Nigeria’s downstream petroleum industry

By Ayo Akinfe

Here is how the industry works

[1] Nigeria’s total petroleum production is 2.5m barrels a day

[2] We have four refineries with a combined capacity of 445,000 barrels a day

[3] Refineries are working at no more than 30% capacity i.e 133,500 barrels (12.2m litres) a day

[4] Domestic petrol consumption totals 12m litres

[5] The cost structure of crude oil

Production

Findings/development - $3.5

Production cost - $1.5

Refining Cost - $12.6

Pipeline/transportation - $1.5

Distribution/bridging fund margin - $15.69

[6] True cost of one litre of producing a litre of petrol anywhere in Nigeria

When refined

Total sum cost of one litre equals $34.8 = $34.8/159 litres (One barrel) = $0.219 - Naira equivalent adds up to 0.219 x N160 = N35.02k. Add tax of N5 + N35.02 and the total is N40.02 a litre.

[7] Basically, it costs N40.02 to produce a litre of petrol in Nigeria, so selling it at N65 a litre generates a healthy profit for the industry

[8] Given that domestic production actually exceeds demand (Even with the refineries operating at only 30%) there is no justification whatsoever for importing petrol

[9] Crude oil is currently being sold on the international market for about N105 a barrel. Multiplied by 2.5m barrels a day, this generates $262.5m a day for Nigeria. Multiplied by 365, this adds up to $95.8bn a year!

[10] Nigeria’s budget is premised on crude oil selling for $73 a barrel. The excess of $32 a barrel goes into the excess crude account which is distributed between the three arms of government. So when Mrs Ngozi Okonjo-Iweala says that the request for more money came from the governors, I ask why she did not ask them what they have done with the extra and unbudgeted cash bonanza they are getting from the excess crude account.

Questions we want answered

[1] Why is petrol refined abroad in the first place?

[2] How many barrels or litres are refined abroad?

[3] The government has told us that it costs N138 to produce a litre of petrol. I challenge them to tell us how this is the case. In the US, petrol sells for this price after it is bought for $105 a barrel from Nigeria and then other costs like shipping, insurance US refining and retailing are added. What Ngozi Okonjo-Iweala just did is look at the retail price in the US and decided that this is how much it costs to produce the same product in Nigeria.

[4] Can the petroleum minister Mrs Diezani Alison-Madueke please explain to us if costs the same amount to produce petrol locally and to import it. If not, then there should be a two-tier market with domestic petrol costing less than imported petrol.

[5] Nigeria does not even pay for the petrol it imports. What happens is that the Nigerian government exchanges the 275,000 barrels per day with commodity traders (90,000 barrels per day to Duke Oil, 60,000 barrels per day to Trafigura (Puma Energy), 60,000 barrels per day to Societe Ivoirienne de Raffinage (SIR) in Abidjan, Ivory Coast and 65,000 barrels per days to unknown sources). If this is how we get our refined imported petrol, I ask why we are paying these marketers this subsidy in the first place.

[6] These are the companies that were getting the subsidy payments:

1. Oando Nigerian Plc N228.506bn

2. MRS N224.818bn

3. Enak Oil & Gas, N19.684bn

4. Bovas & Co. Nig. Ltd, N5.685bn

5. Obat N85bn

6. AP N104.5bn

7. Folawiyo Oil N113.3bn

8. IPMAN Invest. Ltd N10.9bn

9. ASCON N24.1bn

10. Atio Oil N64.4bn

11. AMP, N11.4bn

12. Honeywell, N12.2bn

13. Emac Oil, N19.2bn

14. D.Jones Oil,N14.8bn

15. Capital Oil, N22.4bn

16. AZ Oil, N18.613bn

17. Eternal Oil, N5.57bn

18. Dozil Oil, N3.375bn

19. Fort Oil, N8.582bn

I ask exactly what service they were providing to justify these payments. Mrs Alison-Madueke should please explain what it is they were doing

[7] We were told before the price hike that we had 55 days stock of subsidized oil in reserve. Now that prices have risen to N141 a litre, it means that this “subsidized” petrol is being sold at the higher rate too. Where is that excess of N76 going?

[8] Within just eight months, these companies earned about $7bn in “subsidy” between January and August of 2011. Has the January part of this payment already gone into the government’s planned special account or has it disappeared?

[9] How much will it cost to make our four refineries fully functional and how long will it take to achieve this? Surely, this has got to be a major priority of the petroleum minister. When Mrs Alison-Madueke took office, she should have been given a maximum of six months to sort this out

[10] Has any company ever gone to the petroleum minister and told her they can produce and retail petrol for the fair production price of about N40 a litre? I believe those companies who can do it would have been interested and applied to do so. Mrs Alison-Madueke should please confirm this and tell us why the market was not opened up to those willing to provide petrol as competitive rates.

Our demands

[1] The immediate resignation of oil minister Diezani Alison-Madueke

[2] Get our four refineries fully functional so they can operate at their maximum capacity of 445,000 barrels a day. Have it as a long term goal that petrol and diesel production should always exceed demand by about 10%. This way, you have an in-built mechanism to avert scarcity and shortages

[3] Open up the market to competition so that private refineries can augment this under the plan to bring total domestic refining to 1m barrels a day. This should be done through the offering of incentives and enticements to anyone willing to build a refinery in Nigeria. Encourage anyone wiling to do so with tax holidays, land leases and security under the condition that they provide employment

[4] Scrap the programme of offering licences to certain companies to import petroleum products. All it does is create a cabal of price fixers. Place such a heavy tax on petrol refined abroad that it is no longer economical for the cabal running the racket to keep doing it

[5] Set up a special fund within the NNPC, so that about 10% of its revenue is set aside for infrastructure development, maintenance and capital investments. This way, shutdowns are avoided, facilities are maintained and expansion can be introduced as necessary

[6] Have a four-year programme to build six regional gas-fired power stations, so gas can be used to generate electricity. Under this programme, establish a gas-based national electricity grid to augment PHCN. It should run in parallel to it

[7] The national minimum wage should be increased to N30,000 immediately to cope with the suden surge in inflation

[8] Create a powerful office of oil ombudsman to deal with matters such as hoarding, price fixing and creating artificial scarcity. It should be empowered to impose heavy fines on offenders

[9] Parliamentarians should take a 40% cut in their salaries and this money be diverteds towards paying the new national minimum wage

[10] Ultimately, float the NNPC on the Lagos and either the London or New York Stock Exchange. Let it operate as a private concern that can match and rival the large oil companies. Its activities should be vertically integrated, so it manages the entire process from extraction to retailing via petrol stations. The Nigerian government should maintain something like a 20% stake in it.