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Fresh pressure on FG to hands off refinery ownership

By on March 25, 2013

Industry watchers say that the best way to make the nation’s four comatose refineries begin to function properly would be for the government to get out of the business of owning refineries.

They say that if alternatively, government scales down the current Nigerian National Petroleum Corporation (NNPC), ownership stake to a minority level, equal to or less than 49 percent, refineries in the country would become much more competitive and productive.

This process would entail getting private sector managers to run the refineries, in essence, employing the Indorama model.

The Indorama group which operates the hitherto moribund Eleme Petrochemicals Limited (EPCL), owns a majority 75 percent shareholding, leaving the Federal and Rivers State governments with 25 per cent.

Indorama has managed to turn around EPCL, making it an example of the success story of the Federal Government’s privatisation programme.

The company’s records show that it has paid dividends of over N40 billion to the Federal Government, Rivers State government and employees in the last five years.

If this model were to be employed in the eventual sale of the refineries, government as a minority shareholder would receive dividends without interfering in the day to day operations of the company.

Industry sources maintain that continuing the current reform process by pumping more money into a cesspool of corruption and a black hole of fraudulent Turn around Maintenance (TAM) was bound to be a failure. They add that the said process would guarantee the continued importation of refined petroleum products into the country – along with its ugly baggage of corruption, scarcity and inefficiency- far into the future.

The construction of new refineries in the country, based purely on economic considerations may be hard to justify, especially taking into cognisance the fact that there is refinery overcapacity around the world and in some cases, outright closure or sales of refineries by European operators.

To buttress this point, Shell Petroleum Development Company’s (SPDC) Executive Director, Malcolm Brinded recently said the investment case for building a refinery in Nigeria does not make good business sense.

“In today’s world, not looking at the past but where we are today, there is surplus of refinery capacity which essentially means many refineries in the world run at a loss, which also means one can get refined products back again and pay very little for it to be refined,” he said.

The likely impact of the global refinery over capacity means that major investors or financiers may find it difficult to fund new Greenfield refineries, because they would be competing against older refineries that can survive on low margins which have long recovered the costs of their major investments.

One industry source informs that “the easiest option is to sell the refineries now and let the best people we can find buy them, since it is easier to increase the capacity of the old refineries than to build  new Greenfield refineries.

“We as a nation may choose that for strategic reasons – job creation etc, we want to encourage such investments through tax breaks etc. At the end of the day the best thing to do is to free the market and let the private sector take the decision” he added.

According to the president of  the Trade Union Congress of Nigeria (TUC), Peter Else, the refineries cannot work optimally under the control of NNPC because there is too much government interference.

The managing director of one of the oil companies, meanwhile told BusinessDay that until the refineries are operated as manufacturing entities, they would not work competitively.

“The economics of refineries must be right in terms of capacity, market, pricing and enabling environment. The government cannot solve with a political solution, what is purely an economic matter “he said.

Nigeria, which imports fuel because it lacks refining capacity, is struggling to put its four refineries back on stream, to reduce expenditure on subsidy which claimed almost N1.7 trillion in fiscal year 2011 and reduce its dependence on fuel imports.



[Business Day]

One Comment

  1. Suleiman Wali

    March 25, 2013 at 10:41 am

    privatizing the refineries wont be fruitful unless subsidy is removed and pump price is deregulated. You cant force an investor to sell his product at a regulated price when he got the crude at the market price determined by the forces of demand n supply. The delay and inconsistency of government agencies particularly PPPRA to promptly subsidize to marketers as well as local refiners will further detriment such product delivery business to collapse. If subsidy is removed n pump price deregulated the NNPC can easily source money somewhere to operate n maintain the refineries optimally without government intervention. Since even at installed capacity the NNPC refineries can only meet up around 40% of the demand let modular refineries by local private investors cover up the remaining 60% and hope that a more decent regime will emerge in 2015.