Is Further Refining Capacity a Viable Policy Possibility for Nigeria?
Nigeria at the moment finds herself in a paradoxical state of affairs the place it stays a leading oil exporter, yet experiences a sustained decline in refining capability to fulfill rising home demand. With an energy combine dominated by petroleum merchandise, the country has come to rely increasingly on unsustainable imports to complement inner manufacturing. In recognition of this challenge, Nigeria’s Energy Coverage goals to enhance the country’s capability utilisation to not only meet native demand, but also provide an export base for processed petroleum merchandise. Using existing literature on economic analysis, this work seeks to determine the viability or in any other case of investing within the nation’s refining capacity. Preliminary analysis signifies the steady rise in imported petroleum merchandise will persist till the home refining capacity meets the home consumption stage. This paper will conclude that elevated capability and privatization of refineries is a viable choice to finish the provision problems. It’s because it is going to result in the injection of wanted capital into the enterprises, sustenance of production volumes to satisfy home market demand and potential export necessities, and the elimination of government subventions, which is able to remove inefficiency and finish the drain on public funds.
Nigerian crude, mild in nature and low in sulphur content has a excessive demand within the worldwide market. This trend introduced house to the government, the necessity to strategically reap the benefits of the investment opportunities particularly with reference to refining. The government has thus sought to grant licences to assemble refineries for the refining and export of processed petroleum merchandise via the ministry of petroleum sources. The placement of the country which lies along the coastal line of the Atlantic Ocean, provides easy accessibility and convenience to the supply of provide for the international market. Domestically, the country capitalizes on the proximity of the refineries to the supply and provide point of crude; it also creates and strengthens the local expert labour.
The refining sector and the telecom sector are given concessions within the country in an effort to draw investors, these concessions vary from tax incentives, to as a lot bank guaranties .The accessibility of uncooked supplies, low manufacturing cost and low labour cost serves as additional incentive in comparison with other refining tasks outside the country .Refining margins had been on the decline for a decade now however the current increased international demand for vitality and the constant price increase has brought again buyers interest in refining, especially in the oil producing nations in the African coastal towns.
Nigeria however finds herself in a paradoxical state of affairs the place it stays a leading oil exporter, but experiences a sustained decline in refining capacity to fulfill rising domestic demand. With an vitality mix dominated by petroleum merchandise, the nation has come to rely increasingly on unsustainable imports to complement internal production. In recognition of this challenge, Nigeria’s Power Policy goals to improve the country’s capability utilisation to not solely meet native demand, but in addition present an export base for processed petroleum products.
Part two presents an outline of the worldwide refining business and its future prospects. Part three focuses on the Nigerian market. Section four employs present literature on economic evaluation to find out the viability or in any other case of investing in the nation’s refining capability. Preliminary analysis indicates the regular rise in imported petroleum products will persist until the domestic refining capacity meets the home consumption degree. This paper will conclude that elevated capability and privatization of refineries is a viable choice to end the provision issues. This is because it can lead to the injection of wanted capital into the enterprises, sustenance of manufacturing volumes to satisfy home market demand and attainable export requirements, and the elimination of authorities subventions, which can take away inefficiency and finish the drain on public funds.
2.0 The worldwide Refining Business
The world refining capability has gone by a collection of financial downturns and challenges, between the 1970’s and 1990’s there was a surplus capacity which was as a result of heavy funding within the early 1970’s, the downturns happened after the oil shocks of seventy three-seventy four and seventy nine-eighty and partly also due to the Asian monetary disaster. The latest development within the demand for refined crude has seen the short depletion of spare capability. The spare reserve of throughput capacity stood at 83 Million barrels per day in 2004 was being used up at eighty five% averagely every day (IEA 2006).According to IEA research this development doesn’t allow any lead time for upkeep which limits the scope for elevated capacity and utilization to satisfy present and future demand for refined products. The projections for assembly capacity utilization depends largely on deliberate refinery initiatives below development, capability would must rise to ninety three million barrels per day in 2010, and would have to increase to 118 million barrel per day by 2030, based mostly on the mission on floor if they come to completion capacity rates are seemingly to remain high through 2010.(IEA)
So many factors are chargeable for complicating the whole projections for capability utilization needed to satisfy demand; the industry is seen to be struggling to fulfill up with present and future capability demand. The elevated demand for lighter refined merchandise primarily used to gasoline the transportation business, requires refinery upgrades and heavy investment especially within the Organisation for Financial Cooperation and Improvement (OECD) North America the place the majority of increased demand is coming from. Refineries are built near market in order to maximise proximity in terms of transport and logistics, upgrades, turn around and expansions are often hampered by environmental and native restrictions.
The global oil consumption for mild distillates has risen from sixty five% 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 duty of trying to adjust to the standard specifications of crude to be refined.
The International Power Company (IEA) predicts a 15% rise in oil demand in the UK and a steady global demand progress by 2030, this forecast suggests oil will be the most important source of vitality and will proceed to play an important role in the energy needs of the world. The company also predicts that the Organisation of Petroleum Exporting Countries will likely be supplying half of the worlds oil wants, there shall be fewer nations producing oil and regional commerce will double to roughly sixty five million barrels a day by 2030.
Future Prospects for the Refining Industry
Global demand for oil will keep rising and could be round 50% by 2030, supplying virtually a 3rd of the worlds vitality needs and can be the first source of energy, particularly the oil based gas will provide two thirds of the transport sector and the worldwide vitality mix will be dominated by fossil fuels, whereas the main gasoline will continue to be oil. International locations and regions will experience different demand patterns with developing economies anticipated to have a better diploma of demand progress. The business forecast for the world oil demand will reach 92 million barrels per day in 2010, and one hundred fifteen million barrels by 2030 in comparison to the estimate of 78 million barrels per day in 2003.The above reiterates the necessity for increased capability by investing more in each the downstream and upstream sector of the oil sector, availability of market, security of market and investment safety of the investor.
distance of the availability of sizable markets, secure ports to market the merchandise, and the safety of investments to make this a actuality.
Three.Zero An overview OF THE NIGERIAN REFINING Business
3.1 Nigeria Refining Capacity and Utilisation Developments
The downstream business in Nigeria is properly established. NNPC has 4 refineries, at Kaduna, Port Harcourt and Warri have a combined put in capability of 445,000 bpd. A comprehensive network of pipelines and Depots strategically located throughout Nigeria links these refineries. NNPC, by way of its subsidiary, the Pipelines and Products Marketing Firm (PPMC), supplies solely to bulk prospects. They, in flip, meet the wants of tens of millions of customers across the nation for products ranging from gasoline and jet gasoline to diesel, gas oil and liquefied petroleum gas.
The Eleme Petrochemicals Company, a fully owned subsidiary of NNPC, at Port Harcourt using natural gasoline liquids as feedstock produces polyethylene and polypropylene for the plastic industry in Nigeria.
NNPC produces linear alkyl benzene, benzene, heavy alkylate and deparafinated kerosene at its Kaduna Refinery complex. Linked to the Warri Refinery are a 35,000 metric ton per annum (mtpa) polypropylene plant and an 18,000-mtpa carbon black plant.
However, low capability utilisation of the local refineries result in huge deficits in the availability of refined products. These supply gaps had been such that petroleum merchandise typically sold N3 to N10 per litre above the imported cost of the same product. This was especially so for diesel which is a product principally utilized by oil rigs, development corporations and other industrial and commercial considerations. There was thus an financial incentive to import diesel to satisfy the supply needs of main industrial and business customers.
3.2 Investing in Nigerian Refining Capability
The Nigerian Nationwide Petroleum Company promotes the funding alternatives to be discovered in the nation’s downstream sector:
By conducting reputable seismic data acquisition, investor risk is considerably decreased.
Also, Nigeria’s large oil reserves are accompanied by a manufacturing price per barrel that is one in every of the bottom in the world.
The government has additionally provided enticing fiscal phrases for investors, and permit for the straightforward repatriation of profits, while guaranteeing new ventures.
Moreover, whereas Environmental issues are actually outstanding in the Nigerian oil business, the actual fact nonetheless remains that Nigerian crude is gentle candy, incorporates decrease sulphur crude, thus cheaper to provide. This places Nigerian refineries at a aggressive advantage by way of each operating prices and attractiveness as a place to invest. Crude oil refining with environment friendly export facilities.
Investment in new refineries is regularly becoming a actuality as efforts are being made to extend local refining capacity to satisfy local demand and push for exports in future:
Nigeria accounts for about 59% per cent of petroleum products importation into Sub-Saharan Africa.
Complete import in 2004 was eight.66 Million MT in comparison with the estimated whole import requirement of 13.1 Million MT for the region
The Nigerian import for 2005 (as at September, 2005) stood at 5.54 million MT.
The estimate for 2006 is far higher
This exhibits a growing marketplace for products importation to satisfy the native demand
– Cost and Benefits of Nigerian Refining
Undertaking evaluation is a method of presenting this selection between competing uses of sources in a handy and comprehensible vogue.
In essence, project analysis assesses the advantages and prices of a challenge and reduces them to a common denominator. If benefits exceed costs each expressed by way of this common denominator- the project is acceptable: if not, the undertaking needs to be rejected. As such, mission analysis might appear divorced from both the elemental objectives of the economic system and the attainable various uses of resources in different tasks. The definition of benefits and prices, nevertheless, is such that these factors play an integral part in the decision to accept or reject. Advantages are defined relative to their effect on the fundamental objectives; costs are defined relative to their opportunity cost, which is the profit for-gone by not utilizing these sources within the better of the out there different investments that can’t be undertaken if the assets are used within the undertaking. The forgone advantages are in flip defined relative to their effect on the elemental objectives. By defining prices and benefits in this vogue we try to ensure that acceptance of a venture implies that no alternative use of the sources consumed by this undertaking would safe a greater outcome from the perspective of the country’s targets.
The oil trade is a fancy, capital intensive, sometimes financially dangerous and highly aggressive enterprise. Oil companies can select where on the earth they invest to provide merchandise: they rank all their funding opportunities after which invest where they could make the perfect return.
Downstream oil refining is a stand-alone exercise that has to generate an appropriate return on capital in its personal proper. Nigerian refineries will only entice main investment if they provide the perfect location for a given challenge to generate a profit and justify additional investment.
The new processing units are pricey and take a number of years to plan and build:
– hydrofiners to scale back product sulphur ranges
– depends upon requirement but business spent round £600 million to supply sulphur free petrol and diesel to extend diesel production – about £300 million per refinery.
– residue conversion to scale back or eradicate gasoline oil about £500 million per refinery
Alternatively, the provision of oil products to Nigerian market may very well be met partly by imports from European and different sources. However, this is able to affect on the next:
– safety of provide: Susceptible to external elements
– product costs: costs to the buyer could rise because importing fuels will add to prices of Nigerian entrepreneurs
– the balance of payments: different counties would gain the economic advantages of refining crude oil to products
direct and indirect employment: UK would be less enticing to industries which rely on the refining sector.
Nigeria stands to profit significantly from having a aggressive home oil refining industry. These embody:-
considerably enhanced security of power supply, together with rapid response in the case of a crude oil supply disruption or pure gas scarcity
shopper advantages from availability of top of the range fuels at competitive prices
A substantial contribution to the Nigerian economic system as an entire, and to regional economies, through exports, employment, abilities and technological experience.
The oil refining trade has the potential of bettering Nigeria’s steadiness of funds via a internet commerce surplus on the import and export of oil merchandise.
The provision of petroleum feedstocks to other key business sectors including plastics, paint, fibres, pharmaceuticals and building supplies.
There can also be the creation of direct and indirect employment the refining business will contribute to the financial system.
Environmental advantages – Nigerian oil has low sulphur fuels, which advantages the setting with cleaner fuels.
There is a wider benefit to the financial system Important products embody aviation and marine fuels; fuel oil for energy generation; heating oil for houses, hospitals, factories and colleges; petroleum gases, used mainly in business but additionally as a substitute motor gas; bitumen for roads and roofing; petroleum coke, used in steel making and aluminium smelting, and lubricants for all sorts of engines and equipment.
On the contrary, the absence of these investments will end in:
The lack to satisfy shopper demand.
An unhealthy reliance on imports
Security of provide changing into susceptible to external elements
Unfavourable steadiness of funds position occasioned by rising imports
Inflation, making the economic system unattractive for FDI and local consumers.
A Important products embody aviation and marine fuels; gasoline oil for power generation; heating oil for houses, hospitals, factories and schools; petroleum gases, used primarily in industry but also in its place motor fuel; bitumen for roads and roofing; petroleum coke, used in steel making and aluminium smelting, and lubricants for all sorts of engines and equipment.
As well as offering different industries with an inexpensive and dependable supply of vitality, UK refineries also provide the chemical feed stocks used to manufacture most of the household and consumer goods which might be part of on a regular basis life.
Petrochemicals are key to products as diverse as carpets, fabrics and clothes; fertilisers; pharmaceuticals, cosmetics and medicines; plastics, paints and detergents; packaging, vehicle elements and building materials.
This sturdy native supply base is crucial to retaining technical expertise, stimulating innovation inside UK manufacturing and stopping its disappearance overseas. As in many different areas of UK manufacturing, this may increasingly not have an immediate impact, but a cumulative effect since expertise, expertise and innovative new applied sciences could be lost to overseas rivals.
The oil industry also underpins numerous service industries comparable to engineering contractors. In the absence of a UK refining trade these help services are prone to go overseas, while some smaller native subcontractors could possibly be driven out of enterprise.
Introducing cleaner fuels earlier than different nations also encourages motor manufacturers to test new fuels within the UK, thus serving to to retain technical expertise in this country.
Return on Capital Poor
UK oil refining & marketing annual return on capital earlier than tax & interest costs
Return on capital before tax & curiosity
– performs a big tax gathering service. Yearly the business collects round £30 billion in fuel duty and VAT alone. This is a crucial supply of income for the government.
UK refineries present training for expert staff.
– any investment should ship the required inner price of return.
– the UK is seen as a pretty place to invest in refining in each the brief and the long run.
– Authorities policies reinforce this position.
Oil products are a vital a part of trendy society. The problem is to ensure that in the approaching decades the Nigerian economy continues to have access to inexpensive, safe supplies of the required oil merchandise as both sources of crude oil and consumer demand change. The problem will be met by importing extra merchandise to meet demand or investing in indigenous refineries.
The oil trade is very competitive, advanced, capital intensive and invests for the long run. Any enterprise determination to invest in Nigerian refineries will depend on the notion that Nigeria is an attractive place to take a position. Authorities coverage must thus allay investorsfears by setting out a transparent and consistent long-term vitality policy.
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