Refining Capacity of Nigeria

Is Additional Refining Capacity a Viable Policy Option for Nigeria?

Abstract

Nigeria today finds herself in a paradoxical situation where it remains a leading oil exporter, yet experiences a sustained decline in refining capacity to satisfy rising domestic demand. With an energy mix dominated by petroleum products, the country has come to rely increasingly on unsustainable imports to supplement internal production. In recognition of this challenge, Nigeria’s Energy Policy aims to improve the country’s capacity utilisation to not only meet local demand, but also provide an export base for processed petroleum products. Employing existing literature on economic analysis, this work seeks to determine the viability or otherwise of investing in the nation’s refining capacity. Preliminary research indicates the steady rise in imported petroleum products will persist until the domestic refining capacity meets the domestic consumption level. This paper will conclude that increased capacity and privatization of refineries is a viable option to end the supply problems. This is because it will lead to the injection of needed capital into the enterprises, sustenance of production volumes to meet domestic market demand and possible export requirements, and the elimination of government subventions, which will remove inefficiency and end the drain on public funds.

INTRODUCTION

Nigerian crude, light in nature and low in sulphur content has a high demand in the international market. This trend brought home to the Government, the need to strategically take advantage of the investment opportunities especially in regards to refining. The government has thus sought to grant licences to construct refineries for the refining and export of processed petroleum products through the ministry of petroleum resources. The location of the country which lies along the coastal line of the Atlantic Ocean, provides easy accessibility and convenience to the source of supply for the international market. Locally, the country capitalizes on the proximity of the refineries to the source and supply point of crude; it also creates and strengthens the local skilled labour.

The refining sector and the telecom sector are given concessions in the country in an effort to attract investors, these concessions range from tax incentives, to as much bank guaranties .The accessibility of raw materials, low production cost and low labour cost serves as additional incentive compared to other refining projects outside the country .Refining margins had been on the decline for a decade now but the current increased global demand for energy and the constant price increase has brought back investors interest in refining, especially in the oil producing countries in the African coastal towns.

Nigeria however finds herself in a paradoxical situation where it remains a leading oil exporter, yet experiences a sustained decline in refining capacity to satisfy rising domestic demand. With an energy mix dominated by petroleum products, the country has come to rely increasingly on unsustainable imports to supplement internal production. In recognition of this challenge, Nigeria’s Energy Policy aims to improve the country’s capacity utilisation to not only meet local demand, but also provide an export base for processed petroleum products.

Section two presents an overview of the global refining industry and its future prospects. Section three focuses on the Nigerian market. Section four employs existing literature on economic analysis to determine the viability or otherwise of investing in the nation’s refining capacity. Preliminary research indicates the steady rise in imported petroleum products will persist until the domestic refining capacity meets the domestic consumption level. This paper will conclude that increased capacity and privatization of refineries is a viable option to end the supply problems. This is because it will lead to the injection of needed capital into the enterprises, sustenance of production volumes to meet domestic market demand and possible export requirements, and the elimination of government subventions, which will remove inefficiency and end the drain on public funds.

2.0 The Global Refining Industry

The world refining capacity has gone through a series of economic downturns and challenges, between the 1970’s and 1990’s there was a surplus capacity which was as a result of heavy investment in the early 1970’s, the downturns happened after the oil shocks of 73-74 and 79-80 and partly also due to the Asian financial crisis. The recent growth in the demand for refined crude has seen the quick depletion of spare capacity. The spare reserve of throughput capacity stood at 83 Million barrels per day in 2004 was being used up at 85% averagely on a daily basis (IEA 2006).According to IEA study this trend does not allow any lead time for maintenance which limits the scope for increased capacity and utilization to meet current and future demand for refined products. The projections for meeting capacity utilization depends largely on planned refinery projects under construction, capacity would need to rise to 93 million barrels per day in 2010, and would have to increase to 118 million barrel per day by 2030, based on the project on ground if they come to completion capacity rates are likely to remain high through 2010.(IEA)

So many factors are responsible for complicating the whole projections for capacity utilization needed to meet demand; the industry is seen to be struggling to meet up with current and future capacity demand. The increased demand for lighter refined products mainly used to fuel the transportation industry, requires refinery upgrades and heavy investment especially in the Organisation for Economic Cooperation and Development (OECD) North America where the bulk of increased demand is coming from. Refineries are built close to market in order to maximise proximity in terms of transport and logistics, upgrades, turn around and expansions are usually hampered by environmental and local restrictions.

The global oil consumption for light distillates has risen from 65% in 1980 to 80% in 2006, the plants needed for conversion are costly and take so much time to plan and build, coupled with the task of trying to adjust to the quality specifications of crude to be refined.

The International Energy Agency (IEA) predicts a 15% rise in oil demand in the UK and a continuous global demand growth by 2030, this forecast suggests oil will be the largest source of energy and will continue to play an important role in the energy needs of the world. The agency also predicts that the Organisation of Petroleum Exporting Countries will be supplying half of the worlds oil needs, there will be fewer nations producing oil and regional trade will double to approximately 65 million barrels a day by 2030.

Future Prospects for the Refining Industry

Global demand for oil will keep rising and would be around 50% by 2030, supplying almost a third of the worlds energy needs and will be the primary source of energy, particularly the oil based fuel will supply two thirds of the transport sector and the global energy mix will be dominated by fossil fuels, while the leading fuel will continue to be oil. Countries and regions will experience different demand patterns with developing economies expected to have a greater degree of demand growth. The industry forecast for the world oil demand will reach 92 million barrels per day in 2010, and 115 million barrels by 2030 in comparison to the estimate of 78 million barrels per day in 2003.The above reiterates the necessity for increased capacity by investing more in both the downstream and upstream sector of the oil sector, availability of market, security of market and investment security of the investor.

distance of the availability of sizable markets, secure ports to market the products, and the protection of investments to make this a reality.

3.0 AN OVERVIEW OF THE NIGERIAN REFINING INDUSTRY

3.1 Nigeria Refining Capacity and Utilisation Trends

The downstream industry in Nigeria is well established. NNPC has four refineries, at Kaduna, Port Harcourt and Warri have a combined installed capacity of 445,000 bpd. A comprehensive network of pipelines and Depots strategically located throughout Nigeria links these refineries. NNPC, through its subsidiary, the Pipelines and Products Marketing Company (PPMC), supplies only to bulk customers. They, in turn, meet the needs of millions of customers across the country for products ranging from gasoline and jet fuel to diesel, fuel oil and liquefied petroleum gas.

The Eleme Petrochemicals Company, a fully owned subsidiary of NNPC, at Port Harcourt using natural gas liquids as feedstock produces polyethylene and polypropylene for the plastic industry in Nigeria.

NNPC produces linear alkyl benzene, benzene, heavy alkylate and deparafinated kerosene at its Kaduna Refinery complex. Linked to the Warri Refinery are a 35,000 metric ton per annum (mtpa) polypropylene plant and an 18,000-mtpa carbon black plant.

However, low capacity utilisation of the local refineries lead to huge deficits in the supply of refined products. These supply gaps were such that petroleum products sometimes sold N3 to N10 per litre above the imported cost of the same product. This was especially so for diesel which is a product mostly used by oil rigs, construction companies and other industrial and commercial concerns. There was thus an economic incentive to import diesel to meet the supply needs of major industrial and commercial consumers.

3.2 Investing in Nigerian Refining Capacity

The Nigerian National Petroleum Corporation promotes the investment opportunities to be found in the nation’s downstream sector:

By conducting reputable seismic data acquisition, investor risk is significantly reduced.

Also, Nigeria’s huge oil reserves are accompanied by a production cost per barrel that is one of the lowest in the world.

The Government has also provided attractive fiscal terms for investors, and allow for the easy repatriation of profits, while guaranteeing new ventures.

Furthermore, while Environmental issues are now prominent in the Nigerian oil industry, the fact still remains that Nigerian crude is light sweet, contains lower sulphur crude, thus cheaper to produce. This places Nigerian refineries at a competitive advantage in terms of both operating costs and attractiveness as a place to invest. Crude oil refining with efficient export facilities.

Investment in new refineries is gradually becoming a reality as efforts are being made to increase local refining capacity to satisfy local demand and push for exports in future:

Nigeria accounts for about 59% per cent of petroleum products importation into Sub-Saharan Africa.

Total import in 2004 was 8.66 Million MT compared to the estimated total import requirement of 13.1 Million MT for the region

The Nigerian import for 2005 (as at September, 2005) stood at 5.54 million MT.

The estimate for 2006 is much higher

This shows a growing market for products importation to meet the local demand

  • Cost and Benefits of Nigerian Refining

Project analysis is a method of presenting this choice between competing uses of resources in a convenient and comprehensible fashion.

In essence, project analysis assesses the benefits and costs of a project and reduces them to a common denominator. If benefits exceed costs both expressed in terms of this common denominator- the project is acceptable: if not, the project should be rejected. As such, project analysis may appear divorced from both the fundamental objectives of the economy and the possible alternative uses of resources in other projects. The definition of benefits and costs, however, is such that these factors play an integral part in the decision to accept or reject. Benefits are defined relative to their effect on the fundamental objectives; costs are defined relative to their opportunity cost, which is the benefit for-gone by not using these resources in the best of the available alternative investments that cannot be undertaken if the resources are used in the project. The forgone benefits are in turn defined relative to their effect on the fundamental objectives. By defining costs and benefits in this fashion we try to ensure that acceptance of a project implies that no alternative use of the resources consumed by this project would secure a better result from the perspective of the country's objectives.

The oil industry is a complex, capital intensive, sometimes financially risky and highly competitive business. Oil companies can choose where in the world they invest to produce products: they rank all their investment opportunities and then invest where they can make the best return.

Downstream oil refining is a stand-alone activity that has to generate an acceptable return on capital in its own right. Nigerian refineries will only attract major investment if they provide the best location for a given project to generate a profit and justify further investment.

4.1 COSTS

The new processing units are costly and take several years to plan and build:

- hydrofiners to reduce product sulphur levels

– depends on requirement but industry spent around £600 million to produce sulphur free petrol and diesel to increase diesel production – about £300 million per refinery.

- residue conversion to reduce or eliminate fuel oil about £500 million per refinery

Alternatively, the supply of oil products to Nigerian market could be met in part by imports from European and other sources. However, this would impact on the following:

- security of supply: Vulnerable to external factors

- product prices: costs to the consumer could rise because importing fuels will add to costs of Nigerian marketers

- the balance of payments: other counties would gain the economic benefits of refining crude oil to products

direct and indirect employment: UK would be less attractive to industries which rely on the refining sector.

4.2 BENEFITS

Nigeria stands to benefit significantly from having a competitive domestic oil refining industry. These include:-

substantially enhanced security of energy supply, including rapid response in the case of a crude oil supply disruption or natural gas shortage

consumer benefits from availability of high quality fuels at competitive prices

A substantial contribution to the Nigerian economy as a whole, and to regional economies, through exports, employment, skills and technological expertise.

The oil refining industry has the potential of improving Nigeria’s balance of payments via a net trade surplus on the import and export of oil products.

The supply of petroleum feedstocks to other key industry sectors including plastics, paint, fibres, pharmaceuticals and building materials.

There is also the creation of direct and indirect employment the refining industry will contribute to the economy.

Environmental benefits - Nigerian oil has low sulphur fuels, which benefits the environment with cleaner fuels.

There is a wider benefit to the economy Essential products include aviation and marine fuels; fuel oil for power generation; heating oil for homes, hospitals, factories and schools; petroleum gases, used mainly in industry but also as an alternative motor fuel; bitumen for roads and roofing; petroleum coke, used in steel making and aluminium smelting, and lubricants for all kinds of engines and machinery.

As well as providing other industries with a cheap and reliable source of energy, UK refineries also supply the chemical feed stocks used to manufacture many of the household and consumer goods that are part of everyday life.

Petrochemicals are key to products as diverse as carpets, fabrics and clothing; fertilisers; pharmaceuticals, cosmetics and medicines; plastics, paints and detergents; packaging, vehicle components and building materials.

This strong local supply base is essential to retaining technical expertise, stimulating innovation within UK manufacturing and preventing its disappearance overseas. As in many other areas of UK manufacturing, this may not have an immediate impact, but a cumulative effect since skills, expertise and innovative new technologies would be lost to overseas competitors.

The oil industry also underpins a number of service industries such as engineering contractors. In the absence of a UK refining industry these support services are likely to go overseas, while some smaller local subcontractors could be driven out of business.

Introducing cleaner fuels earlier than other countries also encourages motor manufacturers to test new fuels in the UK, thus helping to retain technical expertise in this country.

On the contrary, the absence of these investments will result in:

The inability to satisfy consumer demand.

An unhealthy reliance on imports

Security of supply becoming vulnerable to external factors

Unfavourable balance of payments position occasioned by rising imports

Inflation, making the economy unattractive for FDI and local consumers.

A Essential products include aviation and marine fuels; fuel oil for power generation; heating oil for homes, hospitals, factories and schools; petroleum gases, used mainly in industry but also as an alternative motor fuel; bitumen for roads and roofing; petroleum coke, used in steel making and aluminium smelting, and lubricants for all kinds of engines and machinery.

As well as providing other industries with a cheap and reliable source of energy, UK refineries also supply the chemical feed stocks used to manufacture many of the household and consumer goods that are part of everyday life.

Petrochemicals are key to products as diverse as carpets, fabrics and clothing; fertilisers; pharmaceuticals, cosmetics and medicines; plastics, paints and detergents; packaging, vehicle components and building materials.

This strong local supply base is essential to retaining technical expertise, stimulating innovation within UK manufacturing and preventing its disappearance overseas. As in many other areas of UK manufacturing, this may not have an immediate impact, but a cumulative effect since skills, expertise and innovative new technologies would be lost to overseas competitors.

The oil industry also underpins a number of service industries such as engineering contractors. In the absence of a UK refining industry these support services are likely to go overseas, while some smaller local subcontractors could be driven out of business.

Introducing cleaner fuels earlier than other countries also encourages motor manufacturers to test new fuels in the UK, thus helping to retain technical expertise in this country.

  • Analysis

Return on Capital Poor

UK oil refining & marketing annual return on capital before tax & interest charges

Return on capital before tax & interest

- performs a significant tax gathering service. Every year the industry collects around £30 billion in fuel duty and VAT alone. This is an important source of revenue for the Government.

UK refineries provide training for skilled workers.

- any investment must deliver the required internal rate of return.

- the UK is seen as an attractive place to invest in refining in both the short and the long term.

- Government policies reinforce this position.

5 Conclusion

Oil products are a vital part of modern society. The challenge is to ensure that in the coming decades the Nigerian economy continues to have access to affordable, secure supplies of the required oil products as both sources of crude oil and consumer demand change. The challenge can be met by importing more products to meet demand or investing in indigenous refineries.

The oil industry is highly competitive, complex, capital intensive and invests for the long term. Any business decision to invest in Nigerian refineries depends on the perception that Nigeria is an attractive place to invest. Government policy must thus allay investors’ fears by setting out a clear and consistent long-term energy policy.

Source: Essay UK - http://turkiyegoz.com/free-essays/economics/refining-capacity-of-nigeria.php


Not what you're looking for?

Search:


About this resource

This Economics essay was submitted to us by a student in order to help you with your studies.


Rating:

Rating  
No ratings yet!

  • Order a custom essay
  • Download this page
  • Print this page
  • Search again

Word count:

This page has approximately words.


Share:


Cite:

If you use part of this page in your own work, you need to provide a citation, as follows:

Essay UK, Refining Capacity of Nigeria. Available from: <http://turkiyegoz.com/free-essays/economics/refining-capacity-of-nigeria.php> [11-12-18].


More information:

If you are the original author of this content and no longer wish to have it published on our website then please click on the link below to request removal:


Essay and dissertation help

badges

 
Haven Season 2 Episode 4 | Carole Samaha 2019 | £9.99 Shipping