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Modular refineries will address perennial shortage of petroleum products – Igwe

By on September 8, 2014

Prof Godwin Igwe is the Director, Centre for Gas, Refining and Petrochemicals, Institute of Petroleum Studies, University of Port Harcourt. In this interview Chika Amanze-Nwachuku, he posited that setting up modular refineries at strategic demand locations in Nigeria will put an end to persistent shortage of petroleum products in Nigeria. Excerpts:

In the recent time you have been very passionate about modular refining system, what is fuelling this passion?

Leaving Nigeria in 1971 and returning in 2011 to find our citizens queuing endlessly at petrol stations for petroleum products, specifically premium motor spirit (PMS) and all other petroleum products, made me sick. It’s painful for me to see this in an oil producing country.  So I thought, why wait for things to happen instead of making things to happen?  Yes, a simple modular refinery could solve this problem of fuel scarcity, hereby making life better for our people.

Do you think modular refining is the answer to Nigeria’s products demand challenges and why?

A focused, educated, local experts or think tank would consider the demand and supply needs of our citizens and proffer solution.  The first solution to filling the gap should not be to import, but to locally satisfy this demand.  Long term thoughtful strategy is very important.  Personal primitive acquisition of wealth is not the solution.  Therefore, setting up modular refineries at strategic demand locations would be a stop-gap pressure reducing measure to the product demand challenges.  Fuel shortages will be greatly reduced if the companies/investors issued with licenses were committed and not use the licenses as a launch pad to seek contract for crude oil export.  As they say, build it and they will come.  We are yet to see the result of the proposed six refineries to be constructed in modular forms within 30 months, at a cost of $4.5 billion, each refinery processing 30,000 bpd, with expected total output of about 30 million litres of fuel every day.  So, after over 20 months after the said MoU was signed, there is nothing on the ground to indicate that the project has actually commenced.  According to Dangote, “with global demand for crude oil projected to keep dropping, the way forward is for us to start exporting refined products rather than crude.  We will get far better money value that way… All I will do is buy crude oil at the market price, refine and sell to marketers at the market price.  If government continues to subsidise, marketers can buy products from us and then collect the subsidy from government.” Modular refining is flexible and cost-effective supply option for crude producers in remote regions.  This is particularly true where there is a need to adapt rapidly to meet local demand.  Relatively low capital cost, speed and ease of construction are key advantages of a modular refinery.

How economic are the modular refineries compared to conventional refining system of big fluid catalytic cracking units (FCCUs)  as we have in the nation’s four refineries?

Economic of scale is important here because you do not want to compare apples and oranges.  The four big refineries have different product slates and processing units, that’s why they are conventional refineries.  A modular unit specifically targets specific products, e.g., gasoline, kerosene, diesel, etc.  Adding a catalytic cracker unit will enable higher quality processing and profit margin.  I think the main economic driver is the cost of buying the crude.  It will become profitable if the entrepreneur could crack the bottoms to make more useful products.  That’s the only way it could become profitable, in the long run.  The addition of a FCCU or a hydrocracker significantly increases the yield of higher-valued products like gasoline and diesel oil from a barrel of crude, allowing a refinery to process cheaper, heavier crude while producing an equivalent or greater volume of high-valued products.  In our own case with lighter, sweeter crudes, we might need only primary distillation capacity, which means less capital expenditure.  Adding a catalytic reformer unit (CRU) produces high octane gasoline from naphtha.

If it’s so economic, why is the federal government still shying away from adopting this system?

Remember, government is not there to make profits, but to regulate and create the environment for entrepreneurs to thrive.  Setting up a modular refinery will enable employment opportunities to be created for the citizens.  When you have a job, you could train your children; you could have banks, hospitals, grocery stores, carpenters, accountants, lawyers, all kinds of occupations to support a town, all through the manufacturing of a product that provides employment.  We need to convince and persuade the government of the economic benefits from modular manufacturing processes.  The government is shy from adopting this system because of the fear of subsidising for crude oil, just like the current NNPC petrol stations.   If the modular refinery entrepreneurs could justify economically, net present value and return on original investment, the government will sell crude to them at prevailing market value.  For modular refineries, our marginal field operators are in a better position to operate since they produce the crude to be refined without going through all the licensing processes.

Could you cite an example of an oil producing country like Nigeria that has adopted the modular system for either short term or long-term measure to meet its domestic petroleum products demand?

Most troubled oil producing countries have modular refineries. In the past 20 years, only three Greenfield refineries have been constructed in Africa. These were built in Adrar (Algeria) and Khartoum (Sudan) with China National Petroleum Company (CNPC) partnering with the governments, with capacities of 13,000 barrels per day (bpd) and 100,000 bpd respectively.
The third one was built in Alexandria (Egypt) by Egypt General Petroleum Corporation, Egypt’s national oil company (NOC) with a capacity of 100,000 bpd. Planned new builds were constructed by Petrochina at Ndjamena (Chad) and Zinder (Niger) with same 20,000 bpd capacity. The third is being constructed by Sonangol, Angola’s NOC at Lobito (Angola) with a capacity of 200,000 bpd. From the foregoing, refining in Africa is led by NOC’s, and new investments are dominated by the Chinese National Petroleum Companies.

Can the modular system rescue some indigenous companies that were licensed many years ago to construct private refineries?

If you consider the petrol filling stations currently in Nigeria, you will observe that ownership is by well-connected politicians and their friends.  Similarly, those indigenous companies that were licensed many years ago to construct private refineries are waiting for subsidies from government. If the indigenous companies are indeed serious, they will refine by buying crude oil at prevailing market price.  Economic viability comes from cracking to add gasoline to the mix.  Oil and gas value chain touches consumers through thousands of products such as fuels (gasoline, diesel, jet fuel, heating oil and non-fuels (asphalt, lubricants, synthetic rubber, plastics, fertilizers, antifreeze, pesticides, pharmaceuticals)). Oil contributes over 80 per cent of Nigeria’s revenue stream but only about 13per cent of GDP due to its limited linkages to the domestic sector of the economy.  Nigeria currently exports about 2.2 mmbbl/d mostly crude oil.  However, nearly 80 per cent of the fuels demand in Nigeria is imported (about 30 million litres/day of PMS), fuelling a significant part of our current account deficit.  Diversifying refined products from fuels only PMS, automotive gas oil (AGO), Kerosene, low pour fuel oil (LPFO) to value added feedstock for domestic manufacturing is vital to link the oil sector to the domestic economy and increase the contribution of the oil industry to GDP growth. Many natural resource rich countries are diversifying and transforming their economies using the hydrocarbon value chain for wealth creation. In Nigeria, diversification should include diversifying the energy mix (from oil to gas) and fuels to non-fuels.  Diversification will result in wealth creation through employment generation, import substitution and GDP growth.  The keys to successful transformation lies in four strategies namely: a) Create national focal point for developing industries beyond fuels; b) Clear fiscal system for midstream oil with fiscal rules of general application; c) Right incentives through price deregulation; d) Industrial parks with pre-investment in infrastructure by the State.  An integrated approach to implementing the identified strategies is vital for the expected wealth creation to be realised.

Funding has always been a major challenge in either turn around maintenance of existing refineries or constructing Greenfield ones, how easy will it be for investors to get financial support for modular refining?

Turn-around maintenance is a standard operating procedure for refineries all over the world.  It is only in Nigeria that it becomes an issue because of poor technical leadership of the industry.  We need a dedicated technology group to take ownership of our processes such that any maintenance problem in Port Harcourt, Warri or Kaduna is solved immediately just like Boeing Corporation sending their crack technicians to anywhere in the world where their airplane has a mechanical problem.  If an entrepreneur will demonstrate to an investor a clear financial economic business plan showing profitability and return on investment, including cost of crude oil, investors will definitely support.  This also requires the passage of PIB to show seriousness with investments in the downstream industries.  Have you ever seen a patriotic country procrastinating on a law that will provide upward mobility for their country? Yes, Nigeria. Electing people who are knowledgeable and educated matter.

To understand turnaround maintenance, remember that machines and other service facilities are subject to deterioration due to their use and exposure to process  and environmental conditions. This deterioration requires to be duly taken care of by various maintenance interventions, techniques and at certain pre-determined intervals so that required use of facilities can be continued and service life extended until the point where maintenance costs become prohibitive and replacement action becomes inevitable. Our own car periodic service maintenance is an example.

Where an operating plant such as the refinery, must be shut down until work is completed and then restarted, thus ‘turning around’ the unit or plant is called Turnaround Maintenance.
The American Petroleum Institute (API) defines turnaround as a periodic shutdown (total or partial) of a refinery process unit or plant to perform maintenance, overhaul and repair operations and to inspect, test and replace process materials and equipment.
Turnaround maintenance activity is required to undertake work that cannot be accomplished while the plant is operating. The Turnaround period is that time a unit is off stream, i.e. between product cut-out and unit being brought back on-stream. Unplanned outage of equipment in refineries, affect the continuity of operations. Overhaul of such equipment is thus carried out during planned Turnaround Maintenance of the process and utilities units. Unscheduled shutdowns result from equipment failure or process upsets. Executing TAM as and when due will eliminate or minimise unscheduled shutdowns. Turnarounds are a critical part of refinery business and are the single most costly part of a plant or process plants maintenance budget.
Some activities during turnaround maintenance (TAM) include but are not limited to the following: Internal inspection of static process equipment / piping which cannot be done during operations; Corrective work resulting from such internal inspections: e.g. replacement of damaged refractory materials, distillation trays and other column internal; Cleaning, maintenance, repair and complete overhaul of rotating/reciprocating, electrical and instrumentation equipment; Complete overhaul of all pressure relieving devices; Cleaning and complete overhaul of all regulating and controlling instruments whose outage can be taken only during a turnaround of the plant; Cleaning and overhaul of electrical switchgears, electric motors etc; Carry out modification jobs to take care of maintenance and operational needs, upgrade technology through use of modern equipment, and make the plant more efficient through maintenance and operating costs and increasing throughput; and Carryout items of work that improve safety and environmental aspects of the plant.
It therefore, becomes essential that goals of turnaround work be as follows: All work targeted to be done during turnaround be completed within pre-determined period; The total expenditure towards turnaround activities be within the approved budget; The turnaround work be carried out without any accident; and the quality of turnaround work be such that all equipment while in operation function in top class manner till the next Turnaround.

The above can only be achieved if: Work to be executed during turnaround are well defined; Planning of work to be done through own workforce, vendor specialists, reputable contractors be carried out early enough so that everyone involved has adequate time to study the same efficiently and be fully ready to execute; Materials requirement is thoughtfully carried out and materials procurement done in such a way that all materials are available before the Turnaround (at least 75 per cent before oil-out.

Some key facts and guarantee for a sustainable turnaround maintenance include: Allows for necessary maintenance or upkeep of operating plant and are needed to maintain safe and efficient operations; Best practice is that Turnarounds are scheduled to take place after every two years operation; In assessing whether to delay a turnaround, a refiner has to include the opportunity cost of a possible unplanned shutdown resulting from the decision to delay the turnaround; Depending on the process unit and the amount of maintenance needed, the length of the turnaround can vary from four to six weeks; A turnaround is not necessary to enable a refinery to shift from gasoline mode to distillate mode. However, if a turnaround is planned, it is possible to use the opportunity to effect planned changes such as catalyst upgrades that could improve the distillate yields. Funding modular refineries will be easier compared with conventional refineries.  In general, the less often units are subjected to unplanned shutdowns and start up, the better (safer) it is, since refinery incidents are more likely to occur during these occasions.  Guarantee for sustainable turnaround maintenance include: Develop a specific turnaround implementation plan in stages; Planning – the cycle can be from one major turnaround to the start of the next turnaround; Resource organisation- procurement of long lead delivery items / labour;  Workscope Management – turnaround are complex and demanding (full job lists and inspection); Preparation of units – good purging and steaming out, spading/ blinding/ scaffolds; Specialised equipment / resources mobilisation- such as very large cranes, catalyst handling equipment and bringing in of vendor specialists to perform/oversee specific maintenance works; The turnaround work period 4-6 weeks;  The final report covering equipment, contractor performance, costs and lessons learnt shared with all stakeholders; Establish committees early with well-understood decision making – a committed, qualified and integrated team; Appoint or select a contractor early and involve them in the planning process;  Begin the processes for the next turnaround immediately following completion of the current one. Also,  benchmark best practice plants.

On security issues, upsurge in the incidents of crude oil theft and other criminal activities in the sector are greatly affecting the future of the Industry. Theft of crude oil pumped to the refineries is estimated at an average of twenty 20 percent. The loss of revenue is significant to the stakeholders. The attendant pollution and environmental degradation from this criminal theft is huge. Also, the integrity of the pipelines is comprised. Unfortunately, several enemies of the Nation’s progress are involved in this nefarious activity. To do nothing means to mortgage our future and that of our children yet unborn and continue to subject our beloved nation Nigeria to continue importation of petroleum products at huge cost and drain to our scarce foreign exchange. We appeal to the communities in the affected areas to rise up against these miscreants. To do nothing is not an option. It is our collective wealth and honour that is being besieged.

Sustainability of refinery operations can only be achieved through efficient management of shutdowns and regular Turnaround maintenance, achieved through in-country capacity building and development.

In view of the ongoing reforms in the petroleum industry, why are downstream operators/investors not thinking in the direction of modular refineries?

If you can fly, why walk? If you can import or not import and yet collect or earn revenues, why bother to construct or produce anything?

In the recent time, the federal government has been criticised for clamping down on illegal refineries in the Niger Delta. Critics argue that government should instead have harnessed the raw skills and transformed them into modular systems. Do you think that this is logical?

Yes, I think it is logical. To reduce unemployment, we have to turn the ‘illegal refineries’ into “legal refineries”.  To make this to happen, we need to design a strategy and policy to set up an energy bank to provide financing, taxable at low interest rate.  My colleagues argue investors should buy crude at competitive market price.  I will argue we sell crude oil to them at slightly subsidised price.  If you legalise, then you stop bunkering because it becomes unprofitable for their sponsors.  They will become proud “owners” of a business, and kerosene, petrol (gasoline), diesel, will be everywhere, satisfying the demand in the country.  Remember the British and our illicit gin?  Yes, they turned round and sold us Gordon Dry Gin. I will persuasively argue that offering them opportunity for ownership, to set up their own businesses, will be a disincentive to break pipelines, hence, becoming useful citizens.  If you think about it, who is the real loser in all these?, we, the people.  Let our successful businessmen and politicians set up industries in their home towns. Providing jobs for your fellow citizens, in your village, is a legacy to remember when we are all gone.  Remember the funeral song….”only remembered by what we have done”?

The “illegals” already have the necessary raw production skills.  We just need to provide guidance and training. The knowledge gap in distillation processes will be provided on appropriate standards, codes, specifications, and catalysis.  This will in turn stop environmental pollution and degradation because all the refining fractions currently poured in rivers (depriving us of safe and reliable drinking water), will be fully utilised in some other process plants.  Stopping pollution is very important, because having money is no guarantee of good health. By providing jobs and reducing unemployment, the Federal Government and 36 states will then have enough money to share.
Path forward, we need to stay technically focused.  We need to develop value systems that see service above self-interest.  The world is changing, where previously, hard men, now know when to be soft with their people.  There is potential for growth, and we should not under-rate human ingenuity and innovation.  So, the issue here is clear:  a) Prioritise and test the idea of modular refineries; b) set up a Refining and Petrochemicals Authority to have a focal point, and c) let illegal become legal.  It is sound reasoning.  It is practicable.  It is demonstratively a true paradigm shift for the good.

Finally, how soon do you think Nigeria can get out of importing refined products to exporting them like crude, as expected of a big producer?

Have you heard the saying: “If you cannot beat them, join them?”  Refining is a mature technology.  It is governed by standards and specifications.  Most of the Middle-eastern refineries are in partnerships with IOCs.  With these partnerships, you will not have shortages in spare parts, manpower and capacity building.  It is a question of live and let live.  What you do not have, you make up.  It appears we are always sleeping, not thinking long term.  We are always waiting for things to happen, instead of making things to happen.  There will be no development if we do not produce, manufacture, make things, design things, right here in Nigeria. So, “as more countries are discovering oil, Nigeria’s exports will begin to drop at some stage. In addition, with climate change, development of alternative fuels, that is bad news for crude oil producers. Our case is even worsening because of frequent production outages and unprecedented oil theft, despite the billion-naira contracts awarded to militants to safeguard the pipelines. We are taking loans every day and our debts are piling up. The world’s biggest consumer of crude, the U.S., has now found a formidable alternative in shale oil.  So, the demand for our oil has fallen and will only continue to fall. The new reality is that crude oil is no longer a monopoly.  As demand falls, the price will fall. As the price falls, production will fall. Many oil fields will become unprofitable to operate. They are likely to close down. In this event, the naira would crash. A fall in foreign exchange inflow will hurt us since we are import-dependent. If we deplete our external reserves to protect the naira, it would impact negatively on the general prices of goods and services, hence, less money to build infrastructure, less money for government overheads, leading to retrenchment and salary cuts. Money to fund fuel subsidy and petrol price will increase and as petrol price goes up, mass unrest will ensue as cost of living rises”.

Some experts lay the blame for the smooth take-off of modular refinery on the doorstep of the National Assembly for their delay in passing the Petroleum Industrial Bill. This is so because the PIB contains mechanisms to deregulate the downstream sector to make it price competitive which encourages direct foreign investment. Do you share this view?
Yes, I agree.  The market drives and regulates prices.  Private enterprises could process the residues (bottoms) from a refining process to make extra revenue, making them competitive.  Let the National Assembly pass the PIB.  It is long overdue.  Regulation in the downstream petroleum sector discourages investment: Companies invest where there is clear and transparent mechanism to recover cost and earn a profit.  Regulation has other downsides, e.g., it lacks fiscal sustainability: subsidy funds are required for other critical sectors of the economy; regulation distorts markets: encourages hoarding and smuggling and creates arbitrage opportunities (black markets).  Regulation benefits mainly the wealthy and middle classes, with a limited share going to those Nigerians most in need.

You recently organised an international conference on the gainful employment potentials in the oil and gas sector. What was the outcome?
It was a very successful conference.  The following observations were made:
That the gas, petroleum refining, petrochemical and fertilizer industries provide the catalyst which ensures the country’s growth and sustainable development through diversifying the  revenue stream and growth in other sectors rather than continuing to depend on costly importation and the resultant drain on our foreign exchange earnings.
Many natural resource rich countries are diversifying and transforming their economies using the hydrocarbon value chain for wealth creation, e.g., SABIC (Saudi Arabia Basic Industries Corporation).  It focuses on manufacturing, using oil by-products as feedstock.  It is a Holding Company, with investment in Joint Ventures with oil majors (SADAF).  It is not an operator and does not have 100% ownership.  The structure ensures commercial operations and commercial viability of its business arrangement across the world.  Its investments are not only domestic, but international, to secure markets for its oil by-products.  SABIC’s diversification strategy includes market diversification.
There are many opportunities for Nigeria to harness and maximise the oil and gas value chain, and that these opportunities will significantly improve the revenue streams from the downstream sector as well as have multiplier effect on the Nation’s economy.
For tremendous success in employment generation and wealth creation to be made, more needs to be done in enhancing the enormous opportunities that abound in the oil and gas sector. Likewise, the absence of strong entrepreneurial activities in any nation makes the country to be perpetually import-dependent with the resultant adverse economic and security consequences.
That a very high GDP figure means very little if it does not translate into jobs and wellbeing for the youths and teeming masses of our people. What matters is the GDP per capita, where we stand on the human development index, in quality of life for our people. This is the challenge for industry and the Government.
The Conference particularly noted the enormous opportunities that abound in the gas industry vis-à-vis Gas-for-power; Gas-for-industries; Gas-for-fertilizers etc.
The conference recommended as follows:
•        There is urgent need for massive investment in the Nigerian Refining & Petrochemicals (R&P) industry.  Development in this sector will not only diversify and transform the Nigerian economy, it will provide an alternative market for the country’s crude oil and natural gas resources and make the country less susceptible to the vagaries of the international oil and gas market.
•        There is need to create a national focal point for developing industries beyond fuels. Public-Private-Partnership has worked at Indorama Eleme Petrochemicals Limited (IEPL) and NOTORE Chemical Industries Plc. This model should be extended to all public and private industries in Nigeria for sustainable development and employment generation.
•        A necessary fiscal system that is supportive of high value hydrocarbon spin-off industries, but not dependent on cost recovery from upstream oil activities is advocated. The Conference calls on government to provide various incentives to enable this sector to operate optimally.
•        Appropriate incentives and enabling environment should be provided by Federal and State Governments to support a commercial framework for the development of gas, petroleum refining, fertilizer and petrochemical industries.
•        In Nigeria, diversification should involve varying the energy mix (from oil to gas) and from fuels to non-fuels. Diversification will result in wealth creation through employment generation, import substitution, and GDP growth.
•         It was also recommended that government should take the following steps: Create national focal point for developing industries beyond fuels; clear fiscal incentives to promote investment in the midstream oil and gas sector and industrial parks with pre-investment in infrastructure by the state.
•        Grass root industries should be encouraged in the agricultural sector and there is an urgent need for more farmer education especially on fertilizer application and the use of improved seedlings, as this will further provide employment along the value chain.
•        There is need for greater connection between University researchers, government policy makers, and the industry. The Federal Government needs to invest in research and knowledge generation for innovation and development, and to ensure continuous integration and collaboration. Specific sponsorship should be provided for human capacity building in research centres by government, and internship of students in companies.
•        There is need for government to deal with the issue of pipeline vandalism without which the new investments in the industry cannot thrive. There is need therefore for more investments in production and delivery of gas to the industry. Finally, in the drive towards enhancing employment and development opportunities through gas, petroleum refining, petrochemical and fertilizer industries, Conference stressed the need to arouse a new level of interest towards getting to work in order to eradicate unemployment: “We must begin to work and not talk about work”.

Why do you think it is hard for the authorities to harness the dividends of this sector?
It is hard to harness the dividends of this sector because we do not have the appropriate technical vision and drivers to take ownership.  It is easier to make money running political outfits and other non-productive activities. You do not have passion for what you do not understand.  We are consumers and not producers.  You cannot become developed if you depend on others to produce your machineries, your food, your cars, your refined products, your investment strategies, etc.  Technology plays a vital role in the systematic transformation of the production systems and capacities.   Development will always depend on the internal innovative capacities of a society, for it is man rather than machine that creates development. Technology transfer, therefore, becomes a myth for non-productive nations, and a reality for the nations with new means of production, capital formation and technical knowledge. Sustained economic growth is then further ignited, accentuated and escalated by increasing technical wisdom.  Do we have that requisite innovative, financial, self-discipline for technology to thrive…designing, making, producing and manufacturing goods to satisfy our needs before exporting?
No society has ever been greater than the products of its higher institutions of learning. Therefore, deep thought is required in the way government relates to its educational institutions as “laboratory think tanks”.

Can you in a few words explain the attraction of modular refinery in the way a lay man would understand it?

Yes, the modular refinery is like the big refinery in a miniature form.  It is not the size, but what in can produce.  It is like a luxury Mercedes Benz with all the bells and whistles and a Volkswagen car.  They all have four tires and a steering wheel, moving you from point A to B.  Most importantly, you get your petrol and kerosene without queuing and without paying a high price.

 

 

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