omonbude - oil refining in nigeria (myths and truths) revised

Oil Refining in Nigeria Myths and Truths

Paper prepared by Dr. Ekpen J. Omonbude1

for

The Nigerian Association for Energy Economics Conference

Abuja, Nigeria

April 2011

1 Economic Adviser (Natural Resources), Economic and Legal Section, Special Advisory Services Division, The

Commonwealth Secretariat, Marlborough House, Pall Mall, London, UK SW1Y 5HX. Dr Omonbude can be reached by e-mail: [email protected].

mailto:[email protected]

Oil Refining in Nigeria: Myths and Truths

Ekpen J. Omonbude, PhD i NAEE, April 2011

Table of Contents

1. Introduction ................................................................................................. 1

1.1. Background .................................................................................................................. 1

1.2. Objective of the paper ................................................................................................ 3

1.3. Methodology and structure of the paper ................................................................... 3

1.4. Limitations ................................................................................................................... 4

2. Brief Background to Refining in Nigeria ....................................................... 5

2.1. Global perspective ....................................................................................................... 6

2.2. Regional perspective ................................................................................................... 7

3. Myths about Oil Refining In Nigeria ............................................................. 9

3.1. Backdrop...................................................................................................................... 9

3.2. Myth #1: there is sufficient domestic demand ........................................................... 9

3.3. Myth #2: no over-supply of domestic market .......................................................... 10

3.4. Myth #3: resolution of security of supply concerns ................................................. 11

4. Truths about Oil Refining in Nigeria ........................................................... 13

4.1. Truth #1: on petroleum products consumption ....................................................... 14

4.2. Truth #2: on refining capacity ................................................................................... 16

4.3. Truth #3: on refinery profitability ............................................................................. 19

4.4. Truth #4: on petroleum product specification and quality ....................................... 21

5. Concluding Remarks and Recommendations ............................................. 23

6. References ................................................................................................. 25


Ekpen J. Omonbude, PhD ii NAEE, April 2011

Table of Abbreviations

AGO Automotive Gas Oil

ATK Aviation Turbine Kerosene

DPR Department of Petroleum Resources

GDP Gross Domestic Product

HFO Heavy Fuel Oil

IEA International Energy Agency

IMF International Monetary Fund

IOC International Oil Company

Kb/d Thousand Barrels a Day

LPFO Low Pour Fuel Oil

LPG Liquefied Petroleum Gas

Mb/d Million Barrels a Day

NNPC Nigerian National Petroleum Corporation

NOC National Oil Company

OPEC Organisation of Petroleum Exporting Countries

PMS Premium Motor Spirit

Conversion Factors

In the course of the preparation of this paper, the standard unit of measurement used

throughout this analysis has been presented in barrels per day. Data gathered for this

analysis have come in other units. The table below presents the conversion factors that

have been used for this analysis.

1 Kilolitre

6.2898 Barrels

0.8581 Tonnes (MT)

264.17 US Gallons


Ekpen J. Omonbude, PhD iii NAEE, April 2011

Disclaimer

The findings, interpretations, and conclusions expressed in this paper are those of the

author and do not necessarily reflect the views of the Commonwealth Secretariat and its

affiliated organisations, or those of the executive leadership of the Commonwealth

Secretariat or the Commonwealth member governments. The Commonwealth Secretariat

does not guarantee the accuracy of the data included in this work.


Ekpen J. Omonbude, PhD 1 NAEE, April 2011

1. Introduction

1.1. Background

All things held equal, private petroleum refining in a market with sufficient demand and

potential for growth should ideally mean well for the domestic downstream sector. It is a

commonly held view that there are a number of arguments which support this position,

some of which include efficiency gains, enhanced price competition, and in the case of the

Nigerian Government and people at least, security of supply.

The recent removal of the US$1 million non-refundable deposit requirement of potential

private refiners can be said to demonstrate a degree of determination on the part of the

Nigerian Government to attract investment into the domestic petroleum downstream

sector. The result has been an increase in the level of private investor interest in refining

petroleum products in Nigeria. Media reports suggest that some of such investors have

progressed as far as having made (or are close to making) final investment decisions on the

construction or installation of petroleum refineries in Nigeria. While such media reports

carry varying degrees of validity, they can be said to point at what can be argued as a

potential emergence of a ‘refining boom’ which, coming at a time when the Government-

run domestic refineries have not met the country’s market demand, can easily be

interpreted as a welcome development.

This development has been linked to three points of view being generally held in discussions

of the Nigerian domestic market for petroleum products, namely that:

a. there is sufficient demand, both domestically and regionally;



b. the market will not be oversupplied, and if it does become oversupplied, excess

product can be easily exported; and

c. security of supply issues will be resolved once and for all.

As far as the drive towards the establishment of private refineries in Nigeria is concerned,

two issues emerge as obvious causes for consideration. First, there is the question of

refining capacity and the implications on downstream market fundamentals. While the

existing refineries currently operate far below capacity, their combined nameplate

capacities at 445,000 barrels per day (b/d) are in excess of Nigeria’s domestic petroleum

consumption of approximately 215,000 b/d (based on available information on total

petroleum products consumption for 2009, from the NNPC, although the US Department of

Energy’s EIA puts the figure closer to 280,000 b/d). New capacity additions by way of other

refineries being established could therefore increase the risk of over-supplying the domestic

market. The question therefore arises as to whether the outlook for domestic and regional

demand growth has been thoroughly assessed.

Second, there is the question concerning sustainability of the smaller refineries expected to

come on stream in the medium term, mainly in terms of their level of complexity and thus

the make-up of petroleum products available both locally and for export. Based on available

data from the Department for Petroleum Resources (DPR), the majority of the refinery

projects which currently look more likely to go ahead (or which have commenced

construction/installation) are of much smaller capacity and significantly lesser complexity

than typical large scale full conversion refineries. It is argued that these smaller projects –

with capacities ranging from 1,000 b/d to 30,000 b/d – have been able to secure funding

primarily because of their lower establishment costs, and this has increased their



attractiveness to investors. Given that capacity-upgrading costs are very high and rely on

economies of scale for a chance of profitability, it is important to raise questions about the

long-term prospects of such modular refineries considering that inevitable market dynamics

would test their adaptability.

1.2. Objective of the paper

It is important therefore to ensure that the right fundamental and practical questions are

being asked on a continuous basis, both in terms of Government policy and private investor

strategy, with regard to the feasibility and sustainability of additional private refineries in

Nigeria. This is especially important considering how complex the business and governance

of petroleum refining can be, as developments in global refining over the last decade have

demonstrated.

This paper attempts to address some of such questions which are pertinent to testing the

robustness of plans for the establishment of domestic private petroleum refineries in

Nigeria. The paper discusses the three generally held views as identified in 1.1 in the context

of fundamental truths concerning petroleum products demand in Nigeria, refining

economics, and refining profitability.

1.3. Methodology and structure of the paper

The approach taken in this exercise has been an analysis of market fundamentals (demand,

supply and pricing of refined petroleum products) in the context of the technical aspects of

refining economics, as well as the strategy and policy implications.



This paper is structured into five sections. Following this Introduction, Section two provides

a brief background to petroleum refining in Nigeria. The discussion considers the potential

for, and implications of, petroleum refining in a global and regional context. Section three

argues the generally held views concerning the future of refining in Nigeria as myths, while

section four presents and analyses facts about refining in Nigeria. Section five concludes the

report.

1.4. Limitations

It is important to bear in mind that this paper does not exhaust what is an extensive list of

fundamental and technical factors which pertain to the development of petroleum

refineries in developing countries. For example, the analysis in this paper is constrained by

insufficient transportation data (vehicle fleet, highways), as well as insufficient data on

petroleum products consumption by country in the West African region in order to conduct

a forecast of demand to 2015.

The paper has also not considered other refining investments in the region which could also

serve to test the competitive position of local refineries, nor has it raised questions on

potential environmental issues resulting from refineries which may be forced to shut down

in the long term as a result of poor economic sustainability.



2. Brief Background to Refining in Nigeria

The decision to invest in the construction of a refinery, especially in the wake of global

economic recession and more restricted access to capital, can be a difficult one to make. It

requires an understanding of the development, successes and failures of other refineries in

addition to the more technical factors, in order to provide a holistic assessment of the

investment decision process. This section provides a brief and general background to

petroleum refining as it affects Nigeria from a global and regional perspective, and thus sets

the scene for the analysis to follow in the rest of the paper.

Refining in Sub-Saharan Africa is at an interesting period. On one hand are plans for such

reforms as outlined in the collaborative effort of the World Bank and the African Refiners

Association (see World Bank, 2009), as well as private and Government plans to construct

new refineries such as in Nigeria and Uganda. On the other hand is the status quo, in which

many of the current refineries face extinction due to such considerable challenges as

obsolete processing units, high turnaround maintenance costs, and competition from

imported petroleum products.

The following discussion demonstrates that the decision on building a new refinery must

therefore be the result of a carefully planned process which would have taken into account

such crucial factors as the market for local and regional demand for petroleum products,

design specifications, construction costs, as well as environmental costs.



2.1. Global perspective

The experience of petroleum refining from a global perspective over the past 30 years

illustrated the complexity of the refining business. Refining business models have transited

from an era of continuous construction of new facilities in order to keep up with growing

demand in the boom years, to reduction of plant units and even shut-downs due to such

factors as tighter margins, a recession-led decline in demand for petroleum products,

changes in gasoline and diesel specification requirements, and eventual outright loss-

making operations (Leffler, 2008). For example, industry majors Shell announced in 2010

that they would shut down 6 refineries in order to stem losses from their Global refining

operation (The Times Online, 2010).

Most of the refinery disposals in the Atlantic Basin region have been a result of growing

competition from refiners in other regions such as Asia. Many of these refineries operate

under protected conditions compared to the free market conditions faced by a majority of

the Western refineries. Such refineries enjoy the benefit of a protective structure of import

duties and subsidies on crude oil and petroleum products. Therefore even while the free

market operators may suffer negative refining margins, they can still enjoy positive margins.

The fundamental point with regard to such refineries is that so long as the government

imposes caps on domestic petroleum product prices, the government will cover the losses

incurred by the refiners.



2.2. Regional perspective

The situation in Africa has not been considerably different from the global experience,

having witnessed a significant growth in new plant construction from the 1950s and later

experiencing plant capacity reduction and shut-downs in the last two decades. Many of

these cases of shut-downs and plants operating below capacity have resulted mainly from

poor management, although factors similar to those discussed in Section 2.1 have also

played a part in the history and development of African refining.

The table below provides a breakdown of petroleum refineries in Sub-Saharan Africa and

their nameplate capacities. It shows Nigeria and South Africa as the major refining centres,

accounting for about 70% of the region’s refining capacity. Another notable feature which

the table illustrates is the ownership of refineries in the region. Of the 17 refineries selected,

government ownership (including joint venture participation between private companies

and national oil companies) amounts to well over 60%. The ownership structure of

refineries in Sub-Saharan Africa has played a key role in keeping many of these facilities

operational, despite huge costs and losses.



Table 1 – Selected Petroleum Refineries in Sub-Saharan Africa

Source: adapted from Oil and Gas Journal, various

The situation in Sub-Saharan African refining is characterised by refineries operating very

much below their nameplate capacities, and as such unable to meet local demand for

petroleum products despite the growth in crude oil exports from the sub-region. The cost of

importing refined petroleum products to augment domestic demand has proved a huge

burden for governments in the region, especially taking into consideration the cost of price

subsidies for petroleum products.

COUNTRY NAME TYPE OWNER/OPERATOR

Capacity ('000

barrels/day)

ANGOLA Total Fina Petroleos de

Angola

Simple TOTAL, Fina Petroleos de

Angola S.A.R.L.,

SONANGOL

45

CAMEROON SoNaRa (Société

Nationale de Raffinage)

Simple Total, ExxonMobil, Shell,

Government of

Cameroon, Burkina Govt

45

CONGO Coraf Refinery Simple Government of Congo 21

COTE D'IVOIRE SIR Refinery Complex Total, Shell, ExxonMobil,

ChevronTexaco, PETROCI

60

GABON Sogara Refinery - Gabon Simple TOTAL, ExxonMobil, Shell,

Agip, Government of

Gabon

21

GHANA Tema Refinery Complex Ghana National

Petroleum Corporation

43

KENYA* Kenya Petroleum

Refinery Ltd

Simple Government of Kenya,

Shell International,

Chevron, BP

80

NIGERIA Kaduna Refinery Complex Nigerian National

Petroleum Company

110

Port Harcourt I & II Complex Nigerian National

Petroleum Company

210

Warri Refinery Complex Nigerian National

Petroleum Company

125

SOUTH AFRICA Calref Complex Chevron - Texaco 110

Engen Refinery Complex Petronas, Worldwide

African Investment

Holdings (Pty) Ltd

105

Natref Complex Sasol Ltd, TOTAL South

Africa (Pty) Ltd

109

Sapref Complex Shell and BP South African

Petroleum Refineries

(Pty) Ltd

165

SUDAN Sudan Khartoum Refinery

Co Ltd

Complex Government of Sudan,

China National Petroleum

& Gas Corp.

50

SENEGAL Société Africaine de

Raffinage (SAR)

Simple Total, Shell, ExxonMobil,

Government of Senegal

23

ZAMBIA Indeni Refinery Simple Government of Zambia,

TOTAL

23

* KPRL recently sold 50% equity to Essar



3. Myths about Oil Refining In Nigeria

3.1. Backdrop

As discussed in the introduction to this paper, there are three generally held views

concerning the prospects of additional petroleum refineries in Nigeria, namely: that there is

sufficient domestic and regional demand, excess supply can easily be exported, and security

of supply issues will be permanently resolved by the addition of new private refineries. This

section questions the reality of these views using available statistical data, and the

fundamentals of refining economics.

3.2. Myth #1: there is sufficient domestic demand

Available data from the NNPC on the total domestic distribution of petroleum products for

2009 shows an average annual consumption of about 215,000 b/d (NNPC, Annual Statistical

Bulletin, 20092). While economic growth is a key determining factor in oil consumption, as is

the case with most developing economies, Nigeria’s experience over the past decade has

been one of restricted development influenced by a number of constraining factors other

than movements in real GDP. Some of such constraints have included weakening demand

from the manufacturing sector, problems with the importation of petroleum products,

logistics problems with the distribution of the products to market, industrial action in the

downstream sector, and an apparent degree of product hoarding to raise prices on the black

market (Omonbude, 2009). One or all of these factors would explain for example, why

despite an annual average real GDP growth of about 6% between 2005 and 2009 (Source:

2 Note: converted from kilolitres to barrels of oil equivalent



IMF World Economic Outlook), total petroleum products consumption fell by an average of

1%.

The growth spike in petroleum products consumption between 2007 and 2008 (a significant

20.4% from the 2007 figure of about 196,000 b/d; source: NNPC) points to – among other

factors – the possibility of a degree of suppressed demand in the domestic market. Growth

spurts such as this (or the 21.2% growth between 2001 and 2002) tend to lend support to

the view that significant latent demand does exist, enough to warrant considerable investor

interest in supply and distribution infrastructure. It has been suggested in some discussions

that petroleum products demand could reach as high as 400,000 b/d if issues pertaining to

access are addressed.

3.3. Myth #2: no over-supply of domestic market

A useful approach to determining what refining capacity would be available and when it is

expected to come on stream would be to class each reported project according to an

assessment of what is firm, likely or not feasible. This would depend on a number of criteria

ranging from licence acquisition, through securing investment capital, to actual construction

work on the site. Based on available information on the DPR website, of the nine licences

granted to investors for the construction refineries between 2007 and now, only three

appear to have taken tangible steps towards their establishment.

It would be useful to find out if the DPR has defined long term refining capacity targets or

limits, which would have an impact on the manner and frequency in the granting of licenses

to potential investors. This point is made because of a likelihood of excess refining capacity



in the medium term at least, based on an estimation of the potential refining capacity to

come on stream using available data.

Assuming there are no capacity utilisation improvements in NNPC's existing refineries in the

next five years (i.e. capacity utilisation remains at 25-30%), and taking into consideration the

reported refinery plans which have a likelihood of coming on stream (see Table 2, Section

4.2), there is a possibility that about 375,000 b/d of refining capacity could be in place by

2015. This has been calculated based on the 2009 average refinery capacity utilisation for

the existent refineries of 25%, and the proposed refining capacities of the refinery projects

listed in Table 2 below (assuming they all come on stream by 2015). Assuming 90% capacity

utilisation of the existent refineries, there is then a possibility of nearly 665,000 b/d of

refining capacity which could come on stream in the mid-term. To put such a figure into

context, this would imply that in the next 5 or so years, Nigeria's current consumption

would have to achieve an annual growth of nearly 3 times more than it has grown over any

5-year period since 1980.

3.4. Myth #3: resolution of security of supply concerns

There are two perspectives that lend support to the view that an increase in the number of

domestic refineries would resolve security of supply concerns. First is the domestic view

concerning the growing and arguably unsustainable cost of subsidising petroleum product

imports on the part of the Government; a situation that may be resolved if the existing

NNPC refineries were operating at full capacity. Second is international benefit, wherein

countries such as China and South Korea are looking to diversify their sources of crude



imports and are prepared to invest in hardware and infrastructure in countries overseas

such as Nigeria.

To sufficiently address any security of supply concerns however, a key requirement would

be availability of a wide spectrum of petroleum products at competitive prices. The

information in Table 2 (See Section 4.2) suggests that the more likely refinery additions are

simple refineries, implying that they would only yield a small product spectrum namely

gasoline, kerosene, diesel and residual fuel oil (which typically would constitute 60% or

more of the spectrum). If the refineries are intended for export, they would need to be

complex in order to stay competitive, as the following section demonstrates.



4. Truths about Oil Refining in Nigeria

Generally, there are five broad criteria that determine the economic feasibility of a

petroleum refinery. These are summarised below as follows (adapted from Leffner, 2008;

Fahim et al, 2009):

Crude oil feedstock availability and quality: The simple requirement is of a reliable,

commercially viable, long term source of crude oil, preferably of lighter

specification, which would have significant impact on processing costs.

Structure and outlook for petroleum products demand: The quantity and structure

of products demand in the market determine the configuration of the refinery

especially in terms of capacity size, refining complexity, and crude oil feedstock.

Potential refinery capacity and complexity: This decision is also affected by the

existent supply infrastructure in the market in question, mainly by way of source

and import cost of refined products.

Location of refinery: The location of the refinery is dependent on factors such as

proximity of a crude oil storage facility for daily operational and inventory control

purposes, proximity to product markets and, if possible, an already established

distribution network.

Competitive position of refinery: This factor mainly concerns the geographic

location of the refinery in a domestic and regional product market context, and the

implication of competition on refining margins.

This section considers the above criteria in the context of four identified facts (or ‘truths’)

about refining as they pertain to Nigeria. These ‘truths’ are summarised below as follows:



There is insufficient evidence to ascertain the degree of suppressed demand.

Available data does however suggest that any big growth in demand will be

constrained by a number of other factors such as poor infrastructure.

The impact of the recession on oil and oil products demand has had a knock-on

effect on global refining capacity. It is more likely that there will be excess refining

capacity in the medium term.

Refining business models operate with thin margins and rely heavily on economies of

scale to remain profitable.

Competition in the international market requires refineries to increase complexity in

order to provide a wider spectrum of finished products. This has significant cost

implications.

4.1. Truth #1: on petroleum products consumption

Given the structure of oil consumption in the country, access requirements which would

need to be met, and the necessary demand drivers, it is difficult to fathom the practicality of

an additional 100-200,000 b/d of demand in the medium term at least. Structurally,

transport fuels constitute the bulk of oil consumption in Nigeria, with motor gasoline

(petrol/PMS/super gasoline), automotive gas oil (diesel/AGO) and aviation turbine kerosene

(ATK) accounting for nearly 90% of total petroleum products use in 2009.

Based on data from the NNPC and the International Energy Agency (IEA), this structure has

not changed significantly over the last two decades. Any significant growth in demand is



most likely to come from the transport sector; mainly from petrol use (motor gasoline alone

accounts for over 70% of the petroleum products demand spectrum. See Figure 1).

Figure 1 – Structure of Petroleum Products Consumption in Nigeria, 2009

Total Consumption: 215,000 kb/d

Source: Adapted from NNPC Annual Statistical Bulletin, 2009

The question therefore arises as to what practical factors would influence growth in petrol

demand. Some of the key drivers are as listed below as follows (Omonbude, 2009):

economic growth (real GDP growth as a useful indicator);

measurable and significant growth in motor vehicle acquisitions;

the price of petrol;

the population reaching driving age;

changes in fuel efficiency levels of the motor vehicle fleet; and

the quality and capacity of distribution infrastructure.

LPG0%

PMS76%

HHK6%

ATK6%

AGO9%

LPFO2%

Others1%



In order for significant upward pressure on demand growth to be applied, there would need

to be remarkable upward trends in these respects, with the exception of changes in fuel

efficiency of the motor vehicle fleet (the more efficient the vehicle fleet, the less

consumption growth is expected). While the National Bureau of statistics shows significant

growth in vehicle registrations for Lagos and Kano States (Annual Abstract of Statistics,

2009), overall increase in the national vehicle fleet would need to be far more substantial.

Assuming a direct impact of an increase in real GDP on the propensity to spend on motor

vehicle acquisitions, the turnover rate of imported vehicles at the ports would have to

increase considerably for example. If this were feasible, there would then be extensive

pressure on the pace of development in distribution infrastructure (e.g. capacity of road

networks, vehicle population density in cities) to keep up with such an expansion.

4.2. Truth #2: on refining capacity

The growth in energy demand between 2003 and 2008 encouraged significant investment in

production capacity, both at the upstream and downstream ends of the oil and gas sector.

These investments in capacity upgrades were however negatively affected by the global

financial crisis and eventual economic recession between 2008 and 2009, during which

global demand growth fell by about 1.2 mb/d (Source: BP Statistical Review of World Energy

2010). This led to an increase in the refining capacity overhang in the industry, resulting in a

significant number of confirmed closures and sales of refineries by independent operators in

the Atlantic Basin region, IOCs, and a number of NOCs (Source: FACTS Global Energy). Figure

2 illustrates this.



Figure 2 – Refining & acquisition trends since the economic downturn

Source: FACTS Global Energy

The following table shows the number of private refinery projects licensed by the DPR. The

table is categorised by plant type, capacity and status of progress.

Table 2 – Private Refineries and Petrochemical Plants Status at August 2010 – Licensed

Refiners

OWNERSHIP PLANT TYPE CAPACITY

(kb/d)

STATUS

Amakpe Topping plant 12 Kick-off 2007

Rehoboth Topping plant 12 Receiving commitment deposit

Amexum Complex 100 Kick-off stalled. Lack of finance

Antonio Conversion 27 Structural work commenced

Gasoline Associates Complex 100 Kick-off stalled

Ologbo Topping 12 Engineering package completed

Niger Delta Petroleum Resources Diesel extraction 1 Units installation commenced

TOTAL 264

Source: adapted from DPR Official Website. Note: excludes projects classified by DPR as “yet to be ascertained”.



As discussed in Section 3.3 of this paper, the successful completion of each of these projects

would easily pose an excess refining capacity risk. This risk can however be managed

through such mitigating measures as a clear policy position on strategic stockpiling on the

part of the DPR (or the relevant regulatory body), and identifiable potential product export

markets on the part of the refiners.

A useful question to ask in this respect therefore is what the position of the Government is

pertaining to strategic stockpiling, which carries its own technical limitations. Another

question to ask is if thorough assessments of the structure and outlook for petroleum

products demand in such target international markets have been duly and diligently

conducted. A cursory look at petroleum products demand and supply in the Gulf-of-Guinea

region (and further along the West African coast) in the context of installed and utilised

refining capacity, would also suggest a likelihood of excess capacity if all of the planned

projects were to materialise (See Table 3).



Table 3 – Oil Consumption: West Africa (Selection), Gulf of Guinea

Country Oil Consumption (Kb/d)

Benin 23

Cameroon 26

Cote d’Ivoire 24

Equatorial Guinea 1

Gabon 14

Gambia 2

Ghana 57

Guinea 9

Liberia 4

Nigeria 215

Sierra Leone 9

Togo 21

TOTAL 405

Source: adapted from CIA World Factbook; NNPC

4.3. Truth #3: on refinery profitability

Ensuring and sustaining positive refining margins throughout the life of the plant requires a

great degree of fluidity in adjusting crude oil feedstock, plant processes and transportation

logistics to enhance gross product worth. If the refiners are going to operate under free

market conditions, the larger and more complex plants will most likely fare better than the

skimming/modular refineries simply because they have the scale and flexibility to make

adjustments as market or regulatory forces change over time. The table below illustrates



typical yields from crude oil feedstock of similar sulphur content and weight to West Texas

Sour or Arab Light.

Table 4 – Percent Refinery Yields from Medium Crude

Simple Complex Very Complex

Gasoline 30 50 60

Jet Fuel 10 10 10

Distillate Fuel 20 25 25

Residual Fuel 35 10 -

LPG - 3 4

Coke - - 3

Refinery Fuel 8 12 13

Gain (3) (10) (15)

Source: Leffler, 2008

The question of the extent of regulatory protection, or what market conditions under which

the proposed refineries would operate is thus raised. This is because the profitability of the

projects will depend significantly on the ability of the refinery to maximise refining margins.

Will there be any form of protection or will refiners be exposed to free market conditions?

The implication of operating under some form of subsidy is that the refiners can still enjoy

healthy refining margins even while free market operators suffer losses. The implication for

Government would therefore be a reversal (or adjustment) of policy with regard to

deregulating the downstream sector.



4.4. Truth #4: on petroleum product specification and quality

If it is established that there is a likelihood of excess domestic and regional refining capacity,

a practical solution would be to consider exporting product further across the Atlantic (for

the sake of argument). In addition to an available market, the success of such products on

the international market will depend significantly on meeting international product

specification requirements, mainly in terms of sulphur content in the transport fuels. Unless

the assay of the crude oil feedstock contains comparatively remarkable properties (such as

low sulphur content, and which would as such not necessarily require further processing),

the obvious implication would be that the refineries would need to be complex conversion

refineries (i.e. include cracking, flashing and possibly coking processes) not only to enhance

product yield, but also to improve product quality and thus enhance competitiveness.

This has huge cost implications, and would require significant scaling-up of plant capacity in

order to remain economically viable. Considering that nearly all of the refineries reportedly

planned are simple (or topping) plants, there are questions which would therefore need to

be addressed. For example, there will be need to reconcile the sulphur content limits on

gasoline and diesel in Nigeria and potential export markets with international standards.

Assuming all the proposed refineries use Agbami light sweet crude as their primary crude oil

feedstock for example, an argument could be made for the simple refineries on the basis of

the low-sulphur-content characteristic of this crude type (Note: the Agbami assay shows

0.05% sulphur content, and is produced about 70 miles offshore. The refinery will therefore

have to be located at the coast in order to enhance margins, if this is its main crude oil

feedstock. Also, the author acknowledges the vast array of other crudes whose assays may



bear similar – or better – qualities). Depending on the extent of excess capacity as well as

the extent of regulatory requirements for sulphur content in the petroleum products, there

could well be no need for simple refineries to upgrade. However, the likelihood of

undefined quality specification requirements for petroleum products in the wider

international market is very low. This would create difficulty for such products from straight-

run refineries to find markets.



5. Concluding Remarks and Recommendations

The analysis presented has shown a potential for excess supply of refined petroleum

products both in Nigeria and the wider market, with long term implications for security of

supply. It has demonstrated the importance of ensuring that the right practical questions

are continually asked, both in terms of Government policy and private investor strategy,

with regard to the feasibility and sustainability of private refineries in Nigeria. This is

especially important considering how complex the business and governance of petroleum

refining can be, as developments in global refining over the last decade have demonstrated.

This paper shows that there is need for rigorous due diligence regarding the drive to

develop the Nigerian petroleum downstream sector. For example, a clear plan for refining

capacity targets, both in a domestic and international context, will need to be set out. This

would require a medium to long-term analysis of market fundamentals, both domestically

and in the global context.

From a policy stand-point, it would be unwise to consider the development of petroleum

refining in isolation. A thorough understanding of the direct and indirect linkages to

transport and industry for example, would serve to enhance the robustness of decision

making with regards to defining the course of development in the sector.

Finally, it is important also to point out that a more thorough investigation could well

identify clear and significant latent demand both domestically and in the regional markets,

which would be sufficient enough to accommodate any growth in domestic petroleum



products supply. This could be the case, for example, considering differences in figures

suggested as Nigeria’s total petroleum products consumption. While some observers put

this figure at over 300,000 b/d (e.g. Nigeria Energy Intelligence, 5 October 2009 edition), the

NNPC’s statistical data suggest total delivered petroleum products to be about 215,000 b/d.

Whichever the case, a clear definitional framework explaining what constitutes total

consumption should serve to resolve such discrepancies.



6. References

BP Statistical Review of World Energy, 2010, available online via

http://www.bp.com/productlanding.do?categoryId=6929&contentId=7044622

Department of Petroleum Resources, Official Website, http://www.dprnigeria.com/

Fahim et al, (2009), Fundamentals of Petroleum Refining, Elsevier Science

International Monetary Fund, World Economic Outlook, 2010

Leffler, W., (2008) Petroleum Refining in Nontechnical Language, Pennwell

National Bureau of Statistics, (2009), Annual Abstract of Statistics, Available online via

http://www.nigerianstat.gov.ng/

Nigerian National Petroleum Corporation, Official Website, http://www.nnpcgroup.com/

Omonbude, E.J., (2009), “Prospects for Domestic Petroleum Refining in Nigeria: a note of

caution”, Nigeria Energy Intelligence, Nov. 23 Edition

OPEC, World Energy Outlook, 2010

The Times Newspaper, (2010), “Shell to cut 1,000 jobs and close six refineries”, Feb 5

Edition, accessed online via

http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article7

015767.ece

http://www.bp.com/productlanding.do?categoryId=6929&contentId=7044622

http://www.dprnigeria.com/

http://www.nigerianstat.gov.ng/

http://www.nnpcgroup.com/

http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article7015767.ece

http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article7015767.ece

omonbude - oil refining in nigeria (myths and truths) revised

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