One year after shuttering its decrepit refineries to ostensibly rehabilitate them, the Federal Government of Nigeria has approved $1.5 billion for the repair of its largest refinery, the Port Harcourt Refinery in Rivers State. With this move, the country is spending money it does not have to fix a refinery it shouldn’t be fixing. This is unwise.
At the 38th virtual Federal Executive Council meeting presided over by President Muhammadu Buhari in Abuja last week Wednesday, Timipre Sylva, minister of state for petroleum resources, said the contract for the project has been awarded to an Italian company, Technimount SPA, who are experts in refinery maintenance
Sylva said the funding has three components from Nigerian National Petroleum Corporation (NNPC) Internally Generated Revenue (IGR), budgetary allocations provisions, and Afreximbank.
The minister said the rehabilitation will occur in three phases, the first phase is to be completed in 18 months, which will take the refinery to a production of 90 percent of its nameplate capacity. The second phase is to be completed in 24 months and all the final stages will be completed in 44 months and consultations approved.
Predictably, this decision has drawn the ire of many Nigerians because the government continues a tradition of wasteful spending on repairs of its refineries, which are usually left afterward to rot.
That a cash-strapped government who has been going cap in hand begging multilateral organisations like the World Bank and IMF for loans could muster $1.5 billion to fix a refinery sounds incredulous.
The fact that this rehabilitation work may outlast this government further imperils the plan. Who is to say that the next government will agree to continue with the programme? What if the next government decides that the NNPC will continue to run the refineries after it is fixed, thereby returning to the same old situation?
Nigeria is heavily indebted, revenue is falling and government expenditure is rising. Since the government claimed that it wants private sector players to manage the refineries, it makes more sense to privatise them outright and dilute its share. This is the secret behind the success of the Eleme Petrochemicals plant and what the government should be doing this instead.
Over the past 12 years, Nigeria has unsuccessfully tried to fix its four refineries even though several turn-around maintenance projects have gulped billions of naira. A government struggling to fulfil its most basic obligation of security should not be managing a complex refining process.
Nigeria imports over imports more than 90 percent of its refining needs because its refineries are unproductive. They have struggled to operate at 10 percent capacity, even as the NNPC still spends billions paying salaries of personnel.
Globally refineries are challenged. Many refineries are privately owned and run on razor-thin low margins in order to realise the highest returns. Refinery managers seek to pay the lowest price for crude oil, maximise the yield of the higher value products, control operating costs and receive the highest price for its refined products on a sustained basis.
NNPC’s crude allocation was meant to be refined locally and sold at a controlled price at retail outlets. But that model isn’t working. Rather these refineries have high operating costs and cannot maximise the yield on the high-value product (petrol) because they receive the lowest prices for it.
While the government has announced Tecnimont, a reputable refinery maintenance multinational firm as the winner of the refinery rehabilitation contract, it is unclear what plans are in place to ensure the refinery will be properly maintained afterward.