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SCHOOL OF SOCIAL SCIENCES

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ACADEMIC YEAR: 2017/18 SEMESTER: 2
STUDENT ID: 180003925

MODULE CODE: CP52002

TITLE OF PAPER: The Prospects of The Oil Refining Industry In Nigeria: Is Additional Refining Capacity A
Viable Option?

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THE PROSPECTS OF THE OIL REFINING INDUSTRY IN NIGERIA:

IS ADDITIONAL REFINING CAPACITY A VIABLE OPTION?

Adanma N. J. Anizoba

ABSTRACT: “Nigeria has the world’s 10th greatest oil reseves, with about 90 percent of

the country’s export revenue and 35 percent of its total GDP coming from its oil

industry”(Wapner, 2017). This research paper provides an economic analysis of the current state

of the refining sector and identifies the most important drivers that will spike the growth of the

refining sector in Nigeria that is anticipated to occur over the next 5 years. It brings to light the

existing potential for domestic refining of petroleum products in the country. The global market

is expected to continue to depend principally on fossil fuels as their source of electric power or

energy, even in the next decade. This continuous dependence should see oil-producing countries

such as Nigeria concentrating on gaining financially from its natural resources. “With oil prices

expected to uninterruptedly decline and remain comparatively low, the focus on refining should

become necessary; creating favourable circumstances to transform the fundamentals of the

downstream sector and move from a “net imports” to “net exports” structure” (PwC, 2017).

Drawing from this, it is evident that the prospects for the oil refining industry in Nigeria are very

bright and that there is a great potential for additional refining capacity through Private Sector

Strategies and interventions. There is a huge market waiting to be tapped into in the Nigerian

downstream petroleum sector.

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TABLE OF CONTENT

TABLE OF CONTENT---------------------------------------------------------------------------3

LIST OF ABBREVIATIONS--------------------------------------------------------------------4

1.0 INTRODUCTION AND PROBLEM STATEMENT--------------------------------5

2.0 LITERATURE REVIEW------------------------------------------------------------------7

2.0.1 Past, Ongoing and Future Refining Projects in The

Industry---------------------------8

2.02 Challenges Facing the Oil Refining Industry in Nigeria-------------------------------10

2.0.3 Economic Feasibility of Refinery Projects----------------------------------------------11

2.0.4 Performance Indicators for Petroleum Refinery Operations--------------------------12

2.0.5 Projected Growth in Nigeria’s Refining Capacity--------------------------------------13

3.0 CONCLUSION AND POLICY IMPLICATIONS-----------------------------------15

4.0 BIBLIOGRAPHY---------------------------------------------------------------------------17
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TABLE OF ABBREVIATIONS

AGO Automotive Gas Oil

ATK Aviation Turbine Kerosene

Bpd Barrels per day

Bpsd Barrels per stream day

DPR Department of Petroleum Resources

GDP Gross Domestic Product

HFO Heavy Fuel Oil

IEA International Energy Agency

IMF International Monetary Fund

IOC International Oil Company

Kb/d Thousand Barrels a Day

LPFO Low Pour Fuel Oil

LPG Liquefied Petroleum Gas

Mb/d Million Barrels a Day

NNPC Nigerian National Petroleum Corporation

NOC National Oil Company

OPEC Organisation of Petroleum Exporting Countries

PMS Premium Motor Spirit

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1.0 INTRODUCTION AND PROBLEM STATEMENT

Nigeria has an oil refining industry that may present a challenge for detailed economic

analysis. There are several factors within the petroleum industry in Nigeria that may be said to

foster the growth and development of its domestic refining industry such as large crude oil

reserves, domestic demand for refined petroleum products that exceeds current production and

somewhat historically sustained efforts from the government to grow the industry. Despite all

these, Nigeria has never been able to effectively meet its domestic demand and in nearly sixty

years, has only been a major net exporter twice. There are various issues that arise when we look

at Nigeria’s oil refining sector and the state-owned refineries. These include but are not limited

to poor policy formulation and implementation at the governmental level and poor industry

operations and poor maintenance culture at the institutional level. “Over the past few decades,

there has been continuous advocacy for full privatisation and several have contended for the

deregulation of the downstream sector of the petroleum industry” (PwC, 2017).

Nigeria presently produces “light, Agbami sweet crude” meaning local refineries may be

able to source and process crude oil at lower rates, increasing the “economic viability of

increased refining capacity”(PwC, 2017). 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. This trend brought home to the government, the need to strategically take

advantage of the investment opportunities especially regarding refining. The government has

thus sought to grant licences for the construction of refineries for the refining and exportation of
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processed petroleum products. 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.

Preliminary research indicates that the quantity of petroleum products the country

imports will continuously increase until the domestic oil refining capacity meets the domestic

consumption level. There are various factors responsible for complicating the whole projections

for capacity utilization needed in the industry to meet current and future capacity demand. The

increased demand for lighter refined products mainly used to fuel the transportation industry

requires refinery upgrades and heavy investments. For the past fifty years, Nigeria has

consistently endeavoured to keep its refineries operating at maximum and the country is the 3rd

highest importer of refined petroleum products in Africa, importing over 80% of petroleum

products used by consumers. This remains a constant drawback as the country is said to have a

nameplate refining capacity that surpasses the industry demand. Despite the continuous setbacks

plaguing the industry, the intrinsic opportunity for Nigeria's once dormant refining sector holds

better prospects for the future and recognition of key drivers will accelerate the imminent

refining revolution (PwC, 2017).

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2.0 LITERATURE REVIEW

This section of this research employs the use of existing past and current literature on

economic analysis to determine the viability or otherwise of investing in increasing the nation’s

refining capacity. Nigeria joined the Organization of Petroleum Exporting Countries (OPEC) in

1971 and established the Nigerian National Petroleum Company (NNPC) in 1977; a state-owned

company which is a major player in both the upstream and downstream sectors (Blair 1976, pp.

98-120). Nigeria’s first refinery was built as part of a joint venture by Shell and British

Petroleum known as NPRC (Nigerian Petroleum Refining Corporation); in the city of Port-

Harcourt in 1965. With an initial capacity of 38,000 bpd which later expanded to 60,000 bpd,

production sought to provide gasoline for the immediate domestic transportation market. The

refinery’s operations ran smoothly and effectively until the passage of 1969 National Petroleum

Act, which vests the ownership of all petroleum resources in the state. This act requires that

upstream producing oil companies are obligated to “subsidise” the local refineries by selling

about 8 percent of their crude oil production at around $1.80/barrel (nearly 5 percent of the then

world market price).

The refining sector in the country has been given concessions such as tax incentives in an

effort to attract investment from private bodies. The accessibility of raw materials, low

production cost, and low labour cost serve as additional incentives 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.
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2.0.1 Past, Ongoing and Future Projects in The Industry

According to the NNPC website, at present, NNPC has four refineries, two in Port

Harcourt, and one each in Kaduna and Warri. The refineries have a combined installed capacity

of 445,000 bpd. The NNPC’s operations arm manages 11 subsidiary companies including the

companies operating the four state-run refineries:

 Warri Refinery and Petrochemical Company (WRPC) commissioned in 1978

with an installed refining capacity 100,000 bpd, and upgraded to 125,000 bpd in

1986,

 Kaduna Refineries and Petrochemicals Company (KRPC) commissioned in 1980

with an installed refining capacity of 100,000 bpd and upgraded to 110,000 bpd in

1986,

 and the two at the Port Harcourt Refinery Company (PHRC); the first

commissioned in 1965 with an installed capacity of 35,000 bpd and later

expanded to 60,000 bpd and the second commissioned in 1989 with 150,000 bpd

processing capacity.

A comprehensive network of pipelines and depots strategically located throughout

Nigeria links these refineries. The PHRC is made up of two refineries, located at Alesa Eleme

near Port Harcourt with a jetty (for product import and export). The jetty is located 7.55 km

away from the refinery complex. In 1983, the Port Harcourt refinery with 60,000 bpsd name

plate CDU capacity and the tankage facilities were acquired by NNPC from Shell Group. After

this acquisition, a new 150,000 bpsd export refinery at PHRC was built in 1988 and
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commissioned in 1989 with the aim to cater for the domestic market supply and export its

product surplus.This new refinery brings the current combined installed capacity of PHRC to

210,000 bpsd.

The installed capacities of KRPC and WRPC are 110,000 bpsd and 125,000 bpsd

respectively.  NNNPC, through its ssubsidiary, thePipelines 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. NNPC produces linear alkyl benzene, benzene, heavy alkylate and deparaffinated

kerosene at its Kaduna Refinery complex. Linked to the Warri Refinery is a 35,000-metric ton

per annum (mtpa) polypropylene plant and an 18,000-mtpa carbon black plant

(www.nnpcgroup.com).

In 2014, the Dangote Group was granted an approval to build a $9 billion oil refinery on

the outskirts of Lagos; signing a $3.3 billion agreement with both local and foreign financial

investors to fund the project. The refinery will be the first successful private crude oil refining

plant in the country, with an estimated capacity of 500,0000 bpdto 650,000 bpd. The Dangote

refinery (estimated capacity of 650,000 bpd), currently in the works starts operations in mid-

2019, at 50% utilisation, and the company has acquired interests in at least three blocks to secure

feedstock for the new refinery.

The existing refineries (with a combined capacity of 445,000 bpd) are currently operating

at 15% utilization and other modular refineries (each at a proposed capacity of 100,000 bpd) also

come onstream early 2019, operating at 90% utilization. A feasibility study by Mackenzie

Energy Consulting Ltd. and Foster Wheeler Energy in 2011 reported that the planned modular

refineries in Lagos, Kogi, and Bayelsa were economically viable (Oirere, 2016). According to
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NNPC, following the completion of the new refineries, West and Central African countries will

look to Nigeria for fuel supplies and discontinue imports from Northwest Europe, the Middle

East, and Asia.

2.0.2 Challenges Facing the Oil Refining Industry in Nigeria

The major problems facing the refining industry include the following:

 Inadequate Funding and Autonomy

 Lack of proactive governance, due to the bureaucratic system within the NNPC.

 Poor Maintenance of the Refinery infrastructure, because of ineffective supervision of

activities and a lack of systematic maintenance.

 Political Interference by the Federal Government

 Frequent Emergency Shutdowns of Units or entire refineries, causing loss of production.

 Delayed or complete failure to carry out turnaround maintenance on schedule.

 The absence of competition in the market, and

 The lack of technical expertise needed to successfully run the refineries.

 Poor Policy Formulation and Implementation for the Industry at the Federal Level
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2.0.3 Economic Feasibility of Refinery Projects

Generally, there are five broad criteria that determine the economic feasibility of a

petroleum refinery. These criteria are summarised below (modified; from Leffner, 2008; Fahim

et al., 2009):

a. Crude oil feedstock availability and quality: The requirement is a reliable, commercially

viable, long-term source of crude oil, preferably of the lighter specification, which would

have a significant impact on processing costs.

b. 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

capacity size, refining complexity, and crude oil feedstock.

c. Potential refinery capacity and complexity: This decision is also affected by the existent

supply infrastructure in the market in question, mainly by way of the source and import

cost of refined products.

d. 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.

e. The 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.

According to a 2017 report on the refining revolution in Nigeria by PwC, “the economic

viability of a refinery is dependent on the interaction of three elements: type of crude oil used,

the complexity of the refining equipment, and the desired type and quality of products
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produced”. Crude oil types are typically categorised by their physical density (light/sweet and

heavy) and yield different types of products. Heavy crude produces a larger yield of lower-value

products (fuel oils), requiring a huge investment in the refining process while light produces a

large yield of higher-value products (transportation fuels) and requires less investment in the

refining process. A report on the ongoing revolution in the Nigerian refining industry by

Pricewaterhouse Coopers (PwC) states that Nigeria currently produces light, sweet crude,

meaning local refineries can source and process crude at lower rates, increasing the viability of

refining assets, particularly modular refineries which have lower feedstock requirements.

An essential prequisite for refining profitability is locating the balance between the cost

of inputs and price of outputs in a highly volatile environment influenced by global, regional,

and local supply and demand fluctuations (PwC, 2017). Refineries have little or no influence

over the price of input and outputs. To improve profitability, there should be operational efficacy

to reduce operating costs such as labour, maintenance, and energy. This is achieved through

innovation, frequent maintenance & upgrades and optimisation to produce more output from

fewer inputs. Each refining asset is a “unique and complex industrial facility”, with some

flexibility in the crude oil it can process, and the variety of product yields it can refine. Factors

such as refinery configuration and complexity directly impact refinery end products while

location and transportation infrastructure impact energy, labour and compliance costs (PwC,

2017).

2.0.4 Performance Indicators for Petroleum Refinery Operations

The standard criteria used in industry for measuring the performance of petroleum

refineries include but may not be limited to the following:

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 The percentage capacity utilisation which is commonly used to essentially measure the

overall efficiency of utilisation of the refinery.

 The products yield with regard to design output, which essentially measures the

productiveness of the processing units of the refinery.

 Documented and verifiable safety records including the number, frequency, and

severity of different causes of accidents on site at the refinery.

 The refinery on-stream factors, measured for individual process units, as well as the

entire refinery. These factors measure the continuity and reliability of the operations.

2.0.5 Projected Growth in Nigeria’s Refining Capacity

According to a report by BMI Research, growth in the country’s refining capacity in the

early 2020s will ‘substantially’ erode the country’s crude oil exports due to a ‘weak’ new project

pipeline. Analysts acknowledged the projected start of operations of the 650,000 barrel per day

(bpd) Dangote refinery by 2020 and the potential of a second 250,000 bpd facility up and

running by 2021 but noted that the country may struggle to increase its oil production to meet

new demand from these facilities, as well as sustain exports. The report states that it is either

crude oil exports will fall as there will be an increase in domestic crude demand from the new

refineries, or refineries will run at lower utilization rates due to export commitments and

inconsistent supply because of the limited project pipeline, or both could happen. But, however,

if the government can push through the various parts of the Petroleum Industry Bill (PIB),

supporting investor confidence in future regulatory and fiscal conditions, there will be an

existing domestic demand market for the oil.

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There is increasing optimism that there will be a change in the Nigerian petroleum

industry structure from a “net imports” to “net exports” nation due to the development of the

Nigerian National Petroleum Policy, and the sustained decline in crude oil prices. This

conversion will see Nigeria become a net exporter of refined products and one of major oil

refining hubs of West Africa by the onset of the next decade (PwC, 2017). About 80% of

Nigeria's refined product supply comes from imports, thus creating a huge economic potential

for local refining. There is huge potential for uptake in the West African market has a current

demand of about 39 billion litres, and refineries such as SIR (Ivory Coast), SOGARA (Gabon)

and SAR (Senegal) cannot meet this demand for refined products in the region (PwC, 2017).
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3.0 CONCLUSION

The economic analysis presented in this paper uses various literature to show that

potential exists for a more than adequate supply of refined petroleum products both in the

country and the wider market, with long-term implications for the security of supply. This paper

shows that there is a need for stringent and meticulous due diligence regarding the effort to

develop the Nigerian refining industry. This could include set out clear plans to achieve refining

capacity targets daily and subsequently annually, both in a domestic and international context.

This would involve a government strategy that requires a medium to a long-term analysis of both

domestic and global market fundamentals. About the feasibility and sustainability of the new

private refineries in Nigeria, ideal government policies and private investment strategies must be

put in place to ensure that there are continuous practical rules, plans, and solutions to achieve

success and development in the refining industry. This aspect is especially important considering

how complex the business and governance of petroleum refining can be.

To focus on the challenges facing the oil refining sector in Nigeria and foster

development, policy and decision making, and correct implementation would be a huge factor in

amending past mistakes made by the government and other stakeholders in the oil and gas

industry. This will go a long way in encouraging more private investor participation in the oil

refining sector. Regarding this, it will be imprudent to consider the development of petroleum

refining in isolation, since it has effects on other aspects of the downstream sector (PwC, 2017).

The NNPC, as the main body in this sector, plays a huge role in the enhancing refined petroleum

products for exports.

Finally, it is important to note that a more thorough investigation could be carried out by

further analysis, and possibly economic modelling to identify significant underlying and covert
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demand in the domestic, regional and likely global markets, which would be sufficient to

integrate any growth in domestic supply of refined petroleum products. After several years of

negligence, ineffectiveness and nepotism in Nigeria’s downstream sector, there is a gleaming

hope that the growing private investments and recent industry reforms will help revolutionize the

refining industry and revamp the country’s refineries into viable enterprises.
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4.0 BIBLIOGRAPHY

Akinola, Adeoye O.(2018), Globalization, Democracy and Oil Sector Reform in Nigeria,

Palgrave Macmillan.

Blair, John (1976), The Control of Oil. New York, NY: Pantheon Books.

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

Gbadebo, Olusegun Oludaru(2008), “Crude oil and The Nigerian Economic

Performance”, Oil and Gas Business: The Electronic Scientific Journal,1/2008, pp. 6-9,26.

Hary, O. C., (2006), Nigeria’s petroleum market segments: characteristics and financing

requirement in oil gas financing in Nigeria: issues, challenges, and prospect. Lagos, Nigeria;

CIBN.

Ifiok, Ibanga, (2006), The Economics of privatizing and deregulating the Nigerian

Downstream oil sector, florin.com

Kupolokun, Funsho, (2005), Liberalization: the experience of the Nigerian Petroleum

Sector, Alexanders Gas and Oil connections, Volume 10, issue No. 2, 27 Jan.

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/

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Oirere, Shem, (2016), “Reforms will shape future of Nigeria’s refining industry”,

Hydrocarbon Processing Global, accesed online via www.hydrocarrbonprocessing.com

Omonbude, E.J., (2009), “Prospects for Domestic Petroleum Refining in Nigeria: a note

of caution”, Nigeria Energy Intelligence, Nov. 23 Edition

Omonbude, E.J., (2011), Oil Refining in Nigeria: Myths and Truths, NAEE Conference,

April 2011.

OPEC, World Energy Outlook, 2010

PwC, Nigeria’s Refining Revolution, 2017, accessed online via

https://pwc.com/ng/en/assets/pdf/nigerias-refining-revolution.pdf

Robinsoll, M. S. (1964), “Nigerian Oil: Prospects and Perspectives”, Nigeria Journal of

Economics and Social Studies 219-29.

Sarah A. K. (1994), Nigeria: The Political Economy of Oil, Oxford Institute for Energy

Studies, Oxford University Press.

Schipke, Alfred, (2001), Why do Governments Divest? : The Macroeconomics of

Privatization: Berlin: New York: Springer, (p. 67).

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

Wapner, Abraham. Mar. 2017, ccsi.columbia.edu/files/2013/10/Nigeria-Case-Study-

May-2017_CCSI-Final.pdf.