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

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: e.omonbude@commonwealth.int.

Oil Refining in Nigeria: Myths and Truths

Table of Contents
1. Introduction ................................................................................................. 1
1.1. 1.2. 1.3. 1.4. 2.1. 2.2. 3.1. 3.2. 3.3. 3.4. 4.1. 4.2. 4.3. 4.4. Background.................................................................................................................. 1 Objective of the paper ................................................................................................ 3 Methodology and structure of the paper ................................................................... 3 Limitations ................................................................................................................... 4 Global perspective....................................................................................................... 6 Regional perspective ................................................................................................... 7 Backdrop...................................................................................................................... 9 Myth #1: there is sufficient domestic demand ........................................................... 9 Myth #2: no over-supply of domestic market .......................................................... 10 Myth #3: resolution of security of supply concerns ................................................. 11 Truth #1: on petroleum products consumption ....................................................... 14 Truth #2: on refining capacity ................................................................................... 16 Truth #3: on refinery profitability ............................................................................. 19 Truth #4: on petroleum product specification and quality ....................................... 21

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

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

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

5. Concluding Remarks and Recommendations ............................................. 23 6. References ................................................................................................. 25

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Table of Abbreviations
AGO ATK DPR GDP HFO IEA IMF IOC Kb/d LPFO LPG Mb/d NNPC NOC OPEC PMS Automotive Gas Oil Aviation Turbine Kerosene Department of Petroleum Resources Gross Domestic Product Heavy Fuel Oil International Energy Agency International Monetary Fund International Oil Company Thousand Barrels a Day Low Pour Fuel Oil Liquefied Petroleum Gas Million Barrels a Day Nigerian National Petroleum Corporation National Oil Company Organisation of Petroleum Exporting Countries 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 6.2898 0.8581 264.17

Kilolitre Barrels Tonnes (MT) US Gallons

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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.

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Oil Refining in Nigeria: Myths and Truths

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 Governmentrun domestic refineries have not met the countrys 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;

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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 Nigerias 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 Energys 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 Ekpen J. Omonbude, PhD 2 NAEE, April 2011

Oil Refining in Nigeria: Myths and Truths

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. Ekpen J. Omonbude, PhD 3 NAEE, April 2011

Oil Refining in Nigeria: Myths and Truths

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.

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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.

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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 lossmaking 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.

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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 regions 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.

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Table 1 Selected Petroleum Refineries in Sub-Saharan Africa

COUNTRY ANGOLA CAMEROON CONGO COTE D'IVOIRE GABON NAME Total Fina Petroleos de Angola SoNaRa (Socit Nationale de Raffinage) Coraf Refinery SIR Refinery Sogara Refinery - Gabon TYPE Simple Simple Simple Complex Simple OWNER/OPERATOR TOTAL, Fina Petroleos de Angola S.A.R.L., SONANGOL Total, ExxonMobil, Shell, Government of Cameroon, Burkina Govt Government of Congo Total, Shell, ExxonMobil, ChevronTexaco, PETROCI TOTAL, ExxonMobil, Shell, Agip, Government of Gabon Ghana National Petroleum Corporation Government of Kenya, Shell International, Chevron, BP Nigerian National Petroleum Company Nigerian National Petroleum Company Nigerian National Petroleum Company Chevron - Texaco Petronas, Worldwide African Investment Holdings TOTAL South Sasol Ltd,(Pty) Ltd Africa (Pty) Ltd Sapref SUDAN SENEGAL ZAMBIA Sudan Khartoum Refinery Co Ltd Socit Africaine de Raffinage (SAR) Indeni Refinery Complex Complex Simple Simple Shell and BP South African Petroleum Refineries (Pty) Ltd Government of Sudan, China National Petroleum & Gas Corp. Total, Shell, ExxonMobil, Government of Senegal Government of Zambia, TOTAL 23 165 50 23 Capacity ('000 barrels/day) 45 45 21 60 21

GHANA KENYA*

Tema Refinery Kenya Petroleum Refinery Ltd Kaduna Refinery Port Harcourt I & II Warri Refinery

Complex Simple

43 80

NIGERIA

Complex Complex Complex Complex Complex Complex

110 210 125 110 105 109

SOUTH AFRICA

Calref Engen Refinery Natref

* KPRL recently sold 50% equity to Essar

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. Ekpen J. Omonbude, PhD 8 NAEE, April 2011

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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, Nigerias 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:

Note: converted from kilolitres to barrels of oil equivalent

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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 Ekpen J. Omonbude, PhD 10 NAEE, April 2011

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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

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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.

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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: Ekpen J. Omonbude, PhD 13 NAEE, April 2011

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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

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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

LPFO 2% AGO 9% ATK 6% HHK 6% Others 1% LPG 0%

PMS 76%

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.

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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.

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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)
Amakpe Rehoboth Amexum Antonio Gasoline Associates Ologbo Niger Delta Petroleum Resources TOTAL Topping plant Topping plant Complex Conversion Complex Topping Diesel extraction 12 12 100 27 100 12 1 264 Kick-off 2007 Receiving commitment deposit Kick-off stalled. Lack of finance Structural work commenced Kick-off stalled Engineering package completed Units installation commenced

STATUS

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

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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).

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

Benin Cameroon Cote dIvoire Equatorial Guinea Gabon Gambia Ghana Guinea Liberia Nigeria Sierra Leone Togo TOTAL
Source: adapted from CIA World Factbook; NNPC

Oil Consumption (Kb/d)

23 26 24 1 14 2 57 9 4 215 9 21 405

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

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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
Gasoline Jet Fuel Distillate Fuel Residual Fuel LPG Coke Refinery Fuel Gain
Source: Leffler, 2008

Complex
50 10 25 10 3 12 (10)

Very Complex
60 10 25 4 3 13 (15)

30 10 20 35 8 (3)

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.

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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 Ekpen J. Omonbude, PhD 21 NAEE, April 2011

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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 straightrun refineries to find markets.

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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 Ekpen J. Omonbude, PhD 23 NAEE, April 2011

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products supply. This could be the case, for example, considering differences in figures suggested as Nigerias 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 NNPCs 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.

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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

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