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Nigeria is the only OPEC member country that imports gasoline (PMS) and holds the dubious distinction of being the largest importer in the world. The Nigerian Bureau of Statistics(NBS) has reported that in Q2 Nigeria reportedly imported over 3.89 million metric tons at a cost of over US$2.7bn.

The local state owned refineries have operated for years at capacity utilisation levels beneath 10% and currently are not operating. Nigeria purport to have 4 refineries with a nameplate refining capacity of 440,00bpd but that is misleading in itself. The only refineries which have operated regularly are the Warri Refining and Petrochemical Company and the 2nd Port Harcourt Refining and Petrochemical Plant. The refining narrative has been one of a litany of ineffectual turn around maintenance and dire management for decades. The current Minister of State for Petroleum Resources Dr Ibe Kwachiku has promised the Nigerians that the country will have no need to further import refined products from 2019. Most commentators regard his bravado as evidence of clear policy ineptitude and a fundamental denial of reality, only time will tell.

The authorities recognise that the current state owned refining model is broken but policy decision makers have been uncertain on how to solves the issues. It si our opinion that the Refineries be sold. Privatisation would create the environment for the investment that is required to operate the refineries profitably. Admittedly Civil Society Organisations (CSO) have protested vehemently against such a policy and it is unlikely to happen prior to the next election. NNPC the ostensible operators have begun the practise of issueing the monthly operating losses, presumably to establish the basis for the rationale for selling the Refineries. The refineries crude supply has been vulnerable to pipeline vandalism with numerous outtages over the years, any sale would need to provide a solution to such vandalism and would create substantial additional cost.

The DPR have issued 72 Refinery licenses over the last decade yet with the exception of the 1,000bpd refinery operated by he Niger Delta Exploration and Production (NDEP) Company at Ogbele, Delta State not a single private refinery has gone into production. It is difficult to conclude anything other than the fact that this state of affairs is a consequence of poor policy and a poor regulatory environment.

Government has sought to regulate the downstream sector in Nigeria creating models and enforcing regulations which create price distortions, dictate product pricing and perpetuate a cycle of inefficiency in the distribution of refined products. Deregulation is a prerequisite for operating profitable refineries. The economics of operating a modular refinery are marginal. A topping refinery with a limited product slate may appear attractive from an initial capex perspective, but most modular refineries do not incorporate fluid catalytic units (FCCU) and as a consequence do not produce high value transport fuels such as gasoline.

Attracting investment for private refineries in Nigeria is no mean feat. A 10,000 bpd refinery with a Nelscon Complexity index of 3.5 will cost a minimum of USD$200m. There will be additional costs depending on how the feedstock is delivered to the Refinery and distributed. A project sponsor would necessarily need to provide USD$60 million in equity funding with a favourable project finance structure of 30:70 loan to value. That would require USD$140m in debt funding. Setting aside any funding requirement that would require the operator to have qualified experience in running such a facility, any lender will require a feedstock supply agreement from a creditworthy counterparty. That usually means NNPC who are reluctant to enter into contractual supply agreements which might habour onerous penalty clauses for non performance. NNPC are prepared to provide 60% of the nameplate capacity of the Refinery on a best efforts basis. To my mind this unecessarily complicates the process of obtaing feedstock and may create additional logistical expenses. There are other options which include entering into agreements with a local crude producer, many of whom experience frequent production shut ins. There is however the question of proximity and feedstock cost to be resolved.

I have long argued that where NNPC enter into a feedstock supply agreement for Refineries producing exclusively for local consumption such transactions should be Naira denominated and on terms of credit which will allow deferred settlement. This will assist in mitigating the fx risk that exists as a consequence of the USD/NAIRA rates brought about by the timing difference between the purchase of the crude and the sale of the refined product.

The Department of Petroleum Resources (DPR) or it successor in title under the PIGB, need to create the optimal fiscal rules and regulations to lend support to the financial model that would be used to fund a refinery investment. It is unlikely that local debt can be accessed by project sponsors and all of the external lenders and prospective investors I have met have at the very top of their requirements; that fiscal incentives are structured in such a manner that they cover the periofd of time required to amortise their investments.


The Dangote 650,000 bpd refinery and Petrochemical Complex now scheduled for completion in 2020 is a game changer. It will when it reaches operational capacity invert trade flows for European suppliers and Refiners alike. It will establish Nigeria as an export hub at a time light sweet crudes become increasingly more valuable. Global environmental regulation dictates the increased value of sweet light crudes and a widening of the sweet-sour premium.

The question is how do modular refineries with low NCI operate in a market where Dangote Refinery becomes the dominant actor. What effects does it have on margins and crack spreads. If you take the view as I do , that it is entirely the correct strategy to develop Nigeria as a refining hub that meets it own consumption needs in the absence of regulation, then you must also accept that for foreign direct investors Modular Refineries represent a marginal investment. Such an argument can be proved counterfactually by the absence of any such investments. A number of Chinese investors have made promises to establishin mini refineries but typically in the context of agreements which provide them access to oil and gas concessions.

It is also probable that global trading houses such as Vitol, Trafigura, BP etc may wish to invest in either acreage in Nigeria or the existing refineries which I feel certain will be sold in 2019 as a means to maintain a foothold in the WAF market. The loss of Nigeria as a market for booth European Refiners and Global traders is an adverse event for them but might just benefit Nigeria in the long run.

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