeds that of similarly-situated countries in West Africa and this can
be explained thus:
o Nigeria consumes less PMS than other large, oil-producing nations because i)
only 2% of the crude oil it produces is refined in country, and ii) its GDP
per capita is relatively smaller, likely contributing to fewer vehicles per capita
within the country;
o Nigeria’s relative overconsumption (when compared to neighbouring
countries) is likely due to i) low fuel prices, and ii) cross-border smuggling out
of the country (some of this smuggling occurs between the Benin-Nigeria
border, likely contributing to Benin’s high consumption figures).
Engr. Oniwon enlightened participants on the Nigerian National Petroleum Company
(NNPC) and its operations. He asserted that he would be open in his discussion of the
challenges facing the company in order to take advantage of the Summit to obtain
suggestions from participants. He reaffirmed the company’s determination to tackle
challenges towards meeting the expectations of Nigerians.
NNPC was established by the Federal Government through the NNPC Act of 1977, currently
referred to as the NNPC Act Cap 123, of 2004 with the mandate to among other things, give
effect to arrangements entered into by the Federal Government with a view to securing
participation by the Federal Government and/ or the Corporation in activities connected with
petroleum.The NNPC is specifically charged with performing the following functions:
• Exploring and prospecting for petroleum;
• Refining, treating, processing and generally engaging in the handling of petroleum for
the manufacture and production of petroleum products and its derivatives;
• Purchasing and marketing petroleum, its products and by-products;
• Providing and operating pipeline, tanker-ships and other facilities for the carriage or
conveyance of crude oil, natural gas and their products and derivatives, water and any
other liquids or other commodities related to the Corporation’s operations.
In view of its numerous and sensitive functions, Engr. Oniwonstated that NNPC is of
strategic importance to diverse stakeholders as follows:
To the People of Nigeria: NNPC is among the top five employers of labour in the country
with about 10,000 staff and is also the custodian of the 10th largest oil and 7th largest gas
resources in the world.
To the Federal Government: NNPC is the executor of Nigeria’s oil and gas-based
development policies and contributes 80% of Federal Government revenues and 95% of
foreign exchange.
To Business Partners: NNPC contributes 29% of the Nigeria’s GDP, enables local content
development across the oil and gas supply chain, and is also an enabler of power sector
development.
To International Oil Companies (IOCs): NNPC is partner to about $15 billion in IOCs’
investments in Nigeria and comprises approximately $105 billion or 11% of total IOCs’
commercial value.
3.2.1 NNPC Activities
• NNPC activities in the upstream sub-sector are as follows:
o Managing government interest – carried out by the National Petroleum
Investment management Services (NAPIMS);
o Exploration – carried out by Integrated Data Service Limited(IDSL);
o Production – carried out by Nigerian Petroleum Development Company
(NPDC);
o Marketing of Crude Oil – carried out by Crude Oil Marketing Company
(COMD).
• NNPC activities in the downstream include:
o Gas processing and distribution – carried out by the Nigerian Gas Company
(NGC), Nigerian Liquefied Natural Gas Ltd. (NLNG), Brass Liquefied
Natural Gas (BLNG) and Olokola Liquefied Natural Gas (OKLNG);
o Refining – 4 refineries located at Port Harcourt, Warri and Kaduna with a total
installed capacity of 445,000 bpsd;
o Distribution – 5, 000KM of pipelines and 22 depots managed by Pipelines and
Products marketing Company (PPMC);
o Retail – 37 land Mega Petrol stations, 12 Floating Mega stations (FM
Stations), and 467 Affiliate Stations (AS);
o Gas to Power, Industry and Domestic Initiative.
3.2.2 Refining and Products Distribution Facilities in Nigeria
• Kaduna Refinery (built in 1980) – 110,000 bpsd
• Warri Refinery (built in 1978) – 125,000bpsd
• Port Harcourt Refineries – 210 bpsd (old refinery (built in 1965) – 60,000 bpsd, new
refinery (built in 1989) – 150, 000bpsd)
3.2.3 Demand and Supply of Petroleum Products in Nigeria: Facts and Figures
Engr. Oniwon stated that the aggregate demand for refined petroleum products in Nigeria
is as follows:
• Premium Motor Spirit (PMS) – 35 million litres/day
• Automotive Gas and Oil (AGO) – 12 million litres/day
• Dual Purpose Kerosene (DPK) – 11 million litres/day
He noted that with a short term view of 60% throughput, Nigeria can meet:
• 40.55% of PMS
• 77% of DPK, and
• 85% of AGO
However, with 90% throughput, Nigeria can meet
• 58% of demand for PMS
• 84% of demand for DPK, and
• 128% of demand for AGO
Table 1 below shows a summary of the contributions of the downstream assets (refineries)
towards meeting the demand for products (refineries performance post rehabilitation).
Table 1: Nigerian Refining Capacity and Domestic Supply of Products
Refinery PMS
(ML/D)
% DPK
(ML/D)
% AGO
(ML/D)
%
KRPC 4.20 12.72 2.95 36.88 3.28 27.33
PHRC 10.32 31.27 4.89 61.13 7.59 63.25
WRPC 5.55 16.82 1.97 24.63 4.47 37.25
Imports 8.16 24.72 0.00 0.00 0.00 0.00
Offshore
Processing
(NNPC)
4.77 14.45 0.70 8.50 2.74 22.83
Total 33 99.98 10.51 131.14 18.08 150.66
Given the figures above,Nigeria would require additional refining capacity of about 400,
000bpsd particularly to close the PMS supply gap.
Regarding the domestic consumption pattern of petroleum products, Engr. Oniwon stated that
the majority of gasoline and kerosene consumption occurs in the wealthier regions along the
coast. The table below shows a summary of PMS and DPK consumption by the six (6)
geopolitical zones in the country
Table 2: Consumption of Petroleum Products by Regions in Nigeria
Region %of PMS
Consumption
%of DPK
Consumption
% of Total
Population
North West 7 3 26
North East 5 3 14
North
Central
19 23 15
South West 50 8 20
South East 3 2 12
South South 17 61 15
Total 101 100 102
The figures in the above table show that wealthy South West and South South regions of the
country jointly account for 67% and 69% of PMS and DPK consumption respectively, but
only 35% of the total population.
Engr. Oniwon also acknowledged that meeting products distribution targets are highly
dependent on the functionality of depots and the network of pipelines. He stated that PPMC,
a subsidiary of NNPC, is in the process of wetting depots across the country in readiness for
deregulation. For instance, the Kaduna area pipelines have been repaired and depots filled
beyond 50% even though Kaduna refinery is currently not producing due to lack of crude. He
also noted that Mosimi area has functioning pipelines yet depots level is less than 50%.
PPMC is also focusing on getting Gombe and Maiduguri pipelines functional but this might
take 3 to 4 weeks to complete. He alsostated that it is crucial to get Port Harcourt area depots
filled in time for deregulation. He lamented that the Warri – Benin pipelines are continuously
vandalized although the depots could be reached whenever it is necessary.He noted that the
security problems facing the entire industry manifest most on the distribution infrastructure
due to their vulnerability to vandalization. He reported that Nigeria loses between 100, 000 –
200, 000bpd to illegal bunkering and pipeline vandalization and that illegal bunkering is also
linked to dirty politics. He shared pictures of vandalized pipelines and illegal bunkering as
evidence to support his argument.
Engr. Oniwon reported that the NNPC have had to therefore rely heavily on road
transportation of productsdue to the incessant disruption to the pipelines network. This has
increased cost implications and also explains the disparity in prices of products across the
country. The result is that stations in far distances such as the North East are more likely to
experience higher fuel prices and scarcity of products than other area. Long transportation
hauls are also more likely to be disrupted by vandalism, theft or diversion, and strike actions
by unions (e.g. National Union of Road Transport Workers). This is due to long
transportation distances from the Kaduna depot. He noted that what constitutes the price per
region includes the Petroleum Products Price Regulation Agency (PPPRA) landing price, the
PPMC pipeline costs (N6.15), transport cost (calculated based on the cost of transporting
from the nearest depot) and retailer and dealer commission margins. However, if all 21
depots are functional, the highest and lowest fuel prices would be N141.12 and
N135.86respectively. But with only 9 functioning depots, the highest and lowest prices vary
between N152.28 and N136.63. He stated that uniform prices of petroleum products cannot
be achieved because of differentials in cost of distribution and transportation.
3.2.4 Deregulation as Key to Improving Capacity Utilization and Profitability in the
Long Term
Engr. Oniwon used the opportunity to emphasize that deregulation of the downstream sector
remains the key to solving the numerous operational challenges within the sector and
ensuring effectiveness and profitability. He however suggested that activities towards
deregulation should be phased as follows:
Short Term – Prepare to Operate as a Stand Alone Profit Centre
He suggested that activities under this phase should include:
• Agree and implement the proposed fee arrangement with PPMC;
• Implement plans to get the refineries ready to operate as stand lone profit centres to
encourage commercial mind-set in the organisation:
o Put in place capability building programmes;
o Obtain TMC approval to include PPMC infrastructure that affects
functionality of refineries in the refineries revamp plan;
• Establish credit facility with third parties to guard against working capital issues if the
90-day arrangement with government is abolished;
• Secure funding for the revamp;
• Accelerate the process of appointing services and equipment providers for the revamp
of the refineries.
Medium Term – Prepare for Increased Competition
Activities under this phase should include:
• Implement plan to improve utilization rates, cost efficiency and capabilities;
o NETCO to complete scoping and cost estimates of the revamp;
o Work with PPMC to solve infrastructure issues;
o Appoint EPMC to start the revamp;
o Continue capability building programme;
• Explore the possibility of a decrease in the 445, 000 bp allocation from government as
well as ways to secure supply.
Long Term – Long Term Operational Improvements
Engr. Oniwon suggested that activities under this phase should include:
• Ensure refineries operate at not less than 80% capacity utilization in 3 years to ensure
the business remains competitive;
• Conclude crude supply agreements with other players to improve competitiveness and
reduce dependency on PPMC;
Engr. Oniwonmentionedthat rehabilitation work aimed at improving existing refineries to run
at 90% capacity utilization was underway. He also said that interventions undertaken in 2010
have already moved capacity utilization from 40% in 2010 to 60% in 2012. He acknowledged
that critical asset upgrades are crucial for energy security in Nigeria as well as for the PPMC
to be competitive. He noted that several parts of the PPMC network require critical upgrades
and replacements. Essential projects would include pipeline replacements, rotating equipment
replacements, demurrage reduction projects, depot and ship shore accounting projects
generator replacements, power provision proposals, and the Maiduguri depot outstanding
jobs. He estimated that while the immediate projects (i.e. high risk projects that could lead to
large scale disruptions if not carried out) could cost N60 billion, while the short term projects
(projects that should be carried out prior to deregulation) would cost N200 billion.
Engr. Oniwon noted that deregulation of the downstream petroleum sector has been a
convoluted, unsuccessful process since it was first mooted in 1993. He however
acknowledged that over the past 10 years (and before the attempt in January, 2012), Nigeria
has taken some important steps towards a more deregulated downstream fuel sector. Notably,
price for AGO has been successfully deregulated and NNPC has also been made to pay
market prices for crude oil. Table 3 below summarises the various landmarks in the process
of deregulation from 2002 to 2012.
Table 3: Major Landmarks on Deregulation Since 2003
Date Achievement
2002 Deregulation gets underway – price of crude to NNPC revised from $12 to $18
2003 PPPRA established
July, 2003 Government reverses prices increases following a general strike that kills 12 people
October, 2003 NNPC has to pay market prices for crude
April, 2004 Filling station shut down for failing to display prices
May, 2004 Government halts suggested price increases after a nation-wide strike
November,
2004
Government lowers price in wake of threats to strike and disrupt oil revenue
April, 2005 33-member committee on fuel price submits its report
October, 2005 Government promises no further fuel price increases
March, 2006 Petroleum stabilization fund launched to freeze fuel prices
2009 Price of PMS reduced to N65 from N70
He suggested that successful deregulation would require a proper mapping (in a matrix) of all
key stakeholders according to their degree of influence and degree of alignment with
deregulation. This would help government to design appropriate strategies to ensure that
every group of stakeholders is effectively carried along. For instance, some stakeholders may
lack adequate understanding of the need for deregulation. He pointed out that deregulation is
necessary because the Nigerian downstream sector responds to international market price
analysis. Domestic fuel is essentially driven by the international market prices because
majority of refining inputs are traded on the world market. Refining inputs include crude oil,
labour, other fixed costs, maintenance, freight, catalysts and chemicals, and energy. Crude
oil, for instance, which is the largest input cost for a refinery, is sold in the international
market denominated in US dollars. Therefore, if Nigerian refineries are to produce products
at a price point below international market price, the Nigerian upstream players must sell
crude oil below international market price to Nigerian refineries.
Engr. Oniwon further gave an analysis of the cost of refining 1 barrel of crude oil vis-a-vis
the value of products it yields. According to his analysis, at $115/bbl (N18, 388.50/bbl) 1
barrel of crude oil (which would yield 159 litres of (combined) refined products) would be
sold at N13,186.98. This gives a net loss of N5, 201.52 per barrel of crude oil. This analysis
emphasizes a key challenge to the quest to improve refining capacity because local refining
would be unattractive to investor due to the very low (possibly negative) margin of profit
involved. He stated clearly that Nigeria needs to appropriately price petroleum products.
According to him, what needs to be subsidized is production, not consumption as the country
is currently doing.He noted that the current situation is counter-productive and promotes
cross-border transfers and illegal bunkering. He maintained that deregulation will ensure fair
market value and product availability.He argued that true deregulation would require strong
adherence to free market operating rules including free flow of information, clear and
comprehensive rules, and strict enforcement of the rules.
However, he highlighted that attracting investors to participate in increasing refining capacity
in Nigeria would depend on the business model proposed. He identified 4 different models
which would depend on the modes of compensation to investors (products or cash) and the
levels of participation (equity or non- equity). The 4 business models are:
i. Management Technical Service Contract (Mckinsey’s Contract Operator): This is an
arrangement where a refinery engineering, procurement and construction (EPC)
contractor is paid a fee for addressing capacity and yield shortfall, without
participation; and could also take product in lieu of fees.
ii. Strategic Investor Product Sharing Agreement: This is a model whereby an investor
provides capital and technology for addressing capacity and yield without equity
participation, with compensation in products from the incremental volume.
iii. Strategic Investor with Equity Participation: This is a model whereby a reputable
international refiner provides capital and technology for addressing capacity and yield
shortfall with equity participation in the business and receives compensation in
products and dividend from the incremental volume.
iv. Partial Privatisation: this happens when the refinery operation stabilizes and attains
optimum capacity and yield, it can be partially privatised by way of market listing in
the stock exchange.
He further identified 3 specific business models under which PPMC can manage refineries as
follows:
Tolling Arrangement:Under this model, PPMC pays a fixed cost for available capacity and
therefining margin is split between refineries and PPMC – 70 - 30%. This model requires
minimal organisational changes and it is familiar as it has been tested before in NNPC.
However, he noted that it involves high transaction costs due to multiple interactions to
reconcile volumes and quality of crude and products. In addition, penalties might be difficult
to extract if the amount is too large.
Repurchase Agreement: Under this model, PPMC sells crude to refineries and repurchases
products from the refineries. It involves lower transaction costs as this requires less
reconciliation between PPMC and the refineries and also requires fewer organisational
changes as PPMC still retains control of crude supply chain. He noted that the disadvantage
of the Repurchase Agreement model is that it does not provide full control over value chain
as refineries will still be fully dependent on PPMC for crude supply.
Integrated Model: Under the Integrated Model, crude supply, refining and product marketing
are integrated under one strategic business unit (SBU). This model gives full control over the
value chain to one entity and eliminates transaction costs.
The NNPC GMD reiterated that while it is necessary to attract investors, thecurrent focus of
the company is to revitalize the existing refineries, build new refineries and implement a
significant investment program required to develop pipelines and storage infrastructure that
can effectively address domestic energy needs. To this end, 3 new refineries have been
proposed. These are the Bayelsa Refinery (100,000BPSD capacity), the Kogi Refinery
(100,000BPSD capacity) and the Lagos Refinery (200,000BPSD capacity). These new
refineries will bring the overall installed refining capacity to 845,000BPSD when
completed.Activities with an elaborate transition programme to make the refineries profit-
oriented will be executed in 3 broad phases: the first phase is to indicate readiness, the second
phase is to initiate test run, and the third phase is to sign off on refinery autonomy.
2.2.5 Security of Pipelines
Engr. Oniwon highlighted that even when refining capacity and infrastructure is improved,
the security of pipelines would remain a huge challenge to the industry. He narrated that the
current situation whereby community guards are employed to monitor pipelines while armed
forces provide back up in high risk regions is not financially sustainable. A total of about
1.6Billion is required annually to sustain the current arrangement (community guards cost
N10, 000/guard + 30% Administration Charge which is a total of N13,000/guard). The
security of pipelines is often compromised as the community guards are not paid in full and
on time. He recommended that security allowances should be substantial and promptly paid
to reduce the risk of theft by the security personnel. He further proposed the establishment of
a special security force dedicated to securing pipelines and other facilities. He also suggested
the option of engaging locals to police the pipelines and gave the example of a period that
tanker drivers organised themselves to guard pipelines.
3.2.6 Third Party Access to Facilities
Engr. Oniwon noted that another hindrance to improving investor participation in the
downstream sector is the difficulty for third parties to secure access to pipeline and
depots.This is particularly challenging from both technical and regulatory perspectives. He
noted that to address the technical challenges, there is a need for quality test labs to be set up
at fuel injection points; short term storage depots must be built to hold fuel prior to pipeline
injection; loading and unloading equipment must be standardized; and overall pipeline and
depot infrastructure need to be improved. He also suggested that the regulatory framework
guiding third party buying of fuel from PPMC; lease of separate PPMC tank; sharing of tank
with other players; and sending fuel through pipelines (retain ownership) also need to be
reviewed.
He concluded his presentation by re-emphasizing that the current aspirations of the NNPC
are: to achieve growth in the oil reserves and managed expansion in production capacity;
reposition gas for rapid domestic, regional and export penetration, revitalise downstream
capacity to support domestic energy need (domestic self-sufficiency and efficient supply and
distribution system); and reform key institutions to anchor sustained growth in the industry.
3.3 Contributions from the Discussants
3.3.1 Mr.Humphrey Doody
In his discussion of the paper presented by Engr. Oniwon, Mr Doodyacknowledged the huge
challenges that the NNPC faces. He agreed that security of facilities is the biggest challenge
that the company faces but posed the question -“if security is addressed, what are the quick
wins?”The NNPC GMD responded to Mr Doody’s question on quick wins by saying that
Turn around Maintenance (TAM), which should not be funded by the NNPC, could provide
some quick wins.
3.3.2 Engr. B. A. Onunwor
He acknowledged that the global petroleum industry is also faced with challenges and
emphasized that discussions at the Summit should be focused more on how to make refining
more profitable. He noted that sometimes TAM does notyield the desired results. He stated
that this is because a lot of cost goes into maintenance and the challenge is how to turn
maintenance from cost to profit?He suggested that there is need for a knowledgeable body of
people to work with the different relevantHouse committees to work out solutions. He also
suggested that The House Committee on Petroleum Resources (Downstream) should dialogue
with NNPC top management to draw up a programme for improving refining capacity in
Nigeria.
3.3.3 Mr.EmekaUgwu-Oju
Mr Ugwu-Oju noted that the challenges to improving refining capacity should not be treated
in isolation from the rest of the problems plaguing the Nigerian economy or polity. He
emphasized the needto diversify the Nigerian economy and reduce dependence on oil and
gas.
3.4 Questions/ Contributions from the Floor
Engr. Basil Omiyi further acknowledged that the need to address security of refinery facilities
should be a priority. He also noted that Engr. Oniwon did not mention the Chad Basin in his
presentation and asked the NNPC Group Managing Director to explain what was preventing
the company from exploring the area. Engr. Oniwon responded to the question by stating that
exploration of the Chad basin area was delayed by the politics and bureaucracy involved in
obtaining approval for the budget.
Another participant also asked why illegal refineries seemed to be thriving while it is widely
claimed that profit margin for refining is low? Engr. Oniwon responded to this question by
stating that the feedstock (crude oil) for illegal refineries are obtained free of charge (stolen)
therefore the operators could make high profit margins.
DAY 1 - SESSION 2
4 Deregulation, Private Refineries and the Quest for Self-Sufficiency in
Domestic Supply of Petroleum Products in NigeriaByMr. Ayo Ajose-
Adeogun, CEO Oando Refinery and Terminals
Chairman: Engr. Basil Omiyi, Chairman, Green Acres Energy and Former
Chairman/Managing Director, Shell Petroleum Development
Company Ltd.
Speaker: Mr Ayo Ajose-Adeogun, CEO, Oando Refinery and Terminals, Chief
Corporate Services Officer.
Discussants: Mr Reginald Chika Stanley, Executive Secretary, Petroleum Products
Pricing Regulatory Agency (PPPRA)
Engr. EmekaNwawka, Managing Director, Orient Refineries and
Petrochemicals Ltd.
Mr EmekaUnachukwu, Managing Director, Morflex energy and
Power/First Deputy President, Port Harcourt Chamber of Commerce
4.1 The Presentation: Deregulation, Private Refineries and the Quest for Self-
Sufficiency in Domestic Supply of Petroleum Products in Nigeria
MrAjose-Adeogun began his presentation by establishing the global outlook for refined products. He stated that by 2015, structural trade flows would be determined by deficits in Europe and Asia. He also stated that the role of gasoline would diminish due to surpluses in the Atlantic Basin. He argued that over the next decade, demand for diesel/gas in Asia would surpass supply and the Middle East would become an increasingly significant source of supply able to arbitrage between markets. He noted that Europe would remain in excess gasoline but acutely short of diesel while the US wouldonly balance petrol requirements if refineries were built there.Therefore, large and sustained products deficits should be
expected globally at least for the next decade. At the local level, he pointed out that gasoline would remain Nigeria’s major deficit product and predictedthat demand would grow at the rate of 3-4%per year through to 2020. Therefore, functioning large scale, petrol focused refineries should be the priority for the
country. He noted however that the needs of Nigeria’s neighbours would maintain pressure on any supplies coming into the region. He illustrated that while the opportunity for Nigeria was huge, the current monetary impact of products supply deficit include billions of dollars paid out in net margins to foreign refineries for import plus margins to traders and importers, and terminal fees and demurrage charges. Yet the product supply gap was widening due to structural problems and
inefficiencieswith the state owned refineries such as inadequate maintenance, low capacity utilization, and frequent shutdowns. He noted that the low capacity utilization of local refineries – which he put at an average of 33% - makes for a difficult investment backdrop.He also noted that existing refinery sizes are inadequate.
4.1.1 Benefits of Local Refining “It is not unacceptable to import refined products. What is unacceptable is importing to the
degree that we import”
He noted that there are key considerations to make in establishing refineries. He stated that refineries are best situated close to their markets as it is easier and cheaper to move crude than refined products. He noted that there are considerable benefits for local refining arising from the favourable pricing environment and increasing market attractiveness. However, he emphasized that there are challenges to realizing the benefits of local refining. These include the configuring of refining business as cost centre, lack of management autonomy, the absence of competitive incentives, chronic underinvestment, attrition of key capabilities or skills, and consistently late turn around maintenance (TAM). He identified two ways in which new refineries could be established: new build or transplant. He mentioned that the two strategies involve different resourcerequirements and challenges. He argued that New Build Refineries offer the potential of meeting Nigeria’s demand
because Nigeria requires refineries of significant scale that can only be delivered by the most robust and qualified entities. For a new build, the typical resource requirements are estimated as follows: Capital Expenditure - $2.4 billion (or N384 billion) Land Use – 180 hectares (or 1.8 million sq. metres) Operating Cost/Working Capital - $100 million (or N16 billion)/ %300million (or N48billion) Debt Service - $450million (or N72 billion) He argued that smaller simple refineries could distract authorities and fail to materially
address Nigeria’s petrol need (this is an argument against modular refineries even
though they were widely advocated by some subsequent presenters and discussants). He also noted that costs of re-locating used refineries are always under-estimated and fraught with set up issues. However, in considering cost of setting up new refineries, he said that it is also important to consider that massive associated infrastructure would be required (expressways, rail connections, ports, power generation, water and sewage processing, and residential estates). However, he noted that the financialchallenge is the greatest resource
challenge to establishing new build refineries and execution is a long complex process that
can take a minimum of 5 years.
Although he did not recommendTransplant Refineries, he noted thatthey offer the advantage of reduced execution time – about 3 years and the cost of a transplant could be about 65% of the cost of a New Build. He maintained that the contractual complexity is high and plant equipment ages range from 1965 – 2003 and come with limited warranties on used equipment. 4.2.Solution Alternatives
Mr. Ajose-Adeogun discussed four possible alternatives for improving refining capacity in Nigeria:
1. Import Improvement: The combination of global PMS excesses and poor reception infrastructure make for hanging fruit to rapidly close the gap between local refining and imports. He stated that this strategy would involve private investorsto commit to appropriately configured refineries where utilisation has been a challenge; the need for long term charters on milk round carriers (80k DWT+); the development of integrative synergies in reception facilities and enhancement of alternatives for logistics cost reduction (larger berths, deeper drafts, faster discharge rates); and fully deregulated pricing regime. However, complimentary actions to stabilize the market such as upgrade of existing refineriesand local refining must continue.
2. Concession (of Existing Refineries): The focus of this strategy would be to deliver rapid capacity utilization Improvement. The processes involved include international bidding and award (with local content parameters) of per barrel refining fee; agreeing timelines for refurb investment ramp up on bonus-malus structure with government responsibilities defined and limited to non-refinery issues. Output parameters should also be agreed – no government role in operation at all. Crude and refined products will be supplied and owned by private suppliers. The process has to be market driven i.e. no government involvement in price setting, there will be open carrier system for supply pipelines and the deregulation transition should be executed during investment ramp up.
3. Sell Existing Refineries
4. New Build
Next Steps Mr. Ajose-Adeogun suggested the following next steps:
• Asteering committee should be established with deep private sector leadership. This committee should be multi-sectoral and international in make-up. Part of its responsibility should be to develop the long range plan for Nigerian refining and present to the Department of Petroleum Resources (DPR), House of Representatives, and the Senate.
• There would be need toselect new recipients or Refinery License Award based on new guidelines.
MrAjose-Adeogun also provided his thoughts on a good legislation that is capable of promoting local refining capacity. They include the following:
• General Capabilities Upgrade in the DPR:He suggested that a specific function in the DPR should be set up to handle refinery development, separate from operation of the existing government refineries. This department must include third party private sector leadership. He noted that audit and oversight of this function in terms of efficacy and transparency is paramount.
• Planning: He suggested that there should be commitment to a long range plan that sets out the landscape over the next 30 years. This would have to be in terms that transcend a succession of (as far as this is practicable)
• Pricing - The Act must exhort the DPR to establish clarity on long term pricing for outputs (import price parity, deregulated). This is a priority item and there are precedents of countries (such as India) paying import parity pricing whilst subsidizing prices domestically that helped support development of a private sector refining industry
• Disincentives for Speculators - The spirit of the current deposit required prior to receiving the License to Establish is well received but interferes with project financing and increases cost and risk.A similar approach that creates the obligation via a financial instrument using an international bank as a custodian will reduce cost. This instrument can be transferred to the initial designers / contractors upon project start up.
• Transparency - The Act needs to make it clear how it will deliver clear transparency of process. It needs to genuinely remove the rent seekers in government that obstruct bona fide project development. While this is not a challenge specific to the refining sector, clarity on legislative and license requirements would help reduce the main hurdle to securing finance.
• Wider Capabilities and Infrastructure Development - The Act should support parallel development of ancillary infrastructure (funded directly by the Federal Government, takingsubventions from State Government where required, utilising PPPs) � ports, roads, rail, pipelines, etc. This would significantly benefit the overall Nigerian economy and help transform selected locations into an oil/petrochemical hub serving the West African sub region.
4.3 Contributions from the Discussants
4.3.1 Mr. EmekaUnachukwu MrUnachukwu’s contribution was in the form of a presentation titled “Reducing Dependence
on Imported Fuel through Promotion and Investment in Small and Medium Scale Refineries.” He started by highlighting the key facts &issues around refining in Nigeriawhich include:
• the combined installed production capacity of Nigeria’s refineries is 445,000bbl/day and current capacity utilization about 30%;
• the daily national consumption rate is 35million liters/day for PMS; 12million liters/day for diesel; and 10million liters/dayfor Kerosene;
• production at full capacity utilization cannot also meet the consumption figures. For instance, at full capacity utilization PMS production is estimated at 20m liters/day and estimated cost of product importation to fill gap is $10Billion.
According to Mr.Unachukwu, the facts and issues enumerated above highlight the need to improve refining capacity in Nigeria. He strongly believes that contrary to speculations,smaller or modular refineries offer a viable option to improving Nigeria’s
refining capacity as they are both feasible and profitable.He faulted Government’s strategy of building new refineries insisting that while new refineries might add 750, 000bbl/day, this would not sufficiently address the gap in the supply of refined products. He argued that the expected production increase after TAM would be:
• PMS 20.3m/day to match 35.0m/day consumption;
• Diesel 15.3M/day to match 12M/day consumption;
• Kero 9.2M/day to match 10M/day consumption;
• Plan to commence local refining of Aviation fuel.
Mr. Unachukwu strongly advocated that government should provide the necessary support
that would stimulate the growth of small and medium scale refineries (MODULAR). He
defined modular refineries as refineriesdesigned to operate within capacities of between 500-
20,000bbl/day.He shared pictures of modular refineries and described a typical modular
refinery operating processes.He also explained the processes involved in establishing and
operating a conventional refinery but noted that compared to the modular refineries, the
conventional refineries are a lot more complex to establish and operate. He maintained that
modular refineries require low project set up cost and land space. While conventional
refineries may cost between $2billion -$10billion(depending on the size), modular refineries
only cost between $10million -$200million (also depending on the size). Therefore, modular
refineries are more affordable and have greater potential for promoting private sector
investment. He also added that in terms of the timeline, it takes 11 months to set up a modular
refinery while it takes 3-5years to set up a conventional one. He enumerated the following as
the characteristics of modular refineries that give them the edge over conventional refineries
in terms of cost, time, return on investment, maintenance and upgrade considerations:
• modular refineries eliminate the costly design/construction process from the plant;
• they minimize inclement weather delays and reduce costs since high-cost field
work hours are transferred to the shop;
• modules can be shipped with minimal to no on-site assembly requirements;
• modules are pre-designed, manufactured and tested prior to shipping; and
• smaller individual module capacities mean far less expensive components;
• high rate of return on investment not less than 20% considering fluctuation in
crude oil prices;
• amazing low operational cost - two operators can restart the plant from a cold start
and have the plant in full operation in a matter of hours. They are usually
completely automated;
• modules can be removed and added while the rest of the system stays in operation;
• scheduled maintenance even with spare modules can be performed on individual
modules without affecting others of its type;
• Easily Upgradeable and scalable to accommodate change;
• TAM is cheaper and takes less time than a conventional refinery.
Mr.Unachukwu offered some advice on how to boost the PMS production capacity of
Nigeria’s refineries. He believes that achieving this objective would require investment in
additional catalytic reformers and naphtha hydro-treaters in the existing refineries and using
strategically located, low cost modular refineries not producing PMS to provide naphtha
feedstock for the existing refineries. He believes this could increase PMS production by 15
million litres in 2 years. He also argued that modular refineries could also help the country in
achieving local aviation fuel sufficiency, the local consumption of which is currently
estimated at 2.5 million litres/day.
On the management structure of modular refineries, Mr.Unachukwu stated that it is usually
less complex than that of conventional refineries in which it is necessary to employ hundreds
of workers. In addition, because modular refineries are mostly privately owned, there would
be less room for inefficiency, fraud and other corrupt practices. Technically, modular
refineries allow greater process flexibility – refining units may operate independently or
likewise be interconnectedin combinations as determined by the processing needs.
Policy and Finance Issues
He noted that for government to provide adequate support to the growth of modular
refineries, certain policies would be essential. He stated that promoting the growth of
modular refineries would require new DPR guidelines for small and medium size refineries
that are different from the existing ones that demand “excess monetary and technical input.”
There would be need for special crude supply arrangements and also issuance of credit
guarantee and special grants.
However, Mr. Unachukwu noted that there are challenges to the promotion of modular
refineries. The existence of illegal refineries scattered around the Niger Delta and beyond
creates a negative perception of modular refineries. He noted that there are over 20,000
illegal refineries in operation which support crude theft (bunkering) not to mention the
attendant environmental problems. He also noted that low private sector investment in the
refining sector, social unrest, unemployment and fuel scarcity also constitute challenges to
the growth of modular refineries.
Milestones
He stated that some successes have already been recorded in the establishment of modular
refineries. He cited the examples of Ogbele Refinery (Topping Plant) in Rivers State,
Nigeria; Tema Refinery in Ghana; and Soraz Refinery in Niger Republic.
Conclusion
Mr. Unachukwu concluded his presentation by re-emphasizing that investment and
promotion of small and medium size refineries could make Nigeria self-sufficient in the
production of petroleum products and also develop a regional export market in 3 years.
4.3.2 Mr Reginald Stanley
Mr Stanley in his discussion of the two papers presented remarked that:
• Modular refineries can hardly survive at high crude price periods;
• In agreement with Mr.Ajose-Adeogun on importation of refined products, he noted
that what really matters is the proportion of local consumption that is being imported;
• He suggested that there is need for the establishment and maintenance of strategic
stock reserves in all geo-political zones to address emergency supply gaps or cushion
the effect of international market disruptions;
• He noted that another critical issue that needs to be addressed is “have we been able to
run refineries well?”; He emphasized that it is important to establish a base low for
importation and determine how to run existing refineries better.
4.3.3 EmekaNwawka
In his discussion, Mr Nwawka emphasized that in deciding what model of refineries to
support; a lot depends on the quality of the crude being refined.He reported that his company,
Orient, has been producing refined products for a week (as at the time of the Summit) and
acknowledged that modular refineries are best suited for refining the quality of crude oil that
Nigeria produces. He also noted that there are human resource challenges involved – in both
conventional and modular refineries. So there is need for an overall Charter for human
capacity development in Nigeria.
4.4 Questions/Contributions from the floor
• There is need for a national developmental programme that properly incorporates
refining capacity improvement;
• Do the modular refineries not need pipelines for feed stock supply and distribution of
refined products?Mr.Unachukwu responded to this question by stating that modular
refineries would require pipelines but not as much as conventional refineries do;
• On the accusation against DPR on its unfriendly policies against small and medium
scale refinery operators (made by Mr Unachukwu during his presentation) a
representative of the DPR responded by saying that the clause discouraging small
scale refineries was expunged in 2007;
• To address insecurity of facilities - rather than establish a ‘National Strategic Force’
as suggested by the GMD of NNPC, it would be more effective to implore the
Legislature to improve oversight of existing security outfits. Mr Ajose-Adeogun
supported this position by emphasising that a new security force would not be
necessary but there is need to strengthen existing outfits in order to enable them to
improve the security of refining facilities. Mr Nwawka also reiterated the idea of
engaging communities in policing refinery facilities;
• It was also noted that on capacity building the problem should be addressed as a
collective national ‘mental’ problem.
DAY 1 - SESSION 3
5 Establishing Petroleum Refinery in Nigeria: Regulatory and Financial
Challengesby Engr. Lai Fatona, Managing Director Niger Delta Exploration and
Production Plc.
Chairman: Mr Reginald Chika Stanley, Executive Secretary, Petroleum Products
Pricing Regulatory Agency (PPPRA)
Speaker: Dr.Lai Fatona, Managing Director, Niger Delta Exploration and
Production Plc
Discussants: Mr IfeanyiUba, Managing Director, Capital Oil and Gas Industries
Ltd.
OlumideAdeleke, Deputy Director, Department of Petroleum
Resources
Comrade ChrisOnyeka, Head of Media and Information, Trade Union
Congress of Nigeria
5.1 Introduction
The presenter started by reporting that his company, the Niger Delta Exploration and
Production(NDEP) Plchas been producing 2 Million litres of diesel per day since November,
2011. In responding to earlier discussions, he acknowledged that there is need to set up a
national, short term (about 5-year) target for improving refining capacity by the end of the
Summit.He acknowledged that while the Nigerian oil and gas industry - exploration,
production, transportation and distribution - have matured over the years; the same cannot be
said about refining capacity and capacity utilization.
Dr.Fatona gave a brief history of the development of refining in Nigeria. He noted that prior
to1965, all international petroleum marketing companies in Nigeria imported their stock
independently from their own refineries located abroad. As domestic demand grew for these
products, and following the local availability of crude oil by pipeline, establishment of a
refinery in Nigeria became commercially viable. In 1960 two oil marketing companies in
Nigeria, Shell and British Petroleum (BP), formed a 50/50 joint venture refining company in
Nigeria, the Nigerian Petroleum Refining Company (NPRC).The NPRC built a 38,000b/d
petroleum refinery at Alesa-Eleme, near Port Harcourt to refine local crude oil into five
petroleum fuel products. Construction of the refinery commenced in 1963 and production
started two years later, in 1965. In 1973 the refinery was de-bottlenecked, in order to increase
its crude oil processing capacity from 38,000b/d to 60,000b/d. The domestic demand for
petroleum products which steadily increased was satisfied by the NPRC refinery for about 8
to 10 years.
However, in1970, the Federal Government acting as a member of OPEC compulsorily
acquired and paid for an equity share of 60% in all private international companies working
in the Upstream and Downstream sectors of the Petroleum Industry in the country.
The Federal Government invested these shares in its wholly owned corporation, the Nigerian
National Oil Corporation (NNOC). NPRC was one of such companies whose shares were
compulsorily acquired by government. NPRC was allowed to continue to operate
commercially and profitably, without any interference from government. The Federal
Government participated only at the board, represented by NNOC, as the majority
shareholder. In 1977, a new Decree 77 was promulgated to establish the Nigerian National
Petroleum Corporation, (NNPC). Among the five divisions created in the new NNPC
corporate headquarters was the Refinery Division, which was headed by a General Manager.
This division was responsible for policy, projects implementation and coordination of all
petroleum refining activities of the corporation. In particular, the General Manager Refinery
Division was appointed Chairman, NPRC Board, following the Federal Government’s
compulsory acquisition of the (60%) equity shareholding in the NPRC.
The Warri Refinery (1975-1978)
Dr.Fatona narrated further that following a tendering exercise involving international
engineering contractors, a contract was awarded to Snamprogetti Spa of Milan,Italy. The
contract was for the design, procurement and construction of a new grassroots petroleum
refinery in Warri. The design capacity of the refinery was 100,000 b/d, and the lump sum cost
was $478 million, for project duration of 30 months. This project was completed in 1978. The
refinery commenced operation immediately thereafter.
The Kaduna Refinery (1976-1979)
A second new refinery was planned for the production of lubricating oil products, waxes and
asphalt (for road projects). This refinery which was located in Kaduna consisted of two
refining streams:50,000 b/d fuels units and 50,000 b/d lubes, waxes Asphalt plants. The
contract for the construction of the Kaduna Refinery was awarded in 1976 to Chiyoda
Engineering and Construction Company of Japan, at the cost $525 million, for a project
completion period of 36 months. The refinery was completed on schedule and was
commissioned in late 1979. The existing products pipeline linking Warri Refinery to Kaduna
was converted to pump crude oils for supply to the new Kaduna Refinery
In 1978, the Federal Government through the NNPC acquired the remaining 40 percent
equity of NPRC from Shell and BP. The name of the NPRC was changed to NNPC Refinery,
Alesa-Eleme, near Port Harcourt. A new position of Managing Director and a new
management structure were established. The Chairman of the Board remained the General
Manager Refineries Division of NNPC. While the refinery continued to produce and maintain
its facilities as before.
5.1.2History of Refining in Nigeria (1980-1989)
Dr.Fatona noted that by 1980, with the old Port Harcourt, Warri and Kaduna refineries in
operation, there was still an appreciable level of importation of petroleum products to
augment domestic production from the three refineries. A review of the old study was
conducted to update the demand and pattern of consumption to cover the next period of 10
years.This exercise was also carried out to determine the optimum size and location for an
export oriented refinery, which would also supply the domestic market as required. The
several options considered included, new refineries and/or expansion of existing plants. The
Federal Government decided to expand the capacities of the fuels units in the existing
refineries at Warri and Kaduna by de-bottlenecking.The de-bottlenecking route was quicker
but capacity increases were moderate. The de-bottlenecking projects were completed in 1985.
The new capacities at Warri Refinery and Kaduna Refinery became 125,000b/d and
110,000b/d respectively.
In addition, a new grassroots refinery with a capacity of 150,000 b/d was to be constructed
adjacent to the existing refinery at Port Harcourt. The total additional refining capacity added
from the result of the new study became 185, 000 b/d. This would bring the total refining
capacity in Nigeria on completion of the projects in 1989 to 445,000b/d, which is still the
current total installed refining capacity.
The new Port Harcourt refinery with a capacity of 150,000b/d was designed to include
facilities to export products in excess of domestic demand. The contract for the design and
construction was awarded to a consortium of JGC Corporation/Marubeni Corporation both of
Japan and Spibatignolles of France in October 1985 at a total cost equivalent of US$850
million. The construction was completed and the refinery was successfully commissioned in
October 1989.
Table 4.1Nigeria Refining Capacity as at 2012
Name Date Licensed Installed Capacity
(bls/day)
1 The Port Harcourt Refining Company (PHRC I)
1965 60,000
2 The Warri Refining & Petrochemical Company Limited
1978 125,000
3 The Kaduna Refining & Petrochemical Company Limited (KRPC)
1979 110,000
4 The Port Harcourt Refinery (PHRC II)
October 1989 150,000
5 NDPR Mini Refinery (Ogbele Topping Plant)
Jan 6, 2012 1,000
Total 446,000
He gave the following reasons for the low capacity utilization:
1. Frequent equipment failure, power failure and haulage constraints; and
2. Unsteady crude oil supply occasioned by incessant pipeline vandalism on crude oil
supply lines to refineries.
He noted that the time lapse between 1989 and 2012 signifies 23 years of no refining capacity
enhancement and investment for a country witnessing and living with a rapid and yearly
growth in refined products consumption and utilization.
5.2 Challenges to Local Refining
5.2.1Regulatory Challenges
Dr.Fatona enumerated that the regulatory challenges to increasing refining capacity in
Nigeria are associated with the following:
• Licensing Regime:He stated that there are three licensing layers (establish/
construct/operate) each with accompanying expiration timelines. For instance, the
timeline allowed for establishing company location is 2 years while that for construction
is 1.5 years. He considered these timelines stipulated by the regulation inadequate based
on:
• construction season constraints; • contracting constraints; and • Customs, logistics and others.
He stated that there are applicable studies to accompany each licensing layer and each has its
peculiar implications. For instance, for the human resource needs there would be:
• Energy studies- (for example, except you are a producer, where would your feedstock be
sourced from?);
• Safety studies;
• Environmental studies; and
• Reviews.
5.2.2 Financial Challenges
He acknowledged that the financial challenges to increasing refining capacity have little to do
with availability of funds. He argued that the financial obstacles rather have moreto do with a
lack of deep understanding of the Nigerian Petroleum industry (particularly the technical,
commercial and economic requirements of new projects). He noted that securitization of
funds- collateral demands - range from the absurd, to the ridiculous and often to the
impossible.Other challenges are that: loans are often short term with little breathing room
(moratorium); lending rates are excruciating and; long term money is unavailable.He stated
that to overcome these challenges, investors often recourse to internal funding from cash flow
and joint ventures where they want to be on the driving seat.
5.2.3 Other Unspoken Challenges
Dr.Fatona also indicated that there are unspoken challenges arising from the following:
Feedstock guaranty (Crude oil supply): The key issue here is the recognition that crude oil
is the major input to refining. Therefore, if you do not produce crude oil you will face the
challenge of ensuring steady supply. The questions are: will you have access to buy crude oil
from NNPC, IOCs, or Nigerian Independent producers? And why would any of these sell or
make commitment to sell to you?
Planning:This entails having the right set of professionals at the various stages of the project
life namely:
• Feasibility- developing a credible business plan;
• Market research;
• Product specification;
• Supply and evacuation;
• Plant operations, maintenance and modifications.
Design:The project must embrace technology that suits the environment where it will be
situated.
Sociological challenges: These relate to the prevailing mind set, the psychological and
emotional capacity of personnel in our environment to handle and manage huge projects.It
also includes community relations.
Political challenge: The political climate must be friendly to investors. He illustrated this
with the case ofAmakpe refinery located in AkwaIbom State which is believed to be facing
some challenges between the project owners and the community.
Deregulation:He emphasized that a deregulated sector would provide enabling environment
for investors to make returns on their investments.
Lack of incentives:Incentives may be in the form of tax holidays for a limited period to
allow investors thrive and consolidate in the first few years of coming on stream.
Lack of transparency on the part of investors:He reported thatsome investors have come
under the guise of building refineries only with the intent of securing guaranteed crude oil
from the Federal Government (even before finding the site to construct).
5.3 Installed Refining Capacity vs Population/Consumption
Dr.Fatona noted that only six African countries have installed refining capacity in excess of
their population (Libya, Gabon, Senegal, Algeria, Egypt and South Africa). This, according
to him suggests a huge market for refined products in the continent. He supported the
argument earlier made by Mr. Unachukwu stating that small sized refining capacities may be
inefficient but a clear way to follow towards achieving national and regional self-sufficiency
and a good model for Nigerian independent small volume producers. He maintained that
small scale refineries have benefits such as:
• Potential for partnerships, partnering and shared risks;
• Joint crude oil supply into planned mini refinery;
• Joint development and resulting supply chain development; and
• Community development.
5.4 The Niger Delta Exploration & Production Plc Experience - The Ogbele Mini
Refinery
Dr.Fatona seized the opportunity of the Summittotell the story of his company – the Niger
Delta Exploration & Production Plc.
5.4.1 The NDEP History
He stated that the Niger Delta Exploration & Production Plc (“NDEP”) is an independent
indigenous Nigerian oil and gas company founded in 1992 as an investment vehicle for
Nigerians to participate in the Nigerian oil & gas sector. NDEP has three subsidiaries Niger
Delta Petroleum Resources Limited (“NDPR”), ND Properties Limited, and ND Gas
Development Company Limited (“NDGDC”). NDEP through its operating company and
fully owned subsidiary, NDPR was the first indigenous public oil company to produce a
marginal Oil & Gas field (the Ogbele Field) in Nigeria. The Ogbele oil field in Oil Mining
License (OML) 54 in Rivers State is NDEP’s primary producing asset. As at December 31,
2011, the Ogbele field had produced 6.4MM bbls of crude oil from inception.
5.4.2 Ogbele Mini Refinery
The Ogbele Mini Refinery commenced and completed the mechanical installation activities
of the 1,000bpd Diesel Topping Plant (mini refinery) at the Ogbele Field. Test production of
diesel from our crude oil commenced in March 2011. The Petroleum Minister’s consent was
obtained in November 2011 and the License to Operate was received in January 2012. The
objective of the Ogbele mini refinery is to work towards self-sufficiency in refining capacity
through the following:
• Achieve crude oil production of 10,000 barrels per day and gas production of 50 mmscfd
by 2012;
• Build a market capital in excess of US$500 million by 2012;
• Book proven recoverable reserves of 100 million barrels of oil equivalent by 2015;
• Identification and acquisition of blue sky opportunities and assets;
• Systematic and efficient development of existing marginal field assets;
• Systematic evaluation and acquisition of new medium and long term development assets.
5.4.3 NDEP’s Unique Selling Points
Dr. Fatona reported that NDEP is Nigeria’s first indigenous marginal oil producer and has a
strong and growing portfolio. It enjoys excellent host community relations ensuring minimal
operational interruptions. It is a fully integrated indigenous oil company – crude oil, diesel
and natural gas production. He noted that the strong oil and gas market fundamentals provide
an attractive platform for future growth. NDEP has successfully built Nigeria’s first privately
owned refinery (the Diesel Topping Plant) with a cumulative production of 6.38 million
bblsas at Dec 2011. It also has an experienced management team with more than 100 years of
combined oil & gas experience.
5.5Discussants
5.5.1 OlumideAdeleke, Deputy Director, Department for Petroleum Resources (DPR)
In his discussion, Mr.Adelekereiterated the willingness of DPR to provide necessary
supportto private investors who are interested in refining.He however, emphasized that DPR
is keen on ensuring high levels of quality of production and processes; strict adherence to
environmental and safety standards and the economics and viability of the proposals. He
stated that DPR in supporting small and medium scale refinery operators would not
compromise on any of these standards in order to safeguard the integrity of the industry and
also protect the interest of the country.
5.5.2 Chris Onyeka (of TUC)
Mr Onyeka highlighted the dangers posed by the delayed passage of the Petroleum Industry
Bill (PIB). He noted that a number of the issues raised so far in the Summit could be
addressed by a well-articulated legal framework such that the PIB hopes to achieve. On
deregulation, Mr Onyeka informed the Summit that contrary to widespread opinions about
the position of Labour, it is not against deregulation but it is rather requesting a more
appropriate definition of deregulation that would incorporate how to mitigate the negative
effects on the poor.
5.5.3 IfeanyiUba (Capital Oil)
Mr Uba in his contribution lamented the challenges of insecurity faced by investors and the
industry generally. He stated that while the situation discourages new investors, a number of
investments have folded up with plenty more to follow if the security situation does not
improve. He also highlighted that lack of financing and funding options have also prevented
investment in improving local refining capacity.MrUba also noted that there would be need
for government to improve and expand infrastructure that would be complementary to the
growth of refining capacity such as rails and seaports. He equally joined the call for the
deregulation process to be expedited for any meaningful progress to be made towards
improving refining capacity.
5.6 Questions/Contributions from the Floor
• A participant asked “if modular refineries produce PMS, what happens to the residue”
and the response to this question was that there are no residues.
• What are the recommendations to address the limited number of existing seaports? The
response to this question was that building new ports would not solve the problem but
that it would be better to use what is available more efficiently.
DAY 2 - SESSION 1
6 Challenges of Building a New Refinery in Nigeria: Licensees’
Experience So FarBy MrUbaniNkaginieme PhD, President TotalSupport
Energy
Chairman: Mr OdeinAjumogobia, SAN, Former Minister of Petroleum Resources
Speaker: MrUbaniNkaginieme PhD,President, TotalSupportEnergy Group.
Discussants: Mr Tonye Cole, Chief Executive Officer, Sahara Energy Group
Mr Humphrey Doody, General Manager, Community Interface, Shell
Exploration and Production Africa
6.1 Introduction
Mr. Nkaginieme started his presentation by contributing to what has somewhat become the
key issue of the Summit – on the feasibility of modular refineries.He acknowledged that there
are dangers of emissions and other environmental hazards that could arise from increased
refining capacity. However, he supported the argument for modular refineries stating that that
one modular refinery is already operating and not at a loss.He maintained that it is clear that
government cannot effectively run refineriesand as such there is need to encourage private
investors. He noted however that financing is the biggest impediment and the system
presently is such that local banks are the ultimate risk takers.Mr Nkaginiemeenumerated the
other major challenges to refining in Nigeria to include the following: project feasibility,
environmental, infrastructural, financial challenges, supply assurance, market assurance,
regulatory, political risks, powerful interests, technology, operations and maintenance,
concepts, promoter knowledge and experience, and location.
6.2 Background: Country Overview
In a background to his presentation, Mr Nkaginiemestated that Nigeria’s democratic
government in 2001 embarked on a deregulation and privatization of the downstream
petroleum sector, a key aspect of which is the issuance of licenses and permits to private
investors. In the period 1970-2001, Government, through its 100% owned company –
NNOC/NNPC and its subsidiaries, controlled all major oil related activities. The government
currently owns the existing 4 refineries(Port Harcourt 2, Warri, and Kaduna) with combined
nameplate capacity of 445,000 BPD. He stated that government had slated the 4 refineries for
privatization, but for a variety of reasons(mostly political) the process was
aborted.Government had issued three Refinery Construction Licenses namely:Amakpe
Refinery (6,000BPD), Brass Refinery (100,000BPD) and Qua Refinery (100,000BPD).
Though the Brass and Qua Refinery Licenses were issued since 1996, neither of them got off
the ground. He noted that their inability to operate could be linked to the flawed arrangement
whereby they were allocated crude oil to refine at overseas affiliated facilities, and then “re-
import” back to Nigeria. This allocation of crude at discounted prices effectively meant they
became instant crude merchants instead of potential refiners.
6.2.1 New Policy Thrust
He also gave an overview of the new policy regime regarding licensing of refineries in
Nigeria. The new 3-stage refinery licensing process involves:
• License to Establish (After feasibility report)
• Approval to Construct (After detailed engineering review (within 2 years)
• License To Operate(After installing plant to specifications)
He noted that only about 21 out of over 72 applications made stage one above while about 15
licensees made it to stage two. He also stated that all the above processeswere largely
managed by the Department of Petroleum Resources (DPR). The idea behind this was to
minimize bottlenecks and allow only serious minded players to move forward. He reported
that out of the 15 licensees who made it to stage two, only about five of them have shown any
serious signs of getting off the ground.
6.2.2 Market Trends
Mr Nkaginieme acknowledged that the key to the success of the new policy thrust would be a
sustained and complete deregulation of the downstream sector. He stated that based on
current scenario, the market has the capacity to accommodate more than 10 small refineries
and or more than 4 large refineries based on the current local demand estimate.
6.3 Potential for Private Refining in Nigeria
Mr Nkaginiemenoted that with less than 50% of total NAMEPLATE refining capacity
available, the total refining capacity of less than 225,000bpd is not up to a third of the
national demand estimated at over 750,000bpd. This offers considerable opportunity for
private and efficiently run refineries.DPR has already issued about 15 “Approval to
Construct” licenses for refineries. A lot of these licenses are for capacities above 50,000 bpd
capacity.He acknowledged that implementation would prove to be extremely difficult due to
the large financial outlay involved. He estimated that it could cost between $0.5 billion and
$2.4Billion. The licensed smaller refineries are therefore more likely to come on-stream
sooner due to the manageable financial requirements. While establishment of a few of the
large refineries could in theory swamp the market, there is sufficient demand for several of
the small refineries to co-exist and operate profitably. In addition, full construction and
installation of small modular refineries is estimated to take an average of 18 months while a
standard 100,000bpd capacity refinery would require a minimum of 6-7 years which gives
smaller modular refineries a significant head start.
6.4 The Refinery Projects – Challenges & Mitigations
In highlighting the challenges of building a new refinery in Nigeria, Mr.Nkaginieme used the
experiences and examples from issues he has dealt with in the course of setting up and
running his company,TotalSupport Refineries.
6.4.1 Project Feasibility
Regarding project feasibility, Mr Nkaginieme stated clearly that:
• A Private Refinery as a private investment will purchase crude oil at prevailing market
crude price;
• Assumingfull deregulation, the margin between crude oil and refined products will remain
relatively stable;
• Refinery projects therefore will remain viable at different crude oil prices.
6.4.2 Concepts, Assumptions & Technology
The speaker noted that for a new refinery project to succeed, the robustness of its concepts,
technology, and assumptions are critical.Refineries are intensely process oriented and
therefore should benefit from economies of scale in plant size.However, the higher refining
costs per barrel of small refineries can be greatly offset by lower transportation cost savings,
particularly when such small refineries are very close to the source of crude supply. He noted
that indeed, small refineries have become the principal new refining plants deployed in
challenging regions such as Siberia and the Australian outback, South East Asia with
significant crude oil production.He stated that the technology has also improved over the
years with manufacturers building modular and viable scalable refining plants with initial
capacities as low as 1,000 bpd.
6.4.3 Unprepared/Uninformed Promoters
Mr.Nkaginieme however warned that promoting a new refinery project is not for the faint-
hearted and un-informed.The management and operation of the various business units
involved in a refinery project require a high level of experience, patience and industry know-
how for a successful implementation. He acknowledged that in a developing country like
Nigeria, long-term investment funds and culture are nearly non-existent, and must therefore
be borne in mind by promoters. He stated that it is therefore critical for the promoters to take
a mid-to-long term view and also have the ability to carry on with the project till financing
becomes available. He opined that it is certainly no longer a means for dispensing political
patronage or becoming instant crude merchants.
6.4.4 Political Risks
He described major political risks to include the risk of government(and regulators) changing
its policy of deregulation of the downstream sector, and possible occasional communal
disturbances in the oil producing areas. He noted that policy flip-flops may burden projects
with unexpected operating expenditures. He acknowledged that country political risk
insurance for third world and emerging markets are usually much higher than those of mature
& stable countries and this usually means higher financing and project costs. He however
stated that political risks could be mitigated through the following strategies:
• Obtaining political risk guarantee from Government; or
• Crude Supply & Market Assurance; and
• Full deregulation of the downstream sector
6.5 Environmental and Health and Safety Concerns
Mr Nkaginieme noted that the world is acutely aware of the consequences of bad
environmental policy and practice. Therefore, regulations to protect the environment have
become increasingly more stringent. Emerging market projects are also expected to be
sensitive to environmental issues for their own sake as well as meeting for instance,
theOrganization for Economic Co-operation and Development(OECD) specifications. He
acknowledged that the good news here is that available technology can largely address these
issues, albeit at a cost. It is therefore the responsibility of new projects to have sensible
mitigants to environmental damage designed into the project and all its processes. He advised
that older refineries should retrofit new technology during rehabilitation or turn-around-
maintenance. A good example of application of technology is the case of his company
(TotalSupport)project where process by-product - flue gas, which is normally flared,is used
for combined heat and power generation at energy conversion efficiencies approaching 90%,
while leaving an emissions footprint that is less than 3% of today’s normal standards.Another
good example, of application of technology,again from his company practice, is the case
whereby all process effluents are collected at skid level and reused or disposed of
properly.The result is a near-zero-effluent refinery. He also reported that his company crude
tanks are located on higher grounds thereby enabling gravity feed, and eliminating quite a
few feed pumps altogether. The implication is less equipment and much reduced maintenance
profile.
6.6 Challenges to Increasing Local Refining Capacity
6.6.1Financial Barriers
Mr Nkaginieme noted that a capital intensive project such as a refinery would require major
equity and debt funding. He lamented that in Nigeria, most of the local banks have very weak
capacities, and are not always able to provide mid-to-long-term debt funding for large
projects. This, according to him, is in fact the biggest reason why mid to large private
industry projects that could rapidly move developing countries forward never happen.Lack of
a government backed guarantee agency also contributes to lack of strong local capacity. Also
because of previous abuses, the government is often sceptical to provide guarantees for
private industry projects.
He noted that developed countries like North America and Europe all have export promotion
agencies (e.g. US-Exim Bank) that provide export credit guarantees and insurance so long as
the bulk of the exported equipment originates from their region.However, they require
counter guarantees from governments and/or local banks from the importing region. So, the
bottom line is that the local bank is still the ultimate carrier of the risk. Weak local banking
capacity equates to inability to provide long term funding. The practical implication is that it
is very difficult to implement any mid-to-long-term privately driven project which costs over
$100million given the current scenario.
Mitigating Financial Barriers
On mitigating the financial barriers mentioned above, he acknowledged that the good news is
that with the new consolidation and mergers going on now in the financial sector in Nigeria, a
few banks with stronger back-bones have emerged and might be able to support larger
projects.However, he noted that the banks are still cautiousin taking on refinery projects
understandably. He suggested thata Political Risk Guarantee from government or Crude
Supply and Market Assurances could make refinery projects bankable without much cost to
government. He also advocated thatfull deregulation of the downstream sector should not be
delayed any longer.
6.6.2Infrastructure and Energy Limitations
Mr Nkaginieme noted that in many instances supporting infrastructure like roads, ports,
jetties, electricity grid etc., required to support a project like a refinery are limited or non-
existent. Therefore most projects like the private refineries coming up in Nigeria would have
to provide new or back-up infrastructure like a Greenfield project. Expectedly this would
result in higher project costs which could discourage potential investors.
6.6.3Third Party Service Barriers
Mr Nkaginiemenoted that in a developing country like Nigeria, critical third party services
are not always available. Some of these include but are not limited to: reliable transportation
for raw materials (in this case crude), machine-shops, health services, power, water, and staff
accommodation.Therefore projects cost would be higher in these circumstances putting third
world projects at a disadvantage relative to same type of projects in developed economies. He
lamented that a new project in Nigeria most times has higher capital costs because it has to
include provision of some of these services as part of the project cost. Usually this results in
increased operating cost also.
6.6.4Currency Stability and Foreign Exchange Challenges
Mr Nkaginiemenoted that crude oil which is a refinery’s main feedstock is normally
denominated in US$. Therefore, currency mismatch and fluctuations may impact adversely
on operating cash flow. Fortunately in Nigeria’s case, the Naira can be said to have remained
relatively stable in the last three years. He however acknowledged that the price of products
in a deregulated market would be largely driven by the dollar and crude prices thereby largely
eliminating currency mismatch issues.
6.6.5Location Challenges
He emphasized that the location of a refinery should be largely driven by economics rather
than any other consideration. He stated that access to crude supply is a major factor in
determining the viability of any refinery. In the case of TotalSupport Refinery, he reported
that crude supply is readily available from offshore fields within 90 nautical miles from the
site of the refinery. Hence, the refinery can access the highest grade of crude oil in the world
because of its strategic location.
6.6.6Technology Challenges
Mr Nkaginiemestated that the modular design of a small refinery allows for a cost-effective
refinery construction and operation. In agreement with arguments made by earlier speakers,
he opined that bottle-necking is also minimized or completely avoided. The refinery
components would be shipped and installed on-site within 18 months compared to a
minimum of 5 – 6 years required by the standard 50,000 - 100,000BPD refineries.He added
that advanced technology employed in the design and construction of the refinery would also
deliver a far more reliable plant with a longer life span. He maintained that the modular
design also facilitates significant maintenance and repairs without shutdown of the refinery.
He reported that upgrades and expansions could be carried out without any downtime.
6.6.7Operations and Management Challenges
Mr Nkaginieme noted that most developing countries, including Nigeria have not developed
good maintenance cultures. He stated that it is therefore critical for new refineries to design
ease of maintenance into their entire processes and operations.He suggested that it is also
desirable to have a “hand-holding” arrangement whereby the manufacturer assists the owners
with management expertise and training local understudies where applicable.He stated that
this should typicallylast for up to 5 years during which the debt burden on such a project
should have been liquidated. This actually provides good comfort to lending institutions
besides the obvious advantage of real technology transfer.In the case of Totalsupport
Refinery, he reported that the designer and manufacturer of the plant would also provide
management for the first 5 years, backed by technical performance warranties in respect of
the plant, and operational performance warranties with respect to refining yield and operating
costs.He emphasized that this arrangement would also ensure completion and start-up within
the scheduled period.
6.6.8Other Risks
MrNkaginieme stated that the establishment of several refineries at about the same time given
the numerous licenses being issued by the Governmentcould constitute a risk to growing
refinery business in Nigeria. He also added that changes in government policies which could
limit access to competitive markets for refined products also constitute a risk.In addition, he
recognized that there is a risk posed by the depreciation of the Naira against the US Dollars
especially as it could increase debt service burden.
6.7 Investment Considerations
He warned that the key attractions of investing in refinery projects in Nigeria must be directly
tied to whether such a project has thought through mitigation of all the challenges.The private
refineries that can get to production quickly would therefore not be under any serious
immediate competitive threat. He noted that the modular refineries would particularly have
technology advantage in their favor. He stated that modular refinery technology allows for
future capacity expansion through the addition of extra modules as the need arises.
6.8Conclusion
He concluded his presentation by stating that despite above mentioned challenges, the oil
industry remains one of Nigeria’s most lucrative and viable investment opportunities. He
noted that the promoters of private refineries and informed investors have a unique
opportunity to deliver an enterprise with huge market demand, and very attractive returns. He
recognised that there is an opportunity for a first mover entry into a lucrative and hitherto
protected market sector with significant margin protection for several years. This is
particularly so given the rapid and large cash generating capabilities of this type of project.
He noted that there is also immunity from foreign exchange fluctuations if pricing of both
inputs and products is tied to a stable currency regime. In addition, there are excellent
prospects of achieving significant market presence and capacity growth through modular
expansion. He emphasized that refinery business is an investment with the potential to be
debt-free in 5 years with positive cash-flow by year 3. He added that it has attractive exit
opportunities for investors.He reiterated that it is therefore imperative thatderegulation must
proceed apace and where possible accelerated.He noted that it is equally clear that despite all
the challenges, there are overriding benefits and mitigants to encourage investments in new
private industry petroleum refining capacity in an emerging economy like Nigeria.
6.9Discussants
6.9.1 Mr OdeinAjumogobia (Chairman of Session)
The Chairman of the session commended the speaker and highlighted the key points of his
presentation. He joined the speaker in calling on the government and especially the
lawmakers to work towardscreating and promoting the enabling environment for viable
investment in building refining capacity.
6.9.2 Mr Humphrey Doody
Mr Humphrey Doody in his contribution emphasized the need to avoid putting the cart before
the horse. He observed that the assumptions on the effectiveness of modular refineries
seemed to be overrated and unrealistic and called for caution.
6.9.3 Mr Tonye Cole
Mr Tonye Cole emphasized the need for a proper consideration of the implication of
improving refining capacity on the environment and that health and safety standards should
be improved and properly enforced.
6.10 Questions/Contributions from the Floor
Speaking from the floor, Mr Basil Omiyiin responding to the issue of financial challenges
noted that “no country ever grows financing its own growth”. He stated that building refining
capacity should be out of national interest (energy security) considerations more than
anything else given that profit margin from refining is generally low.Hence, it is difficult to
attract Foreign Direct Investment (FDI) especially given that other viable opportunities exist
both within and outside the sector in Nigeria.
Mr IfeanyiUba implored government and especially the legislature to endeavour to address
the financial constraints to investments in refining by creating special funds to stimulate
investment or properly integrating the Bank of Industry (BoI) into the sector.
Hon. DakukuPeterside highlighted the need to make a case for adequate support to be
provided to local business men. He also acknowledged that government would need to
provide support by building complementary infrastructure to refineries,for example a good
rail network. He stressed the need for the Summit to arrive at a common ground as it regards
modular and conventional refineries. The Summit appeared divided on the issue considering
the divergent opinions expressed both in favour of and against modular refineries.
6.11 Responses to Questions and Contributions
The presenter responded to the contributions from the floor by first stating thata strong
political climate would be required to enforce existing laws. He cited the example of the
inability of government to effectively enforce the gas flare laws/penalties so far.He
againreiterated that making refineries viable is closely tied to deregulation.In his response to
the contributions, Tonye Cole suggested that a solution to improving local refining capacity
would be to mandate or tie a percentage of IOCs’ production to local refining.
DAY 2 - SESSION 2
7 Encouraging a Robust Development of the Downstream Sector of the
Petroleum Industry in Nigeria: The Role of the Legislatureby Mr Tony
Paul, Managing Director, Association of Caribbean Energy Specialists Ltd.
Chairman: Captain Emmanuel Iheanacho, Former Minister of Interior
Speaker: Mr Anthony Paul, Managing Director, Association of Caribbean
Energy Specialists Ltd.
Discussants: His Excellency NyahumaObika, High Commissioner of the Republic of
Trinidad and Tobago in Nigeria
Mr OdeinAjumogobia, SAN, Former Minister of Petroleum Resources
Dr.TajudeenAkanji, Nigeria Labour Congress
7.1 The Challenge
Mr. Tony Paul started his presentation by stating that the challenge for the Summit was to
identify what actions the legislature could carry out to help address the technical,
commercial, regulatory, security and political challenges identified over the course of this
Summit.
He stated that the objectives of the oil & gas sector are twofold:
• National objectives – which is to maximise the benefits of the resources for Nigeria, and;
• Refining objectives – which is to maximise the benefits of refining for Nigeria including,
Self-reliance/security of supply, “affordable” products for Nigerians, new refinery
capacity, efficiency & profitability, reduced political risk, safety, security, environmental
preservation, etc.
He also stated that the role of the legislature includes ensuring that the benefits of natural
resources are maximised for Nigeria, by:representing the interests of Nigerians; protecting
these interests by making laws and keeping them current and; ensuring that laws are
adequately enforced.
7.2 Value Maximization in Oil, Gas & Mining
Mr. Paul noted that during and as a result of the activities of oil, gas and mining operations,
value may be gained or lost. According to him, the value from natural resources extraction to
any country takes two forms:direct (monetary), or indirect (non-monetary). The direct
(monetary) benefits include royalties, taxes, production shares to government and/or State
company; profits to local enterprises (State and private), salaries, wages, etc. to
individuals.He also stated that a country/region can increase local/national /regional monetary
value addition and/or profit retention in country/region by:extracting or producing and selling
more of the commodity and/or, reducing costs; improving efficiency; getting a higher
price;increasing taxes collected;ensuring and increasing in-country activities and the value
and amount of local/regional content & participation in profitableMid- and downstream
value-chain activities,associated business within country, including inputs of local goods and
services.
He stated that indirect (non-monetary) benefitsinclude, access to raw materials, fuels, locally
manufactured products, etc.multiplier effect on other parts of the economy, and local
communities (jobs, services, facilities, etc.), capacity development, including skills, service
providers, institutions, and infrastructure, environmental, strategic/political advantage (e.g.
national. regional or global positioning, regional integration, etc.). Mr Paul noted that value
could also be gained or lost through a range of factors, related to the management and
governance of the various parts of the sector.Value is therefore affected by: quality,
efficiency and effectiveness of legal, fiscal, institutional and administrative regimes;real or
perceived risks, as investors seek a higher return for taking higher risks. A country/region
couldalso increase local, national or regional indirect value addition and/or profit retentionby
ensuring and increasing the multiplier effect, through profit share retained by government,
state companies and local private companies, and through equity participation. This objective
could also be achieved through quality and timely government spending or
investments;creating and or leveraging synergies with other economic sectors;building
capacity that is required in the sector and that which may be transferable to other sectors and
or exportable; ensuring and increasing other forms of value (social, strategic, etc.); reducing
risk or the perception of risk; and improving and sustaining quality legal, regulatory, fiscal,
administrative and institutional regimes.
7.3 Refining Capacity Development
Mr. Paul stated that in developing refining capacity what would be required is the translation
of vision to action with each stage requiring activities to be conducted by capable, effective,
efficient and empowered entities. He maintained that the role of the legislature lies in
monitoring and assurance. He suggested that the NASS should ensure that the stakeholders
who are responsible for the various stages have clear roles and accountabilities and that their
approach and efforts are adequate. This he emphasized is how it could be determined whether
the legislature is doing what it set out to do or achieving the results expected.
7.3.1 Policy to Action
He also stated that it would be necessary to build flexibility andresponsiveness into the
system. He noted that different stages engender actions and require supporting institutional
arrangements or authorizing instruments (legislation, regulations, contracts, policies, standard
operating procedures). He also noted that the strength, transparency, and consistency of
implementation would be determined by the quality and relevance of these instruments, as
much as the capacity of the implementing and regulatory agencies.
He maintained that while the legislative and regulatory authoritieswould play an oversight
role, the enforcing agencies also have the authority to ensure compliance of legislation. He
emphasized that legislation provides legal mechanism to enable policies while the control
mechanism provides operating guidelines through the use of laws, regulations, contracts,
licenses, and reporting requirements.
7.3.2 Ownership of Refineries
Mr. Paul established the need forownership structures for current and new refineries that are
legally and commercially viable, and balance national and commercial interests.He advocated
the privatization of existing refineries stating that the Privatization Act lists PPMC’s assets
among those to be privatized. He suggested that the privatization process should be such that
Government’s ownership interest would be transferred to the Bureau for Public Enterprise
(BPE) prior to sale and after sale, any equity government retains would be held by Ministry
of Finance Equity Ltd. Proceeds from the sale would then be transferred to a designated
Central Bank account. He illustrated this with the example of Eleme Petrochemical
Company Ltd. In which government sold 75% equity to Indorama through a competitive
tender ($225m acquisition cost, $160m TAM). The remaining equity was split between
Federal and Rivers State governments, host communities, and workers. This led to dramatic
increases reported in output and profitability within 2years.
Mr. Paul then posed the following questions:
• Is any additional legislation needed to transfer ownership of the existing refineries?
On ownership of new refineries:
• Should legislation place limits on who can own equity in future refineries? Would
this serve national interests, or only deter investment?
• Similarly, is it wise to have specific equity percentages or structures—for instance, a
government-controlled JV with international partners—embodied in legislation?
• Is the licensing process a better place to control access to the sector?
He highlighted the fact that despite the expectations, the PIB does not discuss refinery
ownership. Refining is rather listed among the duties of the newly incorporated National Oil
Company.
7.4 Refinery Licensing
He suggested that what would be required is alicensing regime that is robust, efficient and
secures competent investors.The existing legislation, he noted, empowers both the Nigerian
Customs Service Board (Hydrocarbon Oil Refineries Act 2) and the Minister (Petroleum Act
3) to grant refining licenses. He noted that the details of the process are not spelled out.
However, according to recent practice which started in 2001, the Federal Government
established a three-part process (as discussed in earlier presentations) consisting of:
• License to Establish (Acceptable feasibility report)
• Approval to construct (after detailed engineering review within two years of (1))
• License to Operate (after installing plant to specifications)
All of these processes are supposed to be managed by DPR, though in practice it is more
complex.
Mr. Paulstated that the PIB seeks to establish dual licensing regimes for operations in which
the Inspectorate grants technical refining licenses, all refiners must be licensed
(HB.159(39)(o), 289(1), 366(a); IAT 207(2)-(3)); and PPPRA must also grant a commercial
refining license, details of which are unclear (HB.159 177(1)(b); IAT 241(2)).According to
him, this begs the question: Is there a need for the commercial license? Can all relevant
requirements be included under the technical license?
7.5 Getting Feedstock to the Refineries
Mr. Paulstated that there is need for amechanism for ensuring stable, adequate and
affordable supplies of feedstock to existing and new refineries.He noted that the current rule
is that theMinister regulates supply to all refineries (Petroleum Act 9(1)(d)). The PIB
proposes a solution to this problem through the Incorporated Joint Ventures (IJVs)
arrangement. The IJVs are meant to fix the feedstock supply problem by granting
government, as a shareholder in NNPC, the option to purchase crude for its refineries under
specified prices (IAT 165(a)). He noted however that the IJV concept as contained in the
earlier draft of the PIB has been scrapped.
He noted that there are some questions that arise from the current situation. These include:
• Should legislation be used to force Exploration and Production (E&P) operators to
supply a certain amount of their production to refineries, especially at concessionary
prices? E.g., 2010 Oil Producing Companies (Mandatory Investment in Petroleum
Refineries) Bill HB.356. Would this ultimately deter upstream investment and result
in suboptimal supply?
• Could mandatory supply of feedstock to refineries be a term in an NNPC
shareholders agreement between NNPC and the Federation?
• Is any further legislation on this issue needed or desirable?
7.7 Transporting Refined Products
He emphasized the need for an affordable, non-discriminatory access to transport
infrastructure for refineries. He noted that underearlier drafts of the PIB, the National
Transport Logistics Company, (100% government owned) assumes ownership and
operatorship of PPMC’s pipeline and storage infrastructure (HB.159 349). In addition,
licensed refining companies have open access to pipeline network, jetties, storage depots and
loading facilities (HB.159 351), also harbors and storage facilities (HB.159 296; IAT 264(c)).
However, the question is:Should the NTLC structure be scrapped, and PPMC’s transport and
storage infrastructure be privatised instead? Again, he noted that the Privatisation Act
schedules PPMC’s assets for sale.
7.8 Turning a Profit
Mr. Paul recognized the need forfiscal regimes that attract and sustain investment. He
reiterated that the issue is thatglobally, refining margins generally are well below levels seen
prior to the global financial crisis. Over-supply, poor utilization rates and low earnings have
become the norm for many sites. According to him, these trends are likely to continue for
some time. Past drafts of the PIB proposed to grant refineries the same tax holidays and
accelerated write-offs under the Companies Income Tax that apply to midstream gas (IAT
332).The question in this regard is whether this is a competent solution?And are the two sub-
sectors sufficiently similar that the same incentives should apply?
On pipeline tariff, past drafts of the PIB provided for the PPPRA to set tariffs for open access
pipeline and storage infrastructure (HB.159 359) using a methodology of its choosing. The
Bill required that all tariffs should:
• Allow reasonable returns on investment for efficient operators;
• Provide incentives for business and quality development;
• Avoid undue discrimination among classes of customers;
• Take account of all subsidies and favorable financing operators receive;
• Be set only after advertised public hearings at which interested parties may make
submissions.
7.9 What are the Regulatory Gaps?
Mr. Paul noted that there are noticeable regulatory gaps. He stated that the PIB repeals the
Hydrocarbon Oil Refineries Act (1965). Past drafts of the Bill do not contain replacement
provisions governing:
• Statutory penalties for illegal refining (Act 7);
• Payment of excise duties, including obligations, notice, and payment procedures (Act
13);
• Penalties for non-payment of excise duties, including levies of distress, seizure,
forfeiture and condemnation of hydrocarbons refined without payment of excise
duties (Act 13-18, 25);
• Records refineries are required to keep, and government powers to inspect books and
records (Act 20-21).
Mr. Paul therefore posed the question:
Is a more detailed legislative mapping exercise necessary to determine regulatory gaps
post-PIB?
He noted however that improvement to domestic refining capacity cannot be separated from
the larger downstream reform agenda.
7.9.1Petrol Imports Reform
He acknowledged the need for a streamlined, credible products import process that offers
steady, affordable domestic supplies. On the provisions of the PIBon regulation of imports,
he noted that past drafts created a dual licensing regime for marketers—a technical license
granted by DPR and a commercial license through PPPRA.Again, he noted that this raises the
following questions:
• Does the commercial license add any value, or should it be scrapped? Can all
requisite qualifications be captured under the technical license?
• Should any agency allocate import volumes among marketers, or is this incompatible
with a full deregulation agenda?
• Should government retain the ability to regulate supply and distribution? He noted
that past drafts of the PIB have disagreed on this?
7.9.2Transparency and Accountability Measures
Mr. Paul emphasized the need for the regulations to ensure competitive, open, non-
discretionary licensing and tender processes. He noted that past drafts mandated this for the
upstream, but not for downstream activities. The law should ensure that all licenses, tenders
and contracts are published online.He acknowledged that requiringthe Inspectorate to provide
copies of all midstream and downstream licenses through an open registry system is also a
positive step (HB.159 301-306; IAT 221-223, 258-260). He noted that one draft of the PIB
called for online publication of all licenses and contracts where NNPC is a party (IAT
174(6)), but suggested that the strongest PIB should extend this to other government bodies
as well.
He also emphasized the need to publish comprehensive processing, export, and import figures
on the Inspectorate’s website. He reported that one past draft provided for this and other
positive disclosures (IAT 173(9); IAT 362).The law should also void contract confidentiality
clauses for oil revenue and payment information.He noted that one past PIB draft cancelled
confidentiality clauses for upstream taxes, royalties, fees and bonuses (IAT 173). But
stronger language would uphold confidentiality only for business secrets or other narrowly
defined proprietary information.
7.9.3 Reducing Costs to Ordinary Nigerians
Mr. Paul noted that the past drafts of the PIB provided for:
• Creation and administration of strategic reserves by PPPRA, based on criteria
developed by the Minister (HB.159 360);
• Price monitoring by PPPRA, with attendant monitory and inspection powers (HB.159
361);
• Monitoring of product quality, though the roles assigned to DPR and PPPRA may
overlap; and
• …and, of course, plans for phasing out domestic subsidies on petrol, kerosene etc.
impact all of the above.
7.10 Requirements of Legal and Regulatory Framework
Mr. Paul noted that an effective legal and regulatory framework should be able to:
• Empower Regulators to deliver on their mandate;
• Align subsidiary and associated legal instruments, agencies, treaties, etc. with the
imperatives of the evolving refinery strategy;
• Impose mandatory business and government standards;
• Empower stakeholders by:
– Clarifying roles and responsibilities;
– Stipulating capacity requirements to support delivery of all aspects of the
refinery strategy;
– Enabling quality assurance re compliance and reporting;
– Providing access to funding, via budgetary process;
• Establish information sharing and confidentiality protocols;
• Ensure information quality and availability; and
• Ensure that mechanisms for developing and implementing operating procedures are
robust and that these are adhered to.
7.11 Reducing Country and Political Risks
He stated that political risks could be minimised if the legislature fulfils its role through
the following:
• Representing the interests of Nigerians ie inform and engage with or listen to the
people
• Protecting these interests by making laws and keeping laws current:
– Analyse
– Consult/Collaborate (expertise is spread across the chain and among
participants)
– Make suitable, considering all factors
• Ensuring that laws are adequately enforced:
– Empower regulators with authority and institutional and administrative
capacity;
– Ensure the provision of supporting infrastructure, facilities, institutions, etc.;
– Monitor, measure, review and revise, as appropriate;
– Standardised operating procedures;
– Transparency;
– Reporting to the people.
• Keep the end in mind
• Think Strategically – Act Practically
7.12Discussants
7.12.1 His Excellency NyahumaObika, Trinidad and Tobago High Commissioner in
Nigeria
Mr Obika in his discussion extended an invitation to legislators to visit Trinidad and Tobago
to observe practice and processes that have ensured the success recorded so far by the country
in the management of its downstream sector. He emphasized that legislators have a proactive
role to play in stimulating the improvement of local refining capacity.
7.12.1 Mr.OdeinAjumogobia
Mr Ajumogobia emphasized that among other things, one policy thrust should be for
government to increase its attention on the oil and gas downstream.He noted that there has
been so much focus on the upstream sector and the implication was that the downstream
sector has not received the necessary attention.
7.12.2 Dr.TajudeenAkanji
Dr Akanji suggested there is also need to take the Nigerian poor into consideration and as
such any improvement envisaged must be targeted at increasing the standard of living and
poverty reduction. He also emphasized the need to provide adequate information and ensure
transparency on the issue of deregulation. He expressed confidence that the PIB, when
passed into law, is capable of addressing most of the issues already discussed at the Summit.
He highlighted the need for adequate consideration of the environmental impact of increasing
refining capacity.
7.13 Questions/Contributions from the Floor
Hon. DakukuPeterside enumerated specificscontained in the draft PIB that address the
subject of the Summit. These include: Mandatory local refining clause, the JVs to IJVs
clause; the Reserves clause and the Strategic Fund clause.
Chief Okafor (of A-Z Petroleum)noted that the invitation from the High Commissioner of
Trinidad and Tobago should be seriously considered. He emphasized that Mr Paul’s
presentation highlighted the need for Nigeria to learn more from the Trinidad and Tobago
experience on policy and legal framework.
In his response to the contributions, Mr Paul emphasized that the processes for issuing
licenses and selection of operators should be reviewed. He also reiterated the need for more
appropriate record keeping of processes in order to build and establish a track record. He
stated that there is need to match legislation at the high level with what is obtainable on the
ground and the need to ensure that the right investors are selected and proper supervision and
oversight is conducted. He asserted however that there is the possibility of adjusting existing
laws and contracts to meet the desired objectives. He acknowledged that the Trinidad and
Tobago model would offera robust experience but predominantly on gas.
In his concluding remarks, the chairmanthanked the presenter, Captain Iheanacho and
contributors to thediscussion and highlighted the need for the House Committee on Petroleum
Resources (Downstream) to interface with that of Marine Transport because marine transport
constitutes a huge cost component to improving refining capacity.
DAY 2 - SESSION 3
8 Investing in Petroleum Refinery in Nigeria: Funding Optionsby Mr
YinkaOdeleye, Senior Vice President, Citibank Nigeria Ltd
Chairman: Engr. Basil Omiyi, Chairman, Green Acres Energy and Former
Chairman/Managing Director, Shell Petroleum Development
Company Ltd.
Speaker: Mr YinkaOdeleye, Senior Vice President, Corporate Finance,
Citibank, Nigeria.
Discussants: Ike Chioke, Managing Director, Afrinvest Ltd.
Mr Albert Okumagba, Group Managing Director, BGL Plc
8.1 Overview of the Petroleum Refinery Market
Mr. Odeleye started his presentation with an overview of the Nigerian petroleum refining
market.He stated thatNigeria is one of the strongest growth markets in Africa and the second
largest African economy with resilient growth. He noted that growing foreign investment is
driving development and confirming confidence in economic management of Nigeria.
However, he acknowledged that there is a deficit in petroleum product refinery supply,
compounded by resilient growth in the Nigerian economy. This, according to him, creates an
ideal climate for external infrastructure investment. Nigeria is also the most populous country
in Africa with increasing urbanisation and modernisation, driving increased fuel demand. He
emphasized that there are deficits in refinery supply of fuel and key petrochemical products
to meet growing retail and commercial demand.
He noted that the deficits are partly due to critical infrastructure shortcomings especially
energy sector infrastructure. He noted that Nigeria produces 1,800MW of power for a
population of over 150million people, compared with South Africa (which also faces severe
power shortages) which produces 39,000MW for a population of 60million. As a result, 54%
manufacturers in Nigeria cite unreliable power as the biggest production constraint and 57%
of Nigerians have no access to electricity at all.
Mr Odeleye noted that an analysis of regional supply and demand statisticsof petroleum
products also highlight the need for refining investment in Nigeria. He stated that the demand
in West and Central Africa is forecast to grow from 30mt in 2010 to 43mt by 2025. Although
Nigeria is by far the largest demand centre in the region, accounting for about 42% of 2010
demand, transport fuels account for over 70% of oil demand in the region and will be the
main driver of demand growth. He acknowledged that recent announcementsof refinery
construction plans are timely and would likely attract significant attention from strategic and
financial players. In addition, pending deregulation of the downstream market provides
added incentive to strategists looking to invest in retail and refining in Nigeria.Hence,
Nigeria satisfies most of the major success criteria (large growing market, high quality crude
oil, strong financial institutions) required for refinery investment.
However, he noted that increased demand might not translate to more refineries.He argued
that no new refineries have been built in Nigeria for over 30 years despite the established
critical need. His argument was based on the following considerations:
• government’s inability, despite repeated efforts, to fully liberalize the sector and
create the enabling regulatory and pricing environment for investors to thrive is a
source of concern to prospective investors;
• prospective investors are wary of future government policies, political interference in
the refinery operations, security considerations and country risk – the legislature has
a key role to play in ensuring stable and accommodative regulatory policy;
• refining is a capital-intensive industry: fixed and working capital need to be financed;
• increasingly volatile but consistently weak global refining margins make long-term
investments difficult to justify;
• worldwide excess refinery capacity and cheap freight rates increase the impact of
product arbitrages on worldwide refining;
• there is limited availability of equity capital;
• there are size limitations imposed on global financial institutions by Basel II & III as
well as legal lending and concentration limits for Nigerian banks.
Nevertheless, he suggested that awell-designed Public Private Partnership (PPP) model
whereby government provides the right regulatory and risk mitigating environment, and
private investors provide the necessary human, technical and financial capitalwould be the
only way to break the deadlock.
Mr. Odeleye listed the following as key criteria necessary for attracting financing:
� Strong refining margins;
� Investor confidence in the country:
o Clear and stable fiscal, monetary and regulatory policies;
o The application of international market prices;
o IMF/World Bank involvement (where applicable);
� Inland market and logistic infrastructure;
� Product import competition:
o Capture freight premium;
� Local crude of suitable quality – no imbalances;
� Good management;
� Special incentives to stimulate private sector funds:
o Government support;
o Discounted local crude;
o “Ring-fenced” entities with private capital.
8.2 Available Sources for Funding
8.2.1 Equity Markets - Potential Project Sponsors/Equity Partners
Mr. Odeleye expressed belief that Nigeria can attract interest from potential equity partners.
He particularly highlighted the growing interest from Asian National Oil Companies (NOCs)
looking to invest in Africa, International Oil Companies (IOCs), Nigerian corporations and
private equity investors looking to capitalize on growing fund demand and changing
downstream landscape in Nigeria.
He listed existing equity markets to include the following:
8.2.1.1 Nigeria Stock Market
Mr.Odeleye stated that Local Public Equities markets are also available, but less so these
days. He noted however that activity on the Nigerian Stock Exchange (NSE) has declined
significantly in the last few years after peaking in 2007.He stated that market volume is
currently dominated by international (hot money) investors. He noted that the return of
Nigerian investors would be critical to the revitalization and stability of the market.He
acknowledged that recent Pensions Commission (PENCOM) draft guidelines increasing the
maximum percentageamounts thatPensions Funds Administrators (PFAs) could allocate to
equities was a welcome development. He also noted that the House Public Hearing and Probe
into the Nigerian Stock Market was timely. He reported that the hearing has increased public
awareness of the challenges facing the Nigerian Stock Market and would possibly attract
needed reforms. He emphasized that awell-functioning stock market is critical to attracting
both public and private equity.Although a lot has been done by current Securities and
Exchange Commission (SEC) and Nigeria Stock Exchange (NSE) leadership as well as
parliament, more needs to be done especially with regards to brokerage and issuance costs.
8.2.1.2Equity Markets - Investor Considerations
He highlighted some of the key pre-screening questions equity investors would focus on and
discussed the critical issues project sponsors would need to decide, or have preliminary views
on, before approaching them. These questions are in three broad categories as follows:
A. Deal Structure
i. The key investor questions on deal structure include:
� What are the terms of the offer?
� What is the anticipated capital structure and anticipated project/ equity IRR?
� Will the equity stake be driven by US$mm required or by % stake?
� Are there any limitations to the size of the equity stake acquired?
� What are the possible exit options?
� Would the government be able to repurchase the partner’s equity stake?
� Assuming government will be an equity holder are they open to creating more flexible
deal structures that would allow equity reduction over time?
ii. The key issues for consideration regarding the deal structure include:
� Capital structure – both at project inception and longer term;
� Governance – clarity around key project governance issues;
� Deal process – clear and comprehensive timeline for the process.
B. Asset Diligence
i. The key investor questions regarding asset diligence include:
� What are the terms of Engineering, Procurement, and Construction (EPC)?
� What is the expected capital expenditure (capex) and what fraction should be funded
through equity?
� What are the anticipated complexity and technical characteristics of the refinery?
� What is the adequacy of existing transport infrastructure?
� What is the anticipated yield?
� What is the anticipated off take plan?
� What environmental diligence has been conducted?
ii. The key issues to consider regarding asset diligence include:
� Clearly defined EPC strategy;
� Preliminary clarity around key project operating decisions and dynamics;
� Construction timeline and identification of key project completion risks;
� Provision of a technical report / assessment;
� Preparation of business model;
� Environmental diligence.
C. Strategic
i. Key strategic investor questions
� What are the marketing arrangements in place and is there scope for the potential
equity partner to participate in off-take arrangements?
� Does the potential equity investor need to have operating capability?
� Is there potential to extend the relationship into broader alliances / business
development cooperation?
� Is the downstream industry in Nigeria deregulated?
� Petroleum Industry Bill and impact, if any.
ii. Key Issues to Consider
� Communicate strategic rationale and long term commitment
� Formulate preliminary views around investor preference – strategic vs. financial vs.
sovereign backed
� Identify longer term additional business development strategic opportunities
� Identify end-user domestic and potential export markets and access constraints
8.2.2 Debt Markets
Mr. Odeleyelisted thefollowingas available markets to raise debts, and their various
characteristics:
A. Export Credit Agencies
• Appetite available for Nigeria
• Up to 100% cover may be available
• OECD constraints on tenor and pricing if tied to participation
• Intrusive lenders
• Stringent environmental and social requirements
• Likely to be unavailable to raise debt at the sponsor level
B. Multilateral Agencies / Development Finance Agencies
• Large appetite available for Nigeria
• Direct lending available
• Not constrained by the OECD consensus
• Intrusive lenders
• Stringent environmental and social requirements
• Likely to be unavailable to raise debt at the sponsor level
C. International Commercial Banks
• Strong track record
• Flexible drawdowns and prepayment
• Likely to be available to raise debt at the sponsor level
• Limited cross-border capacity
• Tight control / covenant package
• Tenor and size limitation given regulatory changes (i.e. Basel 3)
D. Nigerian Banks
• Favourable perception of Nigeria
• Flexible terms
• Highly likely to be available to raise debt at the sponsor level, through liquidity
primarily in Naira
• Preference for local currency
• High cost of US$ and NGN funding
• Limited appetite for long-tenor
8.2.2.1 Debt Markets - Risk Considerations
Mr. Odeleye noted that completion and refining margin risks are the two critical risks
refinery project lenders focus on. He stated that the ability to mitigate these risks would
dictate the availability, tenor and pricing of debt.
i. He stated that Completion Risks include:
� Construction costs overruns;
� Delays in start-up;
� Inadequate performance at completion;
� Force majeure;
� Economic completion of critical infrastructure upstream and downstream from the
project;
� Scale up of existing technologies or process units;
He suggested that completion riskscould be mitigated through the following:
� Pre-Completion support in the form of debt service undertaking (“DSU”) from
creditworthy guarantors
� Reputable and experienced PMC consultant supporting the sponsors during the
execution of the EPC contracts
� Individual EPC contracts to include appropriate penalties, warranties and liquidated
damages
� Conservative implementation schedule
� Proven technology
� Lump-sum turnkey EPC contract(s) with
o Strong creditworthy and experienced EPC Contractor(s)
o Appropriate liquidated damages/penalty levels
ii. He stated that Refining Margin Risks include:
� Those exogenous to the Project
o High historical cyclicality of refining margins across the industry
o High capital intensity of the industry which ensure that “history will repeat
itself”
� Those endogenous to the Project
o Markets in which the Project sells its production
o Projected refined product / crude price spreads
o Targeted base case DSCR and leverage
Mr. Odeleyesuggested that Refining Margin Risks could be mitigated through the following:
� Operational Mitigants
o Size – capture economies of scale
o Complexity – upgrade low value products, flexibility of product slate
o Location – access to local deficit markets, ability to shift geographic focus,
secured long-term access to crude supply
o Integration – synergies with adjacent facilities (e.g. power, chemicals)
� Financial Mitigants
o Debt sizing based on Backcast analysis and target minimum cover ratios
o Reserve accounts / liquidity mechanisms
o Principal deferral
o Sponsor liquidity support
Table 7.1Debt Markets - Due Diligence Considerations
Risks Main Mitigants
Market Risk
� Volume risk � Price risk
� Long-term product off-take or marketing agreements with credible entities
� Market due diligence � Projected local
demand growth for refined products
� Appropriate DSCR to absorb fluctuations in price risk
Payment
� Payment default from offtakers
� Creditworthy offtakers
� Corporate guarantees � Back-stop from
government
Operations
� Underperformance � Technical Issues � Cost overruns
� Experienced operator familiar with technology and conditions in the local market
� Experienced secondees/staff within the Operator
� Alignment of interest among Sponsors/lenders
Environmental
� Pollution / environmental claims
� Public opposition
� Public consultation � Environmental and
social management plan
� Covenants in financing documentation
Macro-Economic Risk
� Interest Rate, Exchange Rate
� Inflation
� Hedging � Financing / Revenues
/ Cost matching � Cover Ratios
Force Majeure (“FM”)
� Natural FM (acts of God, etc.)
� Political FM (strikes, war, etc.)
� Insurance � Alignment of interest
with government and communities
8.3 Agency Finance
8.3.1 Overview of Official Agency Financing Solutions
He stated that the most important distinction in Agency finance is between “Tied” and
“Untied” solutions. Export Credit Agencies (ECAs) have a strict mandate to support exports
from their country while Development Finance Institutions (DFIs) can support capital
expenditure (capex) investments more generally.
Definitions
� Export Credit Agencies are government agencies that support trade and investment
from the OECD countries to the emerging markets. ECAs must adhere to an
established set of guidelines called the ‘OECD Consensus’. Financing is linked
(“tied”) to procurement of goods and / or services.
� Development Finance Institutions (DFIs) are government institutions focused on
developmental projects and overseas investments into emerging markets. Financing is
“untied”.
� Multilateral Agencies (“MLAs”) are institutions owned by more than one country that
support economic and social progress in their member countries. Financing is
“untied”.
“Tied” vs. “Untied” Financing
Tied Financing
Mr. Odeleye stated that tied financing is a type of credit that is directly linked to procurement
of goods. It is usually provided by ECAs, hence bound by OECD Consensus for terms of
guarantees.
When to Use Tied Financing
� Excellent option when goods are sourced primarily from one country;
� Seeking longer tenors and attractive pricing for capex investments;
� To optimize usage of client’s credit lines.
Benefits of Tied Financing
� It Lengthens tenors;
� Typically exempt from withholding tax;
� Diversifies funding sources, thus preserving credit lines;
� Offers competitive pricing;
� Visibility to future lenders or investors.
Untied Financing
� Financing is linked to development or promoting FDI; � Not related to procurement of goods; � Provided by various DFIs, more recently also by select ECAs.
When to use Untied Financing
� When goods are sourced from a number of countries;
� Mainly developmental projects of an industry or of the financial markets;
� Agencies are more flexible in the types of transactions they can participate in;
� Focus is less on national production but national interest.
Benefitsof Untied Financing
� Pricing is generally at market terms and tenors can extend up to 20 years with
generous grace periods (e.g. 36 months);
� General availability in local currency;
� Product breadth much wider than that of tied financing;
� Useful addition in large capex strategies with multi-country sourcing.
8.3.2 MLA and DFI Financing: Supporting Development and FDI
Mr. Odeleyestated that each Multilateral Agency (“MLA”) and Development Finance
Institution (DFI) has its own specific requirements that can be applied differently on a
case-by-case basis.
8.4 Bank Markets
8.4.1 Nigerian Bank Market
Mr Odeleye noted that local market appetite remains strong for good quality names that are
backed by strong sponsors. He argued that the emergence of larger banks as a result of
consolidation in the industry should provide a larger lending base. However, he noted that
Legal Lending or “One Obligor” limits constrains amount of funds available to a project or
sponsor. He estimated that the aggregate legal lending limit of Nigerian banks is c. US$ 3
billion only. He also noted that interest rates are at historical highs stating that 90, 180 and
360 day Nigerian Interbank Offer (NIBOR) are currently 15.54%, 15.885% and 16.25%
respectively. He acknowledged that the local bank market is characterized by limited
availability of foreign currency (USD) funding. There is therefore preference for tenors of not
more than 5 years. Banks would provide tenors of longer than 5 years on an exceptional basis
for projects backed by credible sponsors and with tight covenant and collateral structures. He
also noted that the Nigerian Bank market is less familiar with Project Finance structuring and
terms.
8.4.2 International Bank Market
Mr. Odeleye noted that during the last five years, 48% of the financing provided to projects in
Africa have come from European lenders and the most active sectors have been Oil & Gas
and Metals and Mining.
8.5 Bond Markets
8.5.1 Nigerian Bond Market - Key Considerations
Mr. Odeleyereported that there was limited secondary market activity for corporate bonds
although there were ongoing efforts to create an OTC platform. He discussed the key
characteristics of the Nigerian bond market under the following headings:
Market Capacity
� The Nigerian Corporate Bond Market is not yet fully developed;
� Bond Market investors mainly consist of Fund Managers, Pension Funds and
Commercial Banks. There is limited capacity in the retail investors market;
� To date market capacity for ‘pure’ corporate issuers tested up to
N37.5 billion (the Flour Mills issue) with the oversubscription giving an indication of
market capacity.
Tenor
� Long tenor bonds (10 years ) have so far only been issued by the Government;
� The Bond Market tenor capacity has been tested for corporate issuer up to 7 years
(UBA);
� Current indications are that there is tenor appetite for up to 7rs, for good corporate
issuers, with an investor preference for either fixed or floating rates.
Pricing
� Corporate bond issuances priced off the government benchmark, as the ‘risk free’ rate
which attract no capital reservation needs;
� Expectations would be for a margin above the risk free rate. Ranges from 0.5–3% on
previous issues;
� Current trends towards fixed rate pricing, given institutional investors cash flow
certainty requirements;
� Minimal annual costs but initial costs can be up to 5%.
Other
� Regulatory approvals will be required from SEC and NSE;
� Regulatory requirements fairly stringent and management will need to recognize
significant input would be required in the process;
� A suitable arranger’s appointment key in the documentation, execution and book
build process;
� Taxes are waived on corporate bonds.
8.6 Islamic Finance
8.6.1 Islamic Finance – Considerations
Mr. Odeleyenoted that structuring an Islamic facility would enable diversification of investor
base. Project financing is inherently suited to Islamic finance given the availability of the
assets within the project.
Execution Approach
� In order to maximise the pool of potential lenders for the project, Mr. Odeleye
suggested reaching out to Islamic investors by way of an Islamic tranche in the
financing:
o As evidence of the merit of this strategy, most recent EMEA regional project
financings have had an Islamic tranche
� He stated that the execution of an Islamic tranche can be easily managed without
impacting the timetable of the financing:
o The Arranger would typically structure an Islamic tranche only after
approaching the market and ensuring that there is a sufficient level of interest
o Documentation for an Islamic financing is fairly standardized, as there are
many precedents. This will ensure rapid execution once a decision has been
made to proceed with an Islamic tranche
� He emphasized that Citi’s recommended execution approach for an Islamic tranche
for the Project would be to form a syndicate of institutions to anchor the transaction,
and then to seek broader support from the market.
He discussed the key advantages and disadvantages of an Islamic tranche under the following
headings:
Key Advantages
� Most inclusive way of tapping the market as many commercial banks and Islamic
institutions can lend to Islamic structures;
� Inherently suited for asset-backed financings;
� Ijara (sale and lease back structure) is the structure mostly used for project finance:
o The Ijara structure enjoys universal shari’a and investor acceptability;
� Documentation is fairly standardized, as there are many precedents;
� Inter-creditor issues are manageable;
� Islamic documentation and Shari’a review and approvals can be managed alongside
conventional documentation by a reputable and knowledgeable Financial Advisor like
Citi.
Disadvantages
� Tenor constrained and less sensitive to relationship pressure;
� While Islamic financiers have historically participated in long term project financing
structures with tenors over 10 years, the sweet spot continues to be 5 years, beyond
which both liquidity and price are somewhat impacted;
� The market continues to be liquid, yet spreads have widened in line with the overall
widening of credit spreads across the international markets.
8.7 Conclusion
Mr. Odeleye concluded his presentation by highlighting the key points as follows:
� There is a deficit in petroleum product refinery supply, compounded by resilient
growth in the Nigerian economy. This creates an ideal climate for external
infrastructure investment;
� Compressing refining margins and global overcapacity pose critical challenges to the
availability of financing especially from offshore investors;
� Despite these challenges, there are pools of capital available to support the
construction of refineries on the condition that there is unwavering government
support at all tiers and arms, aimed at providing the enabling regulatory, commercial,
fiscal and infrastructural environment;
� Given substantial capital requirements, refinery financing will need to be structured as
a multi-source, multi-currency and multi-tranche facility that taps funding from equity
providers, local and international banks, ECAs, DFIs, MLAs, Pension funds and
government (by way of minority equity participation and sovereign guarantees);
� Citi has significant global and regional expertise in arranging refinery project finance
for credible sponsors. We also have long standing relationships with the various
international and local sources of financing.
8.8 Discussants
8.8.1 Mr. Ike Chioke
MrChioke made his contribution by presenting a paper titled “Funding Options for Petroleum
Refineries”
8.8.1.1 Global Industry Perspectives
Mr.Chioke started by stating that crude oil prices have been on the rise since 2002, reaching
an all-time high of about 144 dollars/barrel in 2008. He also noted that demand for crude oil
has also been on the increase and identified the following factors as the drivers of demand for
crude oil:
� The demand and supply for the byproducts of crude oil is relatively price inelastic
with no sustainable alternatives available especially in the short run;
� Despite the perceived merits of using alternative energy sources for generating
electricity and fuelling vehicles, their use has remained unpopular as they are
expensive and are highly dependent on nature;
� Crude oil demand is driven by global economic growth and growth in population.
Higher GDP growth has historically coincided with higher oil consumption growth;
� Strong GDP growth historically leads to a corresponding increase in oil demand, thus
increasing prices (when holding supply constant);
� Crude oil supply remains relatively fixed in the short term, with any meaningful
capacity additions typically expected to come on-stream after a 12 – 18 month period.
Mr. Chiokeidentified the following as the predominant uses for oil in today’s world economy:
� Transportation via gasoline and diesel;
� Industrial use to power industries, factories and plants;
� Residential uses in form of heating oil and in Nigeria, to power generators;
� Electricity generation;
� Commercial uses to run service businesses other than manufacturing.
He also considered the following to be theimportant drivers of crude oil supply:
� Level of world oil production which is typically sub-divided into OPEC and Non-
OPEC supplies;
� Availability of conventional and in few instances, unconventional crude oil reserves;
� Existence (or otherwise) of spare oil production capacity especially in OPEC
countries;
� Amount of oil inventories held by the largest oil consuming nations like the US;
� Geopolitical considerations that could affect oil supply including labour strikes,
weather, civil unrest, terrorism or wars.
8.8.1.2 Recent Developments
Mr. Chioke identified some recent developments in the Nigerian downstream sector that were
likely to affect the supply of petroleum products. He noted that the NNPC signed a
memorandum of understanding with China State Construction Engineering Corporation
(CSCEC) on May 3, 2011 for the construction of three additional Greenfield refineries and a
petrochemical plant in Nigeria. He reported that the project is expected to add 750,000 barrels
per day (“bpd”) of extra refining capacity to Nigeria's current 445,000 bpd. Both parties have
agreed to build two Greenfield 300,000 bpd refineries - one each in Lagos and Bayelsa, and a
150,000 bpd refining plant in Kogi, as well as a gas refining/petrochemical plant based on the
gas pipeline network envisaged under the Gas Master Plan. The estimated cost of all 4
projects has been put at $28.5billion of which NNPC is only required to provide 20% in
equity contribution. He stated that the Minister for Petroleum estimated that a refinery
producing up to 100,000 bpd would cost about US$3.3billion to set up and about US$4.2
billion for a 200,000 bpd refinery.
8.8.1.3 Selected Financing Options
Mr. Chioke stated that in order to ensure a functional refining regime in the Nigerian
petroleum industry, the following modesof financing options might be considered namely:
Venture Capital
Definition: Venture capital represents funds raised from high net worth individuals and
institutional investors to invest in a portfolio of business ventures with an expectation of a
high return on investment.Mr. Chioke noted that the fundamental question each entrepreneur
should consider before pursuing venture capital is whether the potential for return to the
investors is high enough to attract the investors’ attention. He gave an overview of the
characteristics of venture capital as follows:
� Venture capital typically comes from four generic sources namely:
o Private venture capital firms;
o Individual investors generally referred to as “angel investors”;
o Corporations making strategic investments; and
o Governmental sources;
� Venture capital is not long-term money as the idea is to invest in a company's balance
sheet and infrastructure until it reaches a sufficient size and credibility when it can be
sold or when public equity can be injected to provide liquidity;
� Venture capitalists typically buy a stake in an entrepreneur’s idea, nurture it for a
short period and then exit with the professional help of investment bankers.
Bank Debt
� A bank debt is basically any obligation that is owed to a bank, by any kind of
consumer, organization or corporation. The debt may be anything from a bank loan to
a credit card debt or an overdraft that has been used.
� Debt is usually granted with the expectation that it will be repaid. In most cases, this
includes repayment of the original sum, plus interest, which may be accrued on either
a fixed or floating rate basis.
� Four alternative types of bank credit facilities may be arranged to finance a project:
o Term Loan – A loan for a specific amount that has a specified repayment
schedule and a floating interest rate. Term loans almost always mature
between one and 10 years.
o Revolving Credit – Commercial banks often provide construction financing in
the form of a revolving credit facility. The sponsors can draw down on the
facility as funds are needed, subject to a maximum funds availability.
o Letter of Credit – A standby letter of credit facility provides borrowers with
the flexibility to arrange letters of credit to support commercial paper issuance.
Drawings under the letter of credit would pay commercial paper holders if the
commercial paper issuer is unable to.
o Line of Credit – A bridge loan covers any gap between the timing of
expenditures and the scheduled drawdowns of long-term funds. The relatively
high cost of funds provided by a bridge loan reflects the risk that bridge loan
providers must bear.
Mezzanine financing
� Layer of financing between a company's senior debt and equity, filling the gap
between the two
� Subordinate in priority of payment to senior debt, but senior in rank to common stock
or equity
� Mezzanine debt may take the form of convertible debt, senior subordinated debt or
private "mezzanine" securities (debt with warrants or preferred equity)
� Used to fund a growth opportunity, such as an acquisition, new product line, new
distribution channel or plant expansion
� Can be structured to suit the specific needs of the project and can as necessary,
incorporate larger ‘‘share-type’’ or loan contract components
Private Equity (PE)
� Provision of equity capital over a predetermined period by financial investors to
companies with high growth potential as well as competitive products and/or service
offerings
� Private equity unlike venture capital, not only covers the financing required to start up
a business but also includes financing in the subsequent developmental stages of its
life cycle
� Private equity firms have a main goal to seek out companies with the potential for
growth and with the aim to put in place the financial/human capital, skill and strategy
needed to permanently strengthen the company to create additional value
� They typically create funds that make investments that span between four to seven
years and typically redistribute the capital recovered at exit on a pro-rata basis
depending on the size of the initial investment
� Very few PE firms invest in green field projects
Project Finance
Mr. Chioke stated that Project Finance is the structured financing of a specific economic
entity or a special-purpose vehicle, also known as the project company, created by sponsor
using equity or mezzanine debt and for which the lender considers cash flows as being the
primary source of loan reimbursement, whereas assets represent only collateral. It is an
innovative and timely financing technique that has been used on many high-profile corporate
projects, employing a carefully engineered financing mix, that has long been used to fund
large-scale natural resource projects, from pipelines and refineries to electric-generating
facilities and hydro-electric projects. He emphasized that the following issues should be
considered in making project finance decisions:
� The design of contractual arrangements to support project financing;
� Issues for the host government legislative provisions,
� Public/private infrastructure partnerships,
� Public/private financing structures;
� Credit requirements of lenders,
� How to determine the project's borrowing capacity;
� How to prepare cash flow projections and use them to measure expected rates of
return; and
� Tax and accounting considerations; and analytical techniques to validate the project's
feasibility.
Leasing
Mr. Chioke explained that Lease financing is a contractual agreement in which a company,
identified on the contract as the lessor grants the individual or group of individuals leasing
the product/equipment, identified on the contract as the lessee, the ability to operate the
equipment for a given amount of time, identified as the term of leasing, while making
specific monthly payments to the lessor or leasing company. He noted that the structure of a
lease, however, gives great room for meeting the specialized needs of the customer, in which
the customer may return the equipment, continue using the equipment via Lease Financing or
purchase the equipment outright once the contract or lease term ends. He acknowledged that
One of the best upsides to lease financing is that some leases may be able to be counted as an
"off the balance sheet” items while monthly payments on equipment are typically viewed as
required operating expenses and thus could give a business or individual significant tax
benefits as applicable
Public Equity
� Equity financing involves the sale of an ownership interest (in form of common or
preferred stock) in a business in exchange for capital to individual and or institutional
investors;
� Equity financing may come in form of venture capital, initial public offerings,
franchising, business combinations amongst others;
� The main advantage to equity financing is that the business is not obligated to repay
the money but instead, the investors hope to reclaim their investment out of future
profits in form of dividends and capital appreciation;
� The flip side of equity financing is that the investors become part-owners of the
business, and thus have a say in the business’ decision making process but also have
residual claims to the company’s profit; and
� In return for the high risk, equity investors typically require higher returns.
Public Debt
� Debt financing is financing a company by selling fixed income securities including
bonds and notes issued by a business to fund working capital or capital expenditure;
� Such fixed income instruments are typically long term debt financing securities which
span more than a year;
� In the event of bankruptcy, debt holders are considered creditors and must be paid
back by the company’s remaining assets;
� The advantages of debt financing include:
o Non-dilution of ownership structure;
o Tax deductibility of debt;
o Lower interest rates offered bond holders;
� Some of its drawbacks include the negative impacts on a company’s credit ratings,
burden of repayment in the event of business distress and the related issues of
unfavourable interest rate environments.
Structured Finance
Mr. Chioke defined structured finance as encompassing all advanced private and public
financial arrangements that serve to efficiently refinance and hedge any profitable economic
activity. He noted that it is beyond the scope of conventional forms of on-balance sheet
securities (debt, bonds, equity) in the effort to lower cost of capital. He stated that this form
of financing is required if established forms of external finance are either unavailable for a
particular financing need, or where traditional sources of funds are too expensive for issuers
to mobilize sufficient funds for what would otherwise be an unattractive investment based on
the issuer’s desired cost of capital. He identified the following as the advantages of structured
finance:
� Structured finance offers the issuers enormous flexibility in terms of maturity
structure, security design and asset types. It allows issuers to provide;
� enhanced return at a customized degree of diversification commensurate to an
individual investor’s appetite for risk.
However, he emphasized that the increasing complexity of the structured finance market, and
the ever growing range of products being made available to investors, invariably create
challenges in terms of efficient assembly, management and dissemination of information.
8.8.1.4 The Case for Modular Refineries
Mr. Chioke supported the argument for the promotion of modular refineries. He started by
making the following comparison between traditional oil refineries and modular refineries:
� The traditional oil refineries process Crude Oil by means of fractional distillation to
produce a variety of sub-products using their varying boiling points.
� These by-products, which can be used directly as fuels, enhance the economic value
of the crude oil. They include Liquefied Petroleum Gas (LPG), Gasoline, Kerosene,
Diesel Oil, Heavy Fuel Oil, Asphalt, etc.
� These refineries typically process from one hundred thousand to several hundred
thousand barrels of crude oil per day.
� This means that a huge amount of crude oil has to be transported from the oil wells to
the refineries with great transportation costs under hazardous conditions along the
way.
� Their large size and complexity impose high capital and operating costs. They are
hard to site and the associated environmental impact presents a hazard;
o Large quantities of process and cooling water turning into wastewater to be
treated
o Large volume of air emissions and solid waste imposes a need to comply with
ever tighter regulations
� Modular refineries, on the other hand, take advantage of state‐of‐the‐art process
techniques to automatically control the amount of each desired sub-product according
to the needs of the client.
� They can be sited to optimize the production of fuels that can be used in diesel
engines and gas turbines for distributed electrical power generation.
� They require a minimum amount of operating personnel since their automatic
operation can be monitored and controlled remotely.
� They can be installed in a short time to coincide with the start of exploitation of oil
wells and can be operational within 4 hours after a cold start.
� These refineries have a wide range of capacities, going from as low as 500 to over
35,000 barrels per day
The Case for Modular Crude Oil Refineries
Mr. Chioke emphasized that the procurement costs of modular refineries are a fraction of the
cost of the traditional refineries and they have significant benefits of scalability, process
automation which ensures minimal manpower requirements, low transportation costs for
feedstock, air cooled design (eliminating need for large amounts of water), and much lower
emissions. He advised that with the urgent need to significantly ramp up Nigeria’s domestic
refining capacity, the adoption of modular refineries presents a quick and efficient way of
achieving this objective.
8.9 Questions and Contributions from the Floor
The Chairman of the Session, Mr. Basil Omiyi highlighted the key issues from the
presentations noting particularly that there are solutions to financing challenges to improving
refining capacity in Nigeria. However, he added that the hurdles are mainly in meeting the
necessary conditions.
Ms. Ronke Onadeko also highlighted that risks and low margins are the key issues in
refining business. She suggested that these concerns, especially that of security risks, could
be mitigated if all stakeholders – government, business, and communities, could be directly
and jointly involved in the ownership of refineries and associated facilities. She emphasized
that if every stakeholder had a stake for instance, policing facilities would be a joint
responsibility and all the risks would be jointly shared.
Mr Ubani Nkaginieme also emphasized that government guarantee in the form of supply
and market (demand) guarantee is required in order to improve the chances of obtaining
finance from financial institutions.
In his response to the questions and comments from the floor, Mr. Odeleye maintained that
addressing profit margin concerns would require adequate government intervention because
margins are determined by what happens in the international market. Mr. Ike Chioke also
reiterated that appropriate legislation could help to improve funding incentives. For instance,
government could alter the structure of spending such that less is spent on subsidizing
consumption.
9 Communique Session
Chairman: Hon. DakukuPeterside, Chairman HoR Committee on Petroleum
Resources (Downstream)
Rapporteurs: Mr TundeImoyo
Mr ChidozieAja
Dr Lucky Eleanya
Dr Michael Uzoigwe
9.1 Introduction
A draft communique was prepared immediately after the last session on Day 2 of the Summit
by the team of rapporteurs. The content of the draft communique wasextensively discussed
by all participants in a session chaired by Hon. Dakuku Peterside, the Chairman of the House
Committee on Petroleum Resources (Downstream). The final copy of the communique
(below) was adopted and shared with participants after amendments were made.
9.2 A COMMUNIQUE PRESENTED AT THE END OF THE NIGERIAN REFINING
CAPACITY SUMMIT HELD AT THE LE MERIDIEN IBOM HOTEL& GOLF
RESORT UYO, AKWA IBOM STATE, BETWEEN 28th
AND 29th
MARCH, 2012
Preamble
In response to the current need to increase Nigerian refining capacity, the House of
Representatives Committee on Petroleum Resources (Downstream) organized a 2-day
Nigerian Refining Capacity Summit on the 28th and 29th of March 2012, at Le Meridien Ibom
Hotel and Golf Resort, Uyo, Akwa Ibom State. The event was well supported and attended by
public and private sector stakeholders.
The theme of the Nigerian Refining Capacity Summit Uyo 2012 was TOWARDS A
FUNCTIONAL REFINING REGIME IN THE NIGERIAN PETROLEUM
INDUSTRY. Speakers and panelists examined very closely and focused attention on the
issues and challenges faced by both the public and private sector in building and also
operating a refinery. Deregulation as well as alternative refining models were seriously
deliberated.
Hon Dakuku Adol Peterside, Chairman, House Committee on Petroleum Resources
(Downstream), welcomed speakers and participants to the Summit. Goodwill messages were
received from the Governor of Akwa Ibom State, His Excellency, Chief Godswill Akpabio,
CON and the Hon. Minister of Trade and Investment, Dr. Olusegun Aganga, CON. The
Speaker of the House of Representatives, Rt Hon Aminu Tambuwal, CFR declared the
Summit open.
Six presentations were made by eminent resource persons who were supported by selected
discussants. The presentations were followed by interactive sessions.
Key Facts
Summit identified the following key facts-
I. Current average domestic refining output is about 30 per cent of the 445,000bspd
installed capacity;
II. Globally, there are low margins for refining;
III. Modular and conventional refineries are both practicable options and can co-exist;
IV. There is consensus that the deregulation of the downstream sector is imperative for
improving refining capacity;
V. Labour movement and other stakeholders are not averse to deregulation, but the
concern is when and how;
VI. Improving refining capacity would require targeted new legislative and regulatory
provisions as well as enforcement of existing legislations and regulations;
VII. It is acceptable to import finished products, but the issue is what proportion of
domestic consumption should be imported;
VIII. There are multiple financing options local and international ranging from Export
Credit Agencies (ECAs), Multi-Lateral Agencies (MLAs), commercial and
investment banks, bond market, Islamic finance etc. However, there are stringent
conditions to be met to access such funds.
Issues/Challenges
After the six (6) sessions, the issues raised can be summarized under the following
subheadings:
I. Security;
II. Institutional;
III. Infrastructure;
IV. Legislative and Regulatory;
V. Environment;
VI. Human Capacity Building;
VII. Finance; and
VIII. Price Regulation.
Solutions Proffered
Solutions to the above challenges were proffered by legislators, resource persons, discussants
and other participants. The key solutions include but are not limited to the following:
I. For energy security considerations, there is need for Government to build large
strategic storage facilities;
II. There is urgent need to deregulate the downstream sector of the petroleum industry;
III. Health, safety and environmental issues must be handled through enforcement of
existing environmental laws and regulations;
IV. There is need for Government to focus on subsidizing production as against
consumption;
V. There is need for Government to create adequate incentives to stimulate investors and
stakeholders – in order to address issues of ownership risks, security and low margins;
VI. Accelerated passage of the Petroleum Industry Bill (PIB) is key;
VII. Government should provide crude supply assurance and market assurance;
VIII. The need to strengthen institutions that support human capacity development, such as
Petroleum Technology Development Fund (PTDF), Federal University of Petroleum
Resources (FUPRE), Petroleum Training Institute (PTI), etc.
IX. The need to strengthen existing security agencies to improve security of oil and gas
assets was favoured instead of the proposal to establish a Strategic Asset Protection
Strike Force.
Conclusion
The objectives of the House Committee on Petroleum Resources (Downstream) in organizing
the Summit have been addressed. The issues and challenges facing increasing refining
capacity were highlighted and solutions proffered. It is believed that the outcome of the
proceedings will guide the House Committee on Petroleum Resources (Downstream) in
particular and the House of Representatives in general during the consideration of issues
likely to affect the sector in the National Assembly. Key stakeholders identified during the
summit will regularly be consulted and requested to make inputs, as part of post-summit
activities, on issues affecting the sector in the House of Representatives.