…ahead of May 29
•Findings on sharing $800 million palliative or using money to fix Nigeria’s four comatose refineries
Nigeria oil resources, especially petrol, seem to have brought more pain than joy to the citizens.
While nations such as Norway, Russia, UAE, Qatar, Saudi Arabia, through strategic planning and investment of the gains made from harnessing petroleum resources, have turned around their economic fortunes, Nigeria has failed to do the same.
Managers of Nigeria’s petroleum resources have shown that they are more concerned with quick-fix solutions. The implication is that the citizens are now poorer amid abundance with 130 million out of the nation’s 200 million people already living in multidimensional poverty levels.
It is on record that Nigeria is the only member nation of the crude oil cartel, the Organization of Petroleum Exporting Countries (OPEC), with no functional refinery.
This is not to say that Nigeria does not have refineries, no. Nigeria has four refineries located in Port Harcourt (two), Warri and Kaduna with a combined capacity of 445,000 barrels per day.
Many experts say they have been mismanaged in such a way that, over time, they have become moribund.
Today, despite being the number one oil-producing country in Africa, Nigeria imports refined products. Recently, the Minister of Finance, Budget and National Planning, Mrs Zainab Ahmed, said the nation was spending about N250 billion monthly to subsidize the importation of petrol into the country simply because all the nation’s three refineries are down.
According to her, the subsidy cost per litre ranged between N350 and N400. This has grave implications for the economy as funds which otherwise would have been used to carry out capital projects to bridge the infrastructural deficit in Nigeria are spent monthly to subsidize petrol.
The case has been made for the removal of the subsidy. To give vent to this demand, Ahmed said it will be removed before the Buhari administration winds down on May 29. But the move has now been suspended as the National Economic Council (NEC) said, last week, that the decision on whether to remove the subsidy or not will now be taken by the incoming Tinubu administration.
President-elect Bola Tinubu will take over from President Muhammadu Buhari on May 29. Indeed, budgetary provisions of only N3.36 trillion have been made to cover the first six months of 2023, that is, January to June. Making a U-turn on her earlier pronouncement, Ahmed, on Thursday, the Minister said the NEC decided at its meeting that it was not a favourable time to remove the petrol subsidy.
The same day, Labour, which had been at the forefront of the fight against the removal of petrol subsidies without fixing the nation’s four refineries, signalled the crisis to come when it warned that it will have to demand N100,000 minimum wages should the subsidy be dispensed with. The current minimum wage is N30,000. Stating the position of the Nigeria Labour Congress (NLC), the Chairman in Ekiti State, Kolapo Olatunde, said Labour leaders would not accept petrol subsidy removal without optimal functionality of refineries.
According to him, if the government insists on the removal, workers would only accept an increase of the minimum wage to at least N100,000 across the country as the ripple effect of the removal would be devastating for citizens, especially workers.
Olatunde disclosed that the removal of subsidy which “could result in the selling of petrol for as high as N500 per litre” would have an immediate impact on the prices of goods and services in the country, thereby increasing poverty level and economic challenges.
He said, “Let me say here for the umpteenth time that, if the next government removes fuel subsidy, we will have an open invitation to poverty and social crisis in the nation because many citizens won’t be able to survive the negative effect.
“The multiplier effect will be devastating for the masses in the area of increase in prices of goods and services when a litre will be sold for N500 or more.
“If they should go ahead with the removal, we will have no option than to demand an immediate increase of minimum wage from what we have now to at least N100,000 for us to cope with the situation.”
On how the government could handle the situation, the NLC Chairman said, “The best way out is to go back to our refineries and upgrade them to function well or possibly build new ones, that is the best decision for us to survive this problem in our hands.”
Hard decision
Petrol subsidy removal has been a hard decision that Buhari has consistently hesitated to take after taking over from the Jonathan government which, too, tried unsuccessfully to remove the subsidy. Now, the question has been asked, how can one explain that though we have refineries where staff members are employed and salaries paid regularly, crude can’t be refined? Interestingly, this problem of product importation that has been with us since the advent of this democratic dispensation remains unsolvable.
The refineries whose only problem is turnaround maintenance (TAM) cum rehabilitation have become a political campaign tool for every successive government.
One can only understand the depth of the crisis at hand when one realizes that funds are regularly earmarked and released for rehabilitation and the so-called TAM but somehow the refineries never worked.
Removal of subsidy
With the enactment of the Petroleum Industry Act (PIA) 2022, the Nigerian government came to terms with the reality of subsidy removal. No thanks to the humongous cost implication. Compelled by the implementation of PIA and the overwhelming cost of petrol subsidies, government is proffering a solution. As part of an effort to resolve the impact of subsidy removal on ordinary Nigerians, the government wants to borrow $800 million from the World Bank to be distributed as a palliative to 10 million households.
Opposition
Some Nigerians are up in arms against the decision to remove the subsidy or borrow the $800 million palliative money.
Resistance is coming from the NLC, Trade Union Congress, TUC, Nigeria Employers Consultative Association, NECA, and the Northern Youth Council of Nigeria, NYCN, among others.
While NLC, TUC and NECA insisted that there would be no petrol subsidy removal without local refining of crude, and also kicking against the proposed $800 million palliative, NYCN threatened to embark on mass action should government remove the subsidy, stressing that the palliative money will be looted by government officials.
What alternative?
The question has been asked as to why the government is bent on offering palliative instead of rehabilitating local refineries to complement products from the Dangote Refineries which is scheduled to start operations possibly later this year.
Meanwhile an investigation carried out by Sunday Vanguard shows that the $800 million planned to be borrowed for palliative may be more than enough to fix the country’s moribund refineries in Port- Harcourt, Warri, and Kaduna.
Further investigation, in fact, put an average of $380 million or about 110.5 per cent less than the $800 million earmarked for the palliative for standard TAM or rehabilitation of the country’s capacity of 210,000-barrel-a-day refinery, 110,000-barrel-a-day refinery and 125,000-barrel-a-day refinery respectively.
More money spent so far
The Federal Executive Council (FEC) had, in August 2021, approved the sum of $1.48 billion for the rehabilitation of the Warri and Kaduna refineries.
Timpere Sylva, the immediate past Minister of State for Petroleum Resources, had said $897,678,800 will be spent to repair Warri while the Kaduna refinery will gulp $586,902,256, noting that the completion of the rehabilitation will be in three phases spread over 77 months period.
Earlier in March same year, FEC approved the sum of $1.5 billion for the rehabilitation of the Port- Harcourt refinery.
Checks by Sunday Vanguard revealed that the country now imports almost all the fuel it consumes, after exporting large volumes of crude to external refineries. Several attempts at reversing this trend have been made, with little to show for them.
Various NNPC heads have set different targets to end petrol imports. Group Managing Director Mele Kyari said this would be in 2023, while his predecessor Maikanti Baru had set his sights on 2019.
Despite not processing any crude oil, some N80.3 billion ($211 million at the official exchange rate) was used to operate the refineries for nine months in 2020, NNPC data showed.
In 2019, some N149 billion ($486.7 million at a then-official exchange rate of N306 to the dollar) was used, including to pay salaries.
A year earlier, a former NNPC Chief Operating Officer, Anibo Kraga, was quoted as saying that $396.3 million was spent from 1998 to 2008 on TAM at the four refineries. A report from the Nigeria Natural Resource Charter gave a similar figure, but for 2013 to 2017.
In March 2021, the Senate announced a probe into the $25 billion (about N9.5 trillion at current rates) the NNPC claimed it had spent on maintenance over 25 years but which they said had not reduced imports of refined petroleum products. The position of the Senate on this probe is yet to be served or remains inconclusive.
According to the 2012 report by the National Refineries Task Force, a refinery should run for at least two years before having to carry out full maintenance which usually lasted 30 to 40 days.
The NNPC said the $1.5 billion would go to rehabilitating the Port -Harcourt refinery and not TAM. Part of the deal it had with the firm doing the repairs included an exchange of crude oil for cash.
Routine maintenance is different from rehabilitation, Ezekiel Osarolube, the Managing Director of the Kaduna Refining and Petrochemical Company, said in an October 2020 conference.
The Kaduna refinery company is a subsidiary of NNPC. Maintenance involves “opening and cleaning” the system while rehabilitation involves overhauling obsolete equipment, Osalorube said.
The NNPC said it would contract a private company to manage the Port Harcourt refinery after rehabilitation.
Fact Checks
Investigation from Quora.com, an industry fact checker, shows that “the cost of turnaround maintenance (TAM) for a 210,000-barrel-a-day refinery that is about 30 years old and processes sweet crude can vary depending on several factors, such as the scope of work, the condition of the equipment, and the regulatory requirements.
“However, as a rough estimate, a TAM for a refinery of this size and age can cost anywhere from $50 million to $150 million or more. The cost can be higher if significant repairs, maintenance, or upgrades are required, or if the turnaround period is extended.
“The cost of a TAM or rehabilitation for a 125,000-barrel-a-day refinery that is over 40 years old and processes sweet crude can vary depending on several factors, such as the scope of work, the condition of the equipment, and the regulatory requirements.
“However, as a rough estimate, a TAM or rehabilitation for a refinery of this size and age can cost anywhere from $20 million to $80 million or more. The cost can be higher if significant repairs, maintenance, or upgrades are required, or if the turnaround period is extended.
“It is worth noting that the cost of TAM or rehabilitation for a smaller refinery like this may be lower than that of a larger refinery due to the smaller scale of equipment and facilities involved.
“The cost of a TAM or rehabilitation for a 110,000-barrel-a-day refinery that is over 30 years old and processes sweet crude can vary depending on several factors, such as the scope of work, the condition of the equipment, and the regulatory requirements.
“As a rough estimate, a TAM or rehabilitation for a refinery of this size and age can cost anywhere from $15 million to $60 million or more. The cost can be higher if significant repairs, maintenance, or upgrades are required, or if the turnaround period is extended.
“It is worth noting that the cost of TAM or rehabilitation for a smaller refinery like this may be lower than that of a larger refinery due to the smaller scale of equipment and facilities involved.”
Comparisons
Other findings revealed that in 2019, ExxonMobil announced a $1 billion investment to upgrade and expand its 502,500 barrels per day (bpd) Baton Rouge refinery in Louisiana, including a TAM that lasted approximately 65 days.
Also, in 2019, Total’s Port Arthur refinery in Texas with a refining capacity of approximately 225,500 barrels per day (bpd) underwent a TAM that lasted approximately 75 days. However, it cost the company $1.7 billion for the maintenance and modernization of its refining and petrochemical assets in the United States. Unlike Nigeria’s refineries TAM, Total’s TAM includes the Port Arthur refinery. The TAM was part of this larger investment plan.
In 2018, India’s Bharat Petroleum Corporation Limited (BPCL) carried out a TAM on its Mumbai refinery, which has a capacity of 120,000 barrels per day, at a cost of approximately $100 million.
Experts react
Energy experts who spoke to Sunday Vanguard frowned at the government’s $800m palliative plan, calling it reckless and politically motivated.
Executive Director of Emmanuel Egbogal Foundation, Professor Wumi Iledare, said, “Subsidy is not anti-economics but the application of the tool has become an enigma in Nigeria’s economy perhaps because of lack of transparency and accountability. However, borrowing morning for transfer payment to avert social unrest or protest against PMS subsidy removal is not sustainable and it is just a postponement of the evil day.
“The option for the government today is a partial price deregulation phased over a period by regulation with price modulation mechanism.
“Price discrimination is also a possibility which has theoretical underpinnings. The $800 million for 10 million people because of poverty may seem politically laudable. It’s not just economically feasible in the long term to minimise the social welfare losses that come with subsidy!
“Increasing wages is not recommended under prevailing inflationary economy. It will be a double shock to a sluggish economy”.
Dr. Godwin Orovwiroro, an economist, on his part, faulted the government’s planned palliative, adding, “The $800 million loan is intended to cushion the impact of subsidy removal particularly the effect on the economically disadvantaged Nigerians. Subsidy removal has been on the front burner of economic and political policies and it appears to be the only issue being flaunted by politicians as our economic ailment”.
Godwin, who is the Managing Director, Winman Nigeria Limited, explained, “Some people believe that its removal will cure our social malaise. These are narrow-minded approaches as no empirical evidence exists to show that the injection of the loan will solve any problem.
“Let us examine the basis of fuel subsidy. The government’s position is that the cost of importation, including landing charges, is more than the selling pump price. The differential being borne by the government represents the subsidy since the dispensing price is fixed and not subject to market forces.
“What they fail to tell us is that as long as the Naira keeps falling against the dollar, the subsidy malaise will never be cured. The exchange rate has become the amplifier of subsidy and the equation will always tilt to the negative until we embark on production for export to stabilize the exchange rate.”
He argued that until the government addresses fiscal and production challenges facing the economy, “the policy only amounts to window dressing”. The economist went on, “How do you trust a government that is only interested in implementing window-dressing measures? For instance, who are the 10 million beneficiaries and where are they located? What parameters were used to identify them? Are you disbursing the money in cash or through banks? Will it be a loan or a grant? There is nothing to indicate that this policy is well conceived to solve any social problem.
“This government is in a transition phase. Advisedly, taking a loan at its twilight when a new administration is to take over the reins of government is suspicious. The policy should be paused and passed on to the incoming government for scrutiny and proper planning.”
Also speaking, Chief Executive Officer, Centre for the Promotion of Private Enterprise, CPPE, Dr. Muda Yusuf, said, “It is imperative to have palliatives which should be segmented into immediate, short term and medium term deliverables.
“Immediate and short-term options include wage review in public service, electronic cash transfers to the vulnerable groups in our society, designation of few retail outlets [maybe 10 per cent of the outlets as subsidy stations) while all others will sell at deregulated prices for a transition period of one year; the introduction of subsidized public transportation schemes across the country and a reduction in import duties on intermediate products for food-related production to moderate food inflation.
“The autogas program should be accelerated to facilitate the quick conversion of vehicles to use of gas rather than diesel or petrol.
In the medium to long-term, there should be accelerated efforts to upscale domestic refining capacity, driven by private investments; accelerated investments in rail transportation by the government to ease logistics of fuel distribution across the country as well as domestic freight costs.”
VANGUARD
