Fuel subsidy must be scrapped for refineries to work – study

The Federal Government will struggle to attract the investment it needs to get its refineries working unless it scraps a fuel subsidy that keeps domestic gasoline prices artificially low, a government commissioned report seen by Reuters on Wednesday said.

The Minister of Petroleum Resources, Diezani Alison-Madueke ordered the report earlier this year in a bid to find solutions to fix Nigeria’s three refineries, which operate at only 20 percent capacity.

Despite being among the world’s top 10 crude oil exporters, the country imports 80 percent of the fuel it needs, using a state subsidy scheme that loses billions of dollars to graft.

The unpublished report leaked to Reuters said current plans to repair dilapidated refineries will most likely fail, because the government will struggle to mobilise funds and vested interests will try to thwart its efforts.

It proposes that the Federal government privatise its refineries, as it is doing with its also moribund power sector, but warned that getting investment will be a tall order while motor fuel prices remain controlled.

“The regulated pricing policy of the Federal Government for petroleum products is the most widely adduced single reason by prospective investors for the lack of investment in new refineries in Nigeria in recent years,” the report said.

It was presented to President Goodluck Jonathan earlier this month but never published. President Jonathan attempted to remove the popular fuel import subsidy in January, but a week of strikes and protests forced him to partially reinstate them.

Many Nigerians see cheap fuel as the only benefit they get from living in an oil rich state.

The report was among a raft of committees set up in the wake of January’s protests. They include a probe into oil and gas production leaked to Reuters last month that showed Nigeria lost billions of dollars in cut price deals with oil majors.

The latest one said Nigerian refineries were the worst in Africa at using their capacity, which is officially 445,000 barrels per day. Ms Alison-Madueke said in October that Nigeria would spend $1.6 billion on turnaround maintenance to get the refineries operating at 90 percent capacity by 2014.

“Laudable as the (plans) may be, they are not likely to deliver the necessary solution,” the report said, adding it was doubtful the government would be able to raise that money.

“In the event that the work gets going, it will be very difficult to steer it clear of obstructive political and bureaucratic influences,” it said.

Analysts say previous attempts to get refineries going in Africa’s top energy producer have been held back by vested interests such as fuel importers profiting from the status quo.

Several contracts worth hundreds of millions of dollars have been given to companies doing maintenance on Nigeria’s refineries over the last 15 years but with little impact on output.

“They have not operated as performance-oriented businesses and are plagued with severe plant integrity issues,” the report said. A parliamentary probe in April found that graft in the fuel subsidy scheme cost Nigeria $6.8 billion in three years.

The report said in order for the refineries to work government should sell at least 51 percent of its share in the operations to competent private partners, which it said could restore them to 90 percent capacity by 2016.

It also said the government must “rise up to its responsibility” to protect pipelines from rampant oil thieves, which by some estimates drain a fifth of its output.

Why we can’t build more refineries in Nigeria – Senator Abe

The Chairman, Senate Committee on Petroleum Resources (downstream), Magnus Abe on Friday said the reasons why investors are not willing to build refineries in Nigeria is because it is not profitable.

Mr Abe, who was a guest on Channels Television’s breakfast programme, Sunrise Daily, said there are refineries in Sierra Leone and Amsterdam that are operated with Nigeria’s money.

“People go to the bank to get guarantee, buy crude from Nigeria and send to these refineries and the refineries are paid. Whether subsidy or no subsidy is irrelevant to that refinery,” he said.

The Senator said there is no relationship between deregulation and the building of more refineries in Nigeria. “These issues are totally not related,” he said.

“To me, why we are not building refineries in Nigeria may be one, because of the infrastructural and security challenges but more importantly, maybe we are not taking enough advantage of the fact that we are actually producing crude in this country to give guarantees to people to say listen if you build your refinery in Nigeria we promise you that you will have first charge access to our crude, we will sell to you who is refining in Nigeria before we sell to anybody who is taking it out,” he added.

Responding to the question on why the existing refineries are not functioning optimally, Mr Abe said “there is a clear incentive to the refineries not to operate at a 100 percent capacity.

“If I own a refinery in Nigeria and then you give me product and I can go and sell those products outside, I’ll probably make more money than if I refine it here, how is that an incentive to me to refine the product here?”

Petroleum minister says maintenance of refineries will cost N250 billion

The Federal Government plans to spend N250 billion on the Turn-Around Maintenance of the Port Harcourt, Warri and Kaduna refineries.

The Minister of Petroleum Resources, Diezani Aliso-Madueke

This was disclosed by the Minister of Petroleum Resources Diezani Alison-Madueke on Monday while being grilled by the Senate Committee on Petroleum Resources (Downstream) over the failure of the government to fix the refineries.

The minister said the beginning of the fourth quarter of 2014, the Turn-Around Maintenance project would have been completed, and the three refineries would be producing 370, 000 barrels per day, which is about 90 percent of the 445,000 barrels needed daily.

The project would start with the Port Harcourt refinery and Mrs Alison-Madueke said the government will spend $146 million out of which $32million (75 percent) had already been paid for the materials needed.

On why petroleum is selling at varying prices across the nation, the minister merely said: “Since the price was changes in January, it has become difficult for the market forces to stabilise at the official price. There is a major issue of supply partly due to subsidy payments. We are battling hard to ensure sufficient supply.”

Asked if the Department of Petroleum Resources (DPR) was helpless at checking the disparity in prices, she replied: “If you are covering a country as large, there will be issue of pricing”.

“The DPR is, however, moving aggressively in the last months to check the anomaly. Of recent, 75 filling stations have been sealed up across the country over disparity in pricing”, Alison-Madueke told the committee.

She informed the committee that the vandalisation of NNPC pipelines in Arepo, Ogun State was a major reason responsible for the recent fuel scarcity in some parts of the country and especially in the South West.

She noted that in the process of repairing the damaged pipelines, three NNPC officials were kidnapped, confirming that the three officials had been killed.

But the committee said petroleum was selling at varying prices because that the minister was allocating the product to the independent marketers with preferential treatment.

The chairman of the committee, Magnus Abe, said: “How can filling stations sell at N97 per litre when the PPMC, as we have discovered, collected money from marketers without supplying them the product on time. Honourable minister, have you ever gone to the depots to see what marketers go through. We were told that you are giving allocation to only those who have godfathers. Unless this anomaly is removed from the source, we can’t force filling stations to sell at official prices.”

The committee also asked the minister to “digitalize” the process of allocating the products to enhance transparency, saying the “current analogue process is creating hidden costs”.