What You Should Know About Nigerian Refineries

In 2023, the term "refinery" dominated discussions within Nigeria's energy industry. Interestingly, this is not attributed to the full operational status of these refineries but rather to the persistent adjustments of their anticipated full operation dates. The likes of Dangote Refinery, Port Harcourt Refinery, Waltersmith Refinery, and others have inadvertently become conduits for misinformation exploited by public relations specialists and political propagandists.

“The Dangote Refinery,?the largest single-train refinery in the world with investment of?over 25 billion US dollars would also be on stream before the end of 2023 in addition to several modular refineries projects in the country.” – Timipre Sylva, Fmr. Minister of State for Petroleum Resources, January 9 2023

“Your Excellency, distinguished guests, our first product will be in the market before the end of July, beginning of August this year.” - Alhaji Aliko Dangote, May 22 2023.

“From what we have seen here today, Port Harcourt Refinery will come on board by the end of the year” - Minister of State for Petroleum (Oil), Senator Heineken Lokpobiri, August 25 2023.

“The Dangote refinery will receive its first cargo of crude in the next two weeks and will begin producing up to 370,000 barrels per day of diesel and jet fuel from October 2023.” – ?Dangote Group Executive Director, Devakumar Edwin, ?September 18 2023.

“I can confirm to you that by the end of December this year, we will start the Port Harcourt refinery; early in the first quarter of 2024, we will start the Warri refinery and by the end of 2024, the Kaduna refinery will come into operation. This is the commitment we are giving today, and you can hold us accountable for this.” – Mele Kyari, November 23 2023 .

“This heralds the commencement of the production of petroleum products after the Christmas break.” - Senator Heineken Lokpobiri, December 22 2023.

“We are done with phase one. We will complete phase two as promised within 2024, maximum – the last quarter of 2024” – NNPC Ltd GCEO Mele Kyari, December 22 2023.

Examining the Impact of Refinery Operations on Nigeria's Energy Industry

Processing and production in Dangote Refinery, the largest refinery in Africa, has been stalled due to a number of constraints which include the limited supply of crude oil. The delivery from Shell’s trading arm of 1mn barrels from one of Nigeria’s offshore fields represents the first tranche of 6mn barrels of crude due to be supplied to the facility from a range of suppliers. Dangote revealed that the crude will be used for an initial test of the facility’s capabilities before the processing of diesel, aviation fuel and liquefied petroleum gas and latterly premium motor spirit, starts.

Even though the refinery is yet to commence full production, there is still some positive news going into 2024. Nigeria has four refineries in poor condition due to improper management, incurring billions in losses. The Dangote Refinery is expected to be instrumental in Nigeria’s demand for fuel and other petroleum products. Below we outline critical issues surrounding refinery operations in Nigeria

Refineries don’t work alone

The challenges faced by refineries are intricately linked to broader issues in Nigeria's crude oil supply chain. The country's production has experienced a decline, primarily attributed to factors such as oil theft and insufficient infrastructure investment. Currently pumping between 1.2 and 1.4 million barrels per day, Nigeria, despite its oil-rich status, faces concerns about future supplies, necessitating an increase in production to a target of at least 2 million barrels per day. The less the country supplies, the more Dangote will depend on importing more expensive oil from foreign suppliers like Vitol and Trafigura with whom Dangote is reported to have already struck a deal. ?

Will fuel prices drop as soon as we start refining?

Another essential consideration is whether the operation of refineries will result in an immediate drop in fuel prices. The intricacies of fuel pricing involve factors like crude oil prices, landing costs, and the currency in which Dangote procures crude. Government subsidies have kept fuel prices below market value. However, with refinery operations and the removal of subsidies, a market-driven formation of fuel prices is anticipated, potentially leading to an increase.

The refinery's role in reducing fuel handling costs could discourage fuel importation by rendering importers less competitive in the market. In this scenario, the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) is expected to play a pivotal role by introducing a pricing framework, as outlined in the Petroleum Industry Act (PIA). This framework aims to provide stability and predictability to fuel prices, contributing to a more transparent and investment friendly downstream market.

Will Refinery Operations Alleviate Reliance on Imported Petroleum Products?

In 2022, Nigeria's list of imported items prominently featured Petroleum, Gas oil, and Jet fuel. The conflict between Russia and Ukraine elevated crude oil prices globally, consequently impacting the landing cost of petrol. While global tensions have subsided, OPEC is implementing supply cuts to maintain elevated prices. The operation of a functional refinery holds the potential to diminish Nigeria's expenditure on the importation of petrol and other petroleum products. This development would alleviate fuel supply challenges in the import-dependent West Africa region. Notably, Dangote has indicated that at least 40% of the refinery's capacity will be designated for export, promising substantial foreign exchange earnings for the country. By achieving self-sufficiency in all refined petroleum products, this project fosters energy security.

Do refineries pose environmental concerns?

Refineries contribute to environmental challenges by releasing various pollutants, including carbon monoxide and sulfur dioxide, into the air and water. Proximity to a refinery can have detrimental health effects, with residents facing an elevated statistical risk of developing disorders such as asthma, cardiovascular damage, cancers, and birth defects—even if they reside miles away. It is imperative for regulators, encompassing entities like the Federal Ministry of Environment, NESREA, and the Lagos State Environmental Protection Agency, to collaboratively enforce stringent standards, both for Dangote Industries Limited and the well-being of the local residents. A critical aspect is the proper treatment of wastewater effluents discharged from the refinery to ensure detoxification before release. Dangote Industries Limited asserts that the refinery is engineered to produce exceptionally clean fuels, adhering to approved standards, including a sulfur content of less than 10ppm for Premium Motor Spirit (PMS).

Do the operation of refineries and expected increase in fuel demand compromise energy transition goals?

The recent Russia-Ukraine crisis has underscored the precarious nature of global energy stability. The supply of clean energy is constrained and a lot of African economies depend on fossil fuel. The presence of presidents from other West African countries at the commissioning ceremony conveys a clear message to the world: Africa intends to harness its natural resources, even in the face of climate objectives.

Notably, the Dangote refinery is reportedly equipped with carbon capture technologies and storage processes capable of capturing 90% of CO2 emissions. If true, this positions the refinery as a significant contributor to Nigeria's ambition of achieving Net Zero by 2060. The essential consideration remains that Africa must judiciously manage its utilization of fossil fuels, balancing industrialization and economic development with environmental responsibility.

If the influence of refineries on fuel prices seems minimal, what advantages do they offer to individuals and industries?

Refineries often conjure images of diesel, petrol, kerosene, and jet fuel in people's minds. However, these constitute only about 35% of the derivatives produced through crude oil refining. Beyond these conventional products, refineries play a crucial role in mitigating the need for importing other petrochemical feedstocks such as asphalt or bitumen binders.

The construction of roads, fundamental to transportation infrastructure, heavily relies on asphalt derived from heavy crude, a resource typically imported due to Nigeria's primary production of light crude. Additionally, essential materials like pepcoke, vital for the production of aluminum, are derivatives of crude. The availability of jet A1 fuel significantly influences the cost of airline tickets.

The Dangote Refinery, operating at its full capacity of 650,000 barrels, will contribute 3.3 million liters of bitumen binders daily. This substantial output holds the promise of reducing road construction costs by eliminating landing expenses associated with imports. Beyond this, the refinery is poised to reshape the supply chain dynamics of industrial manufacturing not only within Nigeria but also across the West African coast. The availability of petrochemical products is expected to streamline various industrial processes.

Are we getting accurate fuel consumption data?

The NMDPRA says the country’s domestic consumption for petrol?stands at 44.3 million liters per day. However, industry players believe it’s not up to that and the figures are inflated because of corruption. When Dangote refinery starts supplying petroleum products, the actual figure from the supply side will be determined.

What to do about FG owned refineries?

The Nigerian govt has spent nearly 12 trillion naira in turn around maintenance to revive the FG owned refineries, an amount nearly equivalent to the cost of constructing the Dangote refinery. This sum could have been adequate to establish an entirely new refinery. The Kaduna, Port-Harcourt and Warri refinery companies spent the sum of N127.326 billion on salaries , Wages and Employees benefits between 2020 and 2021.[1] Essentially, the refineries have been recording losses because they’re running costs without/with little revenue.

The first phase of the Port Harcourt Refinery involving mechanical completion and flare startup in Area 5 plant and 77.4% of the rehabilitation project is the portion that has been completed.[2] It does not signify that the refinery is in full operation or that it will be in full operation this year as opposed to what is being stated in news headlines. The Minister of State for Petroleum (Oil) phrased the completion as marking the commencement of petroleum production after the Christmas break, leaving room for plausible deniability by not specifying a timeframe – "after Christmas break" could mean January 2024 or December 2025.

Considering how long the project has been dragging and the exorbitant costs incurred, an update of mechanical completion of one of the plants in the refinery can’t be termed a significant development. Of course, it is natural to be excited that we have achieved progress. However, we should not turn a blind eye to the fact that much work still needs to be done and other phases need to be completed. A truly commendable milestone will be the actual commissioning and full operation of the refineries. Therefore, updates on refineries should be communicated without exaggerations or overambitious promises, especially when success hinges on external factors. In spite of the progress made, the question of whether FG owned refineries should be sold to private entities remains relevant.

As 2023 comes to an end, it is only apposite we round off Energy Brief this year with a piece on Refineries. The potential shift towards operational refineries in Nigeria signifies a critical juncture in the oil and gas industry. While promising economic benefits are anticipated, the actual delivery of promises and fixing petroleum infrastructure deficits is imperative to ensure sustainable and responsible refinery operations. See you next year.

Endnotes

1 Dataphyte, https://www.dataphyte.com/latest-reports/nigerian-refineries-makes-zero-revenues-spends-n127-bn-on-salaries-wages/

2 NNPC Ltd, https://www.nnpcgroup.com/insights/nnpc-ltd-fulfils-promise-delivers-port-harcourt-refinery-achieves-mechanical-completion-flare-start-up-of-refinery-s-area-5-plant

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