by Ijeoma Nwogwugwu

 

My take on all this is that it’s high time we do away with the needless emotions and get rid of the four moribund plants on the federal government’s balance sheet. As mentioned earlier, the four plants for almost two decades have not functioned at optimal capacity due to inefficiency, corruption and age.

Diezani Alison-Madueke, Minister of Petroleum Resources, two weeks ago, yielded to sound practical judgment when she announced the federal government’s plan to sell the four state refineries owned by the Nigerian National Petroleum Corporation (NNPC) to private hands. It was an admission by the federal government that the refineries have performed sub-optimally for almost two decades as state-run entities.

She said the government would like to see major infrastructure facilities such as the refineries transferred from the hands of government to the private sector. The process for their sale would start by the first quarter of next year, she added.

My initial thought on seeing the minister’s statement was that NNPC and the petroleum ministry would undertake the privatisation process of the four plants themselves. But that concern was doused a few days later when the Bureau of Public Enterprises (BPE), which has the expertise and is statutorily mandated to take on such transactions, stepped in to state it shall be responsible for the sale of the two Port Harcourt, Kaduna and Warri refineries, with the support of NNPC and the ministry.

Since Alison-Madueke’s pronouncement, there have been a few reactions, chief of which have come from the two oil workers’ unions. Unsurprisingly, both unions have expressed their opposition to the privatisation of the plants and would rather they are fixed, if they must be sold at all.

Other commentators are concerned that the process of their sale would be coinciding with the electioneering period and could happen around the time of the general election in 2015. They are also worried that the refineries, which they termed “national assets”, might be sold to foreigners. There is still another batch of concerned citizens who can’t shake away this gut feeling that the process might not be transparent and could be used as a conduit to sell the plants to oil marketers that have benefitted from the fraud in the subsidy scheme.

My take on all this is that it’s high time we do away with the needless emotions and get rid of the four moribund plants on the federal government’s balance sheet. As mentioned earlier, the four plants for almost two decades have not functioned at optimal capacity due to inefficiency, corruption and age. Right from General Sani Abacha’s regime, Nigeria, the world’s ninth largest producer of crude oil, shamefully turned into an importer of fuel products to meet its domestic energy needs. However, the rule of thumb is for crude oil producers to become net exporters of petroleum products, which helps to expand a country’s revenue base.

Indeed, it was under Abacha that Nigeria first started the crude oil swaps in exchange for petroleum products under a crude oil processing arrangement with overseas refiners such as British Petroleum (BP). Today, Swiss oil trader, Trafigura Beheer BV, lifts 60,000 barrels of crude oil per day (bpd) from the 445,000 allocated to NNPC, as per its refining capacity, in exchange for petroleum products. Similarly, another 60,000bpd is exported to Société Ivoirienne de Raffinage SA (SIR), a refinery built in 1962 in Cote d’Ivoire, under a crude-for-products deal; while another 90,000 – 100,000bpd is allocated to Duke Oil, a subsidiary of NNPC, which reallocates the crude oil in smaller tranches to local oil companies under another swap deal.

It is interesting to note that the SIR refinery, which is older than Nigeria’s first refinery built in 1965 – the old Port Harcourt refinery – continues to function at more than 80 per cent of installed capacity. The simple reason being that the Government of Cote d’Ivoire retains a minority stake in the plant, while France’s Total, Shell, ExxonMobil and Chevron combined hold the controlling interest.

The swap arrangements aside, anyone with some knowledge of the business of refining would attest to the fact that global refining margins are quite thin. This implies that even if NNPC were to operate the plants at optimal capacity, their contribution to the corporation’s balance sheet would be minimal, except it becomes a net exporter of petroleum products, a business strategy aptly adopted by the Ivorian refinery.

Also, it is only those refineries with petrochemical complexes such as the 125,000bpd Warri facility and 110,000bpd Kaduna plant that could contribute significantly to the bottom line. Is it any wonder that the soon-to-be constructed Dangote 400,000bpd refining complex has petrochemical and fertilizer facilities thrown into the mix? Yet NNPC, just like its Eleme petrochemical complex, until it was sold, has not been able to realise maximum value from its four refineries for its shareholders – the federal government and people of Nigeria.

The sadder aspect is that Nigeria threw away the opportunity to handover the plants to the private sector in 2007. In the twilight of the Olusegun Obasanjo administration, the federal government sold the Kaduna and Port Harcourt refineries to Chinese and local investors, respectively. However, the late President Umaru Yar’Adua reversed the sale under the misconceived notion that the plants could still be fixed.

Six years later, the refineries after successive maintenance programmes (what we call TAM), are still unable to refine sufficient petroleum products to meet Nigeria’s domestic energy requirements. The result is the rising demand for our foreign exchange via import substitution by importers of petroleum products and the export of thousands of jobs to other countries that could have been created locally.

The irony is that Alison-Maduke, who was witness to the mistakes of the Yar’Adua administration, still believes the plants should be repaired before they are privatised. This is a terrain that is fraught with pitfalls that she need not venture into. First and foremost, as she pointed out last Thursday, negotiations with the original equipment manufacturers (OEMs) for the Port Harcourt refinery have taken longer than necessary. Should NNPC go ahead and award the contracts for the TAM, this would most certainly take months or years to conclude and would needlessly delay the privatisation process.

Second, all plants and machinery age and depreciate over time. The advancement of technology also renders them obsolete. This means that no amount of maintenance would attract an offer from a buyer close to the cost at which the plants and machinery were originally bought or built. Moreover, since it is the plan of the federal government to sell the refineries lock, stock and barrel, it should not forget that the same facilities have accumulated liabilities, which shall be evaluated and discounted by any rational businessman desirous of acquiring the assets.

For the purpose of this exercise, I shall reproduce some excepts from a serialised article I wrote two years ago titled,Privatisation Made Easy: “Any rational businessman will take into consideration the age of the equipment in the factory, its working condition, and where it is run down, the cost of rehabilitation or replacement. He would also evaluate the liabilities he will be assuming… It is only after this careful evaluation, that he will make an offer based on his assessment of the company.

Other factors that might influence the offer he makes include the operating environment, market fundamentals, the share price of similar companies (in the same industry) listed on a stock exchange, and the future earnings potential of the company (also known as discounted cash flows).”

At this juncture, what the petroleum minister should concern with herself with is superintending over a privatisation process that is transparent and follows due process. She must prove the doubting Thomases wrong that this is a transaction targeted at disposing of the plants to subsidy scammers. Besides, she need not worry about the state of the plants, as they could be sold as is to private sector investors who should takeover the headache of turning them around.

Fortunately, the privatisation of the refineries aligns perfectly with the objectives of the Petroleum Industry Bill (PIB). Like her former colleague Prof. Bart Nnaji in the power sector, this is a perfect opportunity for Alison-Madueke to cast her name in stone and take credit for the transformation of the downstream segment of the oil and gas industry. As such, she should make hay while the sun is still shining and not tarry a moment longer.

 

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Op-ed pieces and contributions are the opinions of the writers only and do not represent the opinions of Y!/YNaija.