Petroleum Sector: What Buhari must know about subsidy, refining and the transparency question

INTRODUCTION

 Thomas Jefferson, an American founding father, the principal author of the Declaration of Independence in 1776 and the third President of the United States, in a famous quote said that ‘’ Honesty is the first chapter in the book of wisdom.” It has been said that the currency of leadership is transparency.

We have found ourselves again in the conundrum of subsidy because the sector has been hooded in clandestine operations. For a long time now we have been jaded with the same old storyline of petroleum products importation rather than refining locally.
With more questions, resolutions can only be found in the realm of self-examination and ethics which apparently, may be lacking in most privileged Nigerians in positions of authority. For venal reasons they develop corrupt tendencies which make them inefficient on the job. Corruption kills productivity in any system.
Our petroleum resources managers for egotistic reasons have not been courageous enough to tell our people that there are as many as 6000 by products and derivatives when we refine a barrel of crude oil (A list of 144 of that is attached here (Courtesy of Ranken Energy). This information is provided to guide and encourage political leaders in channelling scarce resources to address our country’s refining problems
.
USES OF PETROLEUM
One would want to enumerate the uses of petroleum when we refine a barrel of crude oil. Crude oil is made up of a mixture of hydrocarbon chemicals which are separated by distillation in refineries and when further treated by other chemical processes, can be used for a variety of purposes.
When heated at varying degrees from 90-1000 degrees (F) the following products can be recovered: light distillates as Liquefied petroleum gas (LPG – propane and butane), gasoline (premium motor spirit), kerosene, jet fuel and other aircraft fuel. Middle distillates include automotive and rail road diesel fuels, residential heating fuel, other light fuels. The heavy distillates are heavy fuel oils, bunker fuel oil and other residual fuel oils. Others are naphtha’s, solvents, elemental sulphur (sometimes sulphuric acid), petrochemical feedstock, asphalt and tar, petroleum coke, waxes and greases, transformer and cable oils and carbon black.

WHY WE NEED REFINERIES
Refineries are required for strategic reasons including economic, political and security. We gain technologically through skill acquisition for our people that are employed in the expanded industry. We want to get industrialised to increase our gross domestic product (nominal or purchasing power parity) base beyond what it is now and earn more revenue for government. Highly industrialised economies depend heavily on petroleum as fuel and chemical feedstock. Over 90 percent of transportation in the United States relies on petroleum.

Agriculture is a major beneficiary of petroleum. Nearly all pesticides and many fertilizers are made from petroleum. Agricultural productivity is increased largely due to the use of chemical pesticides, fertilizers and increased mechanization. The increase in food production in the last 70 years of green revolution, has allowed world population to grow considerably. Pesticides rely upon petroleum as critical ingredient and fertilizers require natural gas. Farm machinery also requires petroleum.
Rising oil prices cause rising food prices in these ways: increased equipment fuel costs drive higher prices; transportation costs increase retail prices and higher petroleum products prices cause farmers to switch from producing food to other activities. Fewer farmers producing food will cause the price of food to rise.

It is for these reasons that the following net importers of petroleum have refineries in this order: China (51 refining 12.6 mbpd) Japan (29 refining 4.1 mbpd), India (21 refining 4.3 mbpd), Germany (15 refining 2.1 mbpd), France (13 refining 1.5 mbpd), Italy (16 refining 2.1 mbpd) and South Korea (6 refining 2.9 mbpd). The United States only imports crude to augment the shortfall for her 139 functional refineries refining 17.8 mbpd to keep their economy going. The US does not import refined products. They derive the full benefits of petroleum by refining their products locally.
Nigeria is among the top fifteen world producers of petroleum. Incidentally, Nigeria is the only one that exports all her crude and imports virtually all her refined products and their derivatives. This is the reason  we place our budget bench mark on the sale of crude in the international market. We sell a barrel of crude for less than $60 and buy all the by-products and derivatives for as much as $3000.
It is on record that India as a net importer of petroleum has the world’s largest refinery (Jamnagar Refinery Gujurat) with about 1.24 million barrels per day capacity. China with a population of 1.3 billion people meets her domestic demand and also exports to other regions.
The Organisation of Petroleum Exporting Countries (OPEC) has refineries in this order: Saudi Arabia (10 refining 2.5 million barrels per day), Iran (9 refining 1.7 mbpd), UAE (4 refining 0.7 mbpd), Kuwait (3 refining 0.91 mbpd), Venezuela (12 refining 1.8 mbpd), Iraq (11 refining 0.83 mbpd), Algeria (5 refining 0.65 mbpd), Angola (2 refining 0.04mbpd), Libya (5 refining 0.38 mbpd), Qatar (3 refining 0.14 mbpd), and Ecuador (2 refining 0.19mbpd). All their refineries are working and meet their requirements and for export.

This is the Nigerian case. Nigeria has four refineries, two in Port Harcourt (1st P/H 60,000 bpd and 2nd P/H 150,000bpd), and one in Warri (125,000 bpd) and one in Kaduna (110,000 bpd) with a combined refining capacity of 445,000 barrels per day. The oldest in Port Harcourt was built in 1965 and the newest still in Port Harcourt was built in 1989. Warri and Kaduna came on stream in 1978 and 1980 respectively, they have for almost two decades been down due to inadequate maintenance. It has been gory tales of turn around maintenance (TAM) with millions of dollars wasted at regular intervals in our harvests of misfortune.

Today, we are talking about local importers or marketers holding us to ransom as to how and when we get products supply. Tomorrow we may be talking about international petroleum products suppliers refusing us supplies. One can imagine the confusion in our national life and psyche. We must act now to prevent this because it can be a security risk!

Let us remind our country men and women that until recently, we were the third supplier of crude to the United States (40 percent of our crude). By July 2014, the US stopped the importation of Nigeria’s crude. Recently too, America refused selling arms to Nigeria to fight the insurgents in Nigeria and made sure other nations do not sell arms to us. One would like to refresh our memories that the first oil shock in the world in 1973 was a result of the oil embargo on some western countries that supported Israel in the Arab-Israeli war.

PwC INVESTIGATIVE FORENSIC AUDIT ON NNPC

In the just released Nigerian National Petroleum Corporation (NNPC) Investigative Forensic Audit into the allegations of Unremitted Funds into the Federation Accounts by the NNPC between January 2012 and July 2013, the issues that occasioned the Pricewaterhouse Cooper (PwC) forensic audit and comments on NNPC’s operations bothered on transparency and accountability in the ways our commonwealth have been managed over the years. The NNPC had been embroiled in an alleged controversy of not remitting the sum of $20billion into the Federation account.
Let us examine the premium motor spirit (PMS) and dual purpose kerosene (DPK) Subsidy claims in the language of the PwC. In the report, petroleum products subsidies in Nigeria are a form of government intervention designed to alleviate the effect of possible high retail prices and finished petroleum products (PMS and DPK) produced in Nigerian refineries or imported from other countries.
Unlike other marketers that use cash or source for funds from financial institutions to import finished products (PMS and DPK) into Nigeria, NNPC uses crude oil as its main medium of exchange for the finished petroleum products from other countries. The exchange of the crude oil for the finished petroleum products is done under any of the following arrangements: Offshore Processing Arrangements (OPAs) with foreign refineries and swaps of crude oil for finished petroleum products (PMS and DPK).

At the time of the arrival of the finished petroleum products (PMS and DPK), the sum of the international market price of the finished petroleum products (Platts Prices) and the additional costs involved in moving the products into the shore tanks of NNPC or the dealers, is referred to as the landing cost. The landing cost is usually higher than the price that the Federal Government of Nigeria has required that the finished petroleum products be sold to the retailers/dealers at the Depot (Ex-Depot price).

The difference between the landing cost and the Ex-Depot Price is the subsidy due. Apparently, for NNPC subsidies are therefore inherent in the process of converting domestic crude to PMS and DPK which must be sold at the prices regulated by the Federal Government.
At the time of importation of the finished petroleum products into Nigeria, PPPRA is required to verify the quantity delivered in the shore tanks, examine the import documents required for petroleum products importation per the Petroleum Support Fund (PSF) guidelines, and thereafter issue a Payment Advice to the NNPC on the amount deductible as subsidy.
SUBSIDY, TRANSPARENCY AND NNPC OPERATIONS
From the scenario painted in the foregoing excerpt of the PwC report, we have been paying for price differential for imported petroleum products which ordinarily has nothing to do with what is universally known as subsidy in economics.

Basic Economics tells us that subsidy is economic benefit (such as tax allowance or duty rebate) or financial aid (such as cash grant or soft loan) provided by government to support a desirable activity (such as exports), to keep prices of staples low, maintain the income of producers of critical or strategic products, maintain employment levels or induce investment to reduce unemployment. Simply put, subsidy is the money paid by a government or an organization to reduce the cost of services of producing goods so that their prices can be kept low. The basic characteristic of all subsidies is to reduce the market price of an item below the cost of production. It is also called subvention.

We have gone through this circus journey of petroleum products importation for several years now because of the pecuniary barrel of crude gains which the managers of our petroleum reap from our endowed natural resource. We have wasted trillions of Naira in spurious “subsidy” claims. In the claims of N156billion paid on April 30, 2015, foreign exchange and interest differentials were included.

One question is where is the dual purpose kerosene (DPK) meant for the poor that had been consistently ‘subsidised’?
Until the Federal Government decided to appoint the PwC for a forensic audit on the NNPC for the period January 2012 to July 2013, there have never been annual audit reports of the NNPC. Other National Oil Companies (NOCs) publish their annual reports stating their revenue and expenditure profiles. That is how an NOC like the Saudi Aramco is assessed as the largest oil company in the world with vast overseas refining investments.

THE WAY FORWARD

Repositioning the NNPC:

Now what is the way out of the woods for the incoming government of General Muhammadu Buhari? The President-elect, on assumption of office, must use an ‘iron broom’ to sweep the petroleum sector clean (it does not preclude reward system for honest people ). The sector must be repositioned as a business venture that would be accountable to the government and the Nigerian people. Fortunately, General Buhari is familiar with the terrain where he was at the helm as Petroleum Minister to construct the Warri and Kaduna Refineries.
Crude Oil for local refining:
When we refine a barrel of crude oil of 42 gallons or 159 litres, we get products as follows: gasoline or PMS (19.4 gallons or about 73 litres which is about 47 percent), Kerosene or Jet fuel (10 percent), diesel and heating oil (23 percent), propane 4 percent, asphalt 3 percent, other products (petrochemical feedstock derived from manufacturing of chemicals Synthetic rubber and plastics) 18 percent. It gives 105 percent because there is always 5 percent refining gains.
If our four refineries were functioning, the 445,000 barrels would give us 209,150 barrels which translates to 33,000,000 litres of gasoline or PMS. One knows that we do not consume more than 35 million litres per day. If more than that they should tell us what quantity. The NNPC should explain how the 450,000 barrels per day allocation meant for the four refineries (actual refining capacity is 445,000, a difference of 5,000 barrels per day) that hardly function are utilized. They must also explain the “subsidy” regime if in the interim, it should continue until the four refineries are rehabilitated.

Transparency should be the rule of the game. Sinopec’s number two man has just been swept up in what seems to be a relentless and widening array of corruption investigations at state-owned enterprises ordered by President Xi Jinping. Sinopec is the largest Chinese oil refiner.
Joint Venture Agreements:

All Joint Venture (JV) Agreements with our oil majors (International Oil Companies) should be studied for possible review. IOCs should be made to go into joint ventures not only in the upstream as it is at present, but also in the mid and downstream as Saudi Arabia, Qatar and other OPEC countries do. We should go the way of Qatar Petroleum which now has an Exploration and Production Sharing Agreements (EPSA) and Development and Production Sharing Agreements (DPSA) with the following major IOCs: ExxonMobil, Anadarko, Mearsk Oil, Talisman Energy, Wintershall Consortium and Merubeni to make it self-sufficient and a giant in the Middle East. JVs make companies like ExxonMobil of USA to refine 4.6million barrels crude capacity daily. Royal Dutch/Shell refines 4.5million barrels per day. Others are Sinopec 3.9million, BP 3.3million, Conoco Phillips 2.8million, Chevron 2.8million, Total 2.5million. These would be possible if we have proper fiscal, legal and regulatory frameworks.

Overseas Refining Investments
We should make attempts at investing overseas through joint and equity ventures in refineries and other business concerns. Nigeria attempted having a sovereign wealth fund and excess crude account that would have been invested in these facilities but for our profligacy, we would have achieved a lot in this regard. Saudi Arabia has considerable investments in the United States, China, South Korea, Japan and the Philippines. Saudi Aramco and partner Royal Dutch/Shell own three Motiva joint Venture refineries in Louisiana and Texas. The three facilities currently have a total capacity of 740,000 barrels per day. Saudi Aramco through its subsidiary owns 50 percent of Motiva. Qatar has subsidiaries and investments in 25 countries including the UK, US, China, India, Philippines, Gabon, Cayman Island, Bahrain, Kuwait, Saudi Arabia, Singapore, Italy, Hungary, UAE, Mauritania, Vietnam, Egypt, Libya and Congo.

Nigeria in OPEC:

Nigeria is now among the declining countries in OPEC. What this means is that our resource exhaustion has sent production of conventional crude into reverse. If we must continue to meet our OPEC quota and also have enough for our refining requirements, we must increase our current oil reserve which has depleted to 35 billion barrels. . If nothing is done to reverse the trend, we may have no option than to do what other countries like Gabon and Indonesia have done by pulling out of OPEC in 2003 and 2009 respectively, when their consumption overtook production.
Oil Depletion and IOCs Divestments:
Most IOCs are divesting from the onshore in the Niger Delta, concentrating on offshore exploration and production (E&P). IOCs claim they are divesting because of diminishing output of marginal fields, insecurity and operational difficulties in terms of sabotage to infrastructure and oil theft. When IOCs start divesting as they are doing now, it is a pointer that the Niger Delta is maturing. The DPR has hinted that we have reached the plateau of production in the Niger Delta; where oil reserves are dropping and output is dropping too.

Exploration and Production in the Chad Basin and others:

Efforts must now be intensified to commence the suspended exploration activities in the Lake Chad basin which is due to Boko Haram insurgency. 24 oil wells have been discovered though production is yet to commence. Lake Chad basin is of very economic and geopolitical strategic importance to us as some countries that caused the problem that made Nigeria to cede Bakassi Peninsula to the Cameroun are again lurking in the wings. We need to establish proper boundaries with other countries we share the Basin, and also a possible neutral operational zone under the supervision of the Lake Chad Basin Commission. More effort should be put to increase the number of oil wells discovered in the states of Anambra (One well) and Edo (One well) that production is yet to commence.

Maintenance of Refineries:
If there had been transparency in the dealings over the years, we would have had a road map on how to allocate funds for genuine turn around maintenance (TAM). Refinery business is a hi-tech one that requires constant and regular maintenance especially corrosion due to sulphur. Gazprom Neft has just completed installation of major equipment related to the reconstruction and modernization of the primary crude oil distillation unit of the Omsk refinery in Western Siberia, Russia. The Digboi Refinery in Assam, India reputed to be the oldest in the world, built in 1901, and has been upgrading units of the refinery. The motor spirit quality (MSQ) upgrading project was commissioned in 2010. The new terminal which has a state of the art facility in the refinery was commissioned in 2011.

Construction of more Refineries:

Construction of more refineries may also be an option. Going into partnerships with IOCs for such projects may be encouraged. In this regard, we may also go for new modular refineries to be sited close to petroleum feedstock. Modular refineries are process equipment manufactured in controlled conditions, fully assembled and tested prior to overseas shipment, and installed at client’s site in much less time than traditional construction requires.

CONCLUSION

If there had been transparency in our dealings over the years, we would have had a road map on how to allocate funds for genuine TAM. The incoming government should appropriate funds for modernising and upgrading our four refineries to improve processing capacities, oil conversion rates, energy efficiency, production quality and environmental quality. One believes that PMS may cost less than N40 a litre when we refine locally, if we take adequate measures to curb corruption in the petroleum sector.