How fuel subsidy stalled modular refineries’ take-off

In this report, OKECHUKWU NNODIM writes on how the prolonged subsidy on Premium Motor Spirit and other factors stalled the take-off of modular refineries in Nigeria, reports The PUNCH.

Nigeria’s dependence on petroleum products imports would have reduced considerably if all the licensed operators of modular refineries had developed the facilities.

Modular refineries are simplified refineries that require significantly less capital investment than traditional full-scale refineries.

The initial process, or Crude Distillation Unit, allows for simple distillation of crude oil into low-octane naphtha, diesel, kerosene and residual fuel oil.

In Nigeria, modular refineries are crude oil processing facilities with capacities of up to 30,000 barrels per day and are being built as part of plans to curb oil theft and promote peace in the oil-producing region of Niger Delta.

In May 2018, the defunct Department of Petroleum Resources said it granted licenses for the establishment of modular refineries to 25 investors.

It had explained in a statement that “There are three stages to acquire a license for operation. These are: License to establish, Approval to construct and License to operate.

“In 2002, from a total of 105 applications treated, 21 companies were granted Licence to Establish petroleum refineries. The LTE had a validity of 18 months. In 2004, in line with the refinery guidelines, an evaluation of the extent of engineering design work was done.

“17 companies of those previously granted LTE were granted Approval to Construct refineries, with a validity of 24 months.”

The department further stated, “Currently there are 25 licensed companies, with three billed to construct conventional stick-build plants and the remaining 22 as modular units.”

However, since 2018 when the defunct department announced that it had issued 25 licenses for modular refineries, only about four have been successfully completed and they include OPAC Refinery, Duport Edo Refinery, Walter Smith Refinery, and Niger Delta Refinery.

“Many of the refineries could not take off because of the unfavourable economic conditions. For instance, the prices of products were regulated (due to subsidy) and capped,” the Deputy Chairman of the Crude Oil Refinery Owners Association of Nigeria, Mrs Dolapo Kotun, told our correspondent.

She stated this in response to what had happened to the modular refinery licenses issued by the defunct DPR over the years. CORAN is a registered association of modular and conventional refinery companies in Nigeria.

Kotun, who is the Executive Director, Operations, Ikwe-Onna Refinery Ltd, and Chairperson, Downstream, Women in Energy, Oil and Gas, said, “Also, investments being made are in foreign currencies, but products are sold in naira.

“So, many licence holders could not secure funding within the two-year license time frame given. Due to this, some of the licenses need to be re-validated, unfortunately at the same cost paid for the original approval.”

Operators explained that though subsidy on petroleum products, PMS especially, was stopped by President Bola Tinubu towards the end of May this year, the prolonged period of its existence adversely impacted on the take-off of modular refineries.

In April 2023, the Nigeria Extractive Industries Transparency Initiative revealed that the amount spent on subsidising PMS between 2005 and 2021 was N13tn.

The agency’s Executive Secretary, Ogbonnaya Orji, said, “NEITI’s latest policy brief titled ‘The cost of fuel subsidy: A case for policy review,’ revealed that Nigeria expended over N13tn ($74bn) on fuel subsidies between 2005 and 2021.

“The figure in relative terms is equivalent to Nigeria’s entire budget for health, education, agriculture, and defence in the last five years, and almost the capital expenditure for 10 years between 2011 and 2020. It is also important to note other economic opportunity costs of fuel subsidy, which include slashing allocations for the health, education, and technology infrastructure sectors.

“Others include the deterioration of the downstream sector with the declining performance of Nigeria’s refineries and recording zero production in 2020; disincentivised private sector investment in the down and mid-stream petroleum sector; low employment generation since the refining process is done outside the shores of Nigeria; worsening national debt; declining balance of payment, forex pressures and depreciation of the naira and of course product losses, inefficient supply arrangements, scarcity and its attendant queues, etc.”

CORAN pointed out that though the government had its genuine reasons for subsidising fuel, the initiative actually stalled the coming stream of modular refineries.

It, however, stated that with the current implementation of a fully deregulated downstream oil sector, many investors in the modular refinery space were heading back to invest.

“However, with the deregulation and subsequent fuel subsidy removal and ongoing discussions with the MPR (Ministry of Petroleum Resources), NMDPRA (Nigerian Midstream and Downstream Petroleum Regulatory Authority) and NUPRC (Nigerian Upstream Petroleum Regulatory Commission), more of the licensees are going back to kick-start their projects.

“There are currently about four in production with many more in different stages of development,” the CORAN deputy chairman stated.

Also commenting on the development, the National Public Relations Officer, Independent Petroleum Marketers Association of Nigeria, Chinedu Ukadike, told our correspondent that the emergence of functional modular refineries was long overdue.

“What is stopping the government from giving modular refineries’ operators the required support to reduce our continued dependence on imported petroleum products?

“The emergence of functional modular refineries in their numbers in Nigeria is long overdue. We cannot continue to import products when we can build modular refineries that can help us refine some of our crude oil. Now subsidy is gone, let the modular refineries work.

“We know that subsidy also contributed to their inability to come on stream as required. Now that it is gone, we expect the government to also give them the required support so that many of them can start development and refine crude in the nearest future,” Ukadike stated.

Modular refineries will complement Dangote

On whether modular refineries would still be viable in the face of the Dangote Refinery which is estimated to produce 650,000 barrels of crude daily, CORAN replied in the affirmative.

“Modular refineries are very viable and essential in securing Nigeria’s energy needs now and in the future. They are localised in multiple sites in the Niger Delta area, and not just one location as is the case with the Dangote Refinery.

“Hence, these modular refineries will be able to immediately provide world-grade quality refined petroleum products to the local markets around their different refinery sites.

“Dangote’s capacity alone cannot meet Nigeria’s present refined products’ needs and we are not even sure when it will start producing even though it was ‘commissioned’,” Kotun stated.

She noted that even if the country was producing excess capacity, “Who says we cannot export the excess?

“The goal of domestically refining our crude oil is not to just meet demand, but to eventually surpass present demand so that the surplus will make products affordable and Nigeria can also become an export hub for these products.”

CORAN’s position was corroborated by the President of Petroleum Retail Outlet Owners Association of Nigeria, Billy Gillis-Harry, who stated that modular refineries could function alongside other full-scale refineries.

However, Nigeria’s full-scale refineries in Port Harcourt, Warri and Kaduna have been dormant for ages, though the government had severally promised that the facilities would come on stream soon.

“Once we have modular refineries running alongside full-scale refineries, Nigeria will become a petroleum products’ exporter and that is what many of us are advocating for,” Gillis-Harry stated.

Other challenges

On whether holders of refineries’ licenses were facing difficulties that would require government intervention, the CORAN deputy chairman stated the concerns were enormous.

“The challenges being faced include lack of access to intervention funds for modular refineries. Financiers want off-take, and more importantly, guaranteed feedstock which was not provided by NNPCL (Nigerian National Petroleum Company Limited).

“In a bid to address these issues, the former Minister of State for Petroleum Resources set up two committees: One: For the Establishment of Modular Refining Intervention Fund. Two: Technical Committee to make Nigeria an export hub for refined products.

“The two committees, where CORAN played a vital role, developed a white paper, which was not yet implemented before the last administration left.”

Kotun further outlined the other challenges confronting modular refineries, as well as the areas to be addressed.

She said, “Funding is a challenge. The CBN should be mandated to create an intervention fund where genuine modular refineries can source funding to support this critical project. There should be a guarantee of feedstock and supply in accordance with the provisions of the Petroleum Industry Act.

“Currency of feedstock payment should be looked into. Since products are to be sold in naira, the crude supply feedstock should be sold to our members in the same currency. There should be waivers for pioneer greenfield project developers.

“Loading and other fees to be paid upon commissioning of these modular refineries should be waived for some years to encourage more investment. Also, we need security of assets from vandalism and destruction.”

On what should be done to promote the outputs of modular refineries, particularly since the full deregulation of the downstream sector had been implemented, CORAN said loans at single-digit interest rates would be welcomed.

It said the government should “ensure that ATC license holders have access to single-digit intervention funding of up to 20 per cent of total project cost”.

“Ensure they fulfill their domestic feedstock obligations first, before exporting crude oil abroad. Waivers should have an implementation framework so that license holders can have an agreed process to tap into them.

“Waive the re-validation of license fees. We all have already spent and continue to spend our company and investors’ funds to get the licenses in the first place and work towards financial closing and our project implementations.

“Revisit and review fees being charged to already commissioned modular refineries. The government should as a matter of urgency, implement the white paper from the former petroleum minister’s steering committee,” the CORAN boss added.

The body further noted that the government should “ensure that all the waivers, benefits, support given to the Dangote Refinery are also extended to all refining license holders”.

They argued that if modular refineries were properly supported, the country’s perennial fuel scarcity would be a thing of the past.