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THE NIGERIAN ACADEMY OF ENGINEERING
“THE NIGERIAN PETROLEUM REFINERIES:
HISTORY, PROBLEMS AND POSSIBLE SOLUTION.”
A LECTURE DELIVERED AT THE
INDUCTION CEREMONY FOR NEW FELLOWS
By
Engineer Alexander O. Ogedegbe, FNSE, FNSChE
JUNE 11, 2009
GENERAL OUTLINE OF OBJECTIVES
 To inform through a historical survey of the establishment of Nigerian
Refineries.
 To analyse the general performance of the Nigerian Refineries from inception.
 To identify the main reasons for the poor performance.
 To propose possible solution.
Photo: The New Port Harcourt Refinery at Alesa-Eleme, 1989.
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PREAMBLE:
A few weeks ago, the President, Professor Adebayo Sanni asked me, if he could give
me an assignment to deliver what has since become the traditional lecture on this
occasion. He suggested that I should choose a topical subject related to Energy or
Petroleum.
It did not take much thinking for me to decide during the phone conversation that I
would speak on the subject of refineries in Nigeria. The petrol shortage throughout the
country was causing a great deal of havoc for every Nigerian. The Nigerian refineries
are definitely at the heart of the problem. Even if the importation of the products
appears to be the preferred solution, it should only be a temporary one. The best
solution for the long term has been demonstrated to be in local refining of Nigerian
crude oils.
Finally, I chose this topic for personal reasons as a Nigerian and a professional
engineer. I was fortunate to participate intensively in all stages of the execution of the
three Nigerian refinery projects. I also had the privilege of running two them as the
Chief Executive for seven years on aggregate. I am therefore determined to join any
efforts to ensure that they are returned to running efficiently and profitably again.
HISTORY OF THE NIGERIAN REFINERIES.
Exploration for crude petroleum oil in Nigeria first began in 1908. However, serious
and sustained efforts did not happen until Shell Darcy Petroleum Company
commenced operations in 1935.It took this company more than twenty years to
discover petroleum crude oil in commercial quantities in Oloibiri in 1956.
Before 1965, all the international petroleum marketing companies in Nigeria imported
their stocks independently from their own refineries located abroad. As the local
demand grew for these products, and following the local availability of crude oil by
pipeline, establishment of a refinery in Nigeria became commercially viable. Two oil
marketing companies in Nigeria, Shell and British Petroleum, BP, formed a 50/50
joint venture refining company in Nigeria, the Nigerian Petroleum Refining Company
in I960. The NPRC built a 38,000 b/d petroleum refinery at Alesa-Eleme, near Port
Harcourt to refine local crude oil into five petroleum fuel products. Construction of
the refinery commenced in 1963 and production started two years later, in 1965.
Crude oil processed in the NPRC refinery was a portion of the production destined for
export through Shell-BP’s Bonny Island export terminal. By a special contract
agreement among all the five major products marketing companies, they procured
crude oil from Shell-BP. The crude oil was transported by pipeline to the NPRC
Refinery for processing into petroleum products. The oil marketers owned the crude
oil and all the products. They paid NPRC the cost of processing based on the quantity
processed, at an agreed unit price per ton of crude oil. The major marketers also, at
their own cost arranged the timely evacuation of the products from the refinery,
mostly by sea to Lagos and the remaining by road tankers. The refinery was
debottlenecked in 1973, in order to increase its crude oil processing capacity from
38,000b/d to 60,000b/d. The domestic demand for petroleum products, which steadily
increased, was satisfied by the NPRC refinery for about 8-10 years.
In 1970, the Federal Government acting as a member of OPEC compulsorily acquired
and paid for an equity share of 60 percent in all private international companies
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working in the Upstream and Downstream sectors of the Petroleum Industry in the
country. The Federal Government invested these shares in its wholly owned
corporation, the Nigerian National Oil Corporation, NNOC. NPRC was one of such
companies whose shares were compulsorily acquired by government. NPRC was
allowed to continue to operate commercially and profitably, without any interference
from government. The Federal Government participated only at the Board,
represented by NNOC, as the majority shareholder. NPRC paid dividends regularly to
its shareholders. The refinery was adequately maintained and achieved its production
targets efficiently and safely.
NNPC REFINERIES DIVISION
In 1977, a new Decree 77 was promulgated to establish the Nigerian National
Petroleum Corporation, NNPC. Among the five divisions created in the new NNPC
Corporate Headquarters was the Refineries Division, which was headed by a General
Manager. This Division was responsible for policy, projects implementation and
coordination of all petroleum refining activities of the Corporation. In particular, the
General Manager Refineries Division was appointed Chairman, NPRC Board,
following the Federal Government’s compulsory acquisition of the (60%) equity
shareholding in the NPRC.
NNPC REFINERY PORT HARCOURT
In 1978, the Federal Government through the NNPC had acquired the remaining 40%
equity of NPRC from Shell and BP. The name of the NPRC was changed to NNPC
Refinery, Alesa-Eleme, near Port Harcourt. A new position of Managing Director and
a new management structure were established. The chairman of the Board remained
the GM, Refineries Division of NNPC. While the refinery continued to produce and
maintain its facilities as before. Within a few years, the NPRC management’s
commercial culture had been replaced with a more bureaucratic style of the NNPC
management. In fact several management changes occurred within the first five years
which fully entrenched the bureaucratic style and structure. The NNPC Refinery at
Port Harcourt had become a cost centre instead of a profit centre. The same fate
would soon befall the other refineries subsequently constructed by the NNPC.
THE REFINERY PROJECTS AT WARRI, KADUNA & PORT HARCOURT.
The acute and prolonged nationwide shortages of refinery products, especially petrol,
started between 1973 and 1974.These shortages resulted from several factors but were
generally due to the sudden sharp increases in demand. The main reasons for the high
demand were attributed to a considerable increase in the economic activities following
the end of the Nigerian Civil war. This also coincided with the beginning of the so
called ‘Oil boom’ in Nigeria which started in the mid 1970’s. Nigeria suddenly began
to earn unprecedented amounts of revenue from oil. International Oil prices had risen
sharply following the oil embargo of 1973 by the Arab countries as a result of the
invasion of Egypt by Israel. These earnings were mainly from Royalties and the
Petroleum Profit from Tax (PPT) paid by the Oil companies.
The Federal Government financially buoyed by these large earnings from oil had
embarked on a very large number of projects including a Iron & Steel Industry, road
and bridge construction projects, and two grassroots refinery projects. However,
probably the single most contributory factor to the sharp increases in demand for
petrol was the Udoji Awards for salary increases and arrears in the public and private
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sectors. These awards gave a huge step increase in the purchasing power of a large
number of Nigerians. This temporarily created a middle class in the country. Purchase
of all types of vehicles, especially ‘tokunbo’ cars, electrical and electronic household
goods sky-rocketed. The domestic demand for petrol more than doubled. Electrical
power consumption also sharply increased nationwide.
Feasibility studies were first undertaken by BEICIP, an international oil and gas
consulting firm from Paris, in 1974 for the Federal Government. The objectives were
to establish the demand and consumption patterns of petroleum products. These
studies were also used to determine the size of a new refinery to be constructed.
Following a tendering exercise involving international engineering contractors, a
contract was awarded to Snamprogetti Spa of Milan, Italy, in 1975.The contract was
for the design, procurement and construction of a new grassroots petroleum refinery
in Warri. The design capacity of the refinery was 100,000 b/d, and the lump sum cost
was US$478 million, for project duration of 30 months. This project was completed in
1978. The refinery commenced operation immediately thereafter.
A second new refinery was planned for the production of lubricating oil products,
waxes and asphalt (for the road projects). This refinery which was located in Kaduna
consisted of two refining streams, (50,000 b/d fuels units) and (50,000 b/d lubes,
waxes Asphalt plants). The contract for the construction of the Kaduna Refinery was
awarded in 1976 to Chiyoda Engineering and Construction Company of Japan, at the
cost of US $525 million, for a project completion period of 36 months. The Refinery
was completed on schedule and was commissioned in late1979. The existing products
pipeline linking Warri Refinery to Kaduna was converted to pump crude oils for
supply to the new Kaduna Refinery.
By 1980, with the old Port Harcourt, Warri and Kaduna Refineries in operation, there
was still an appreciable level of importation of petroleum products to augment
domestic production from the three refineries. A review of the old study was
conducted to update the demand and the pattern of consumption to cover the next
period of 10 years. This was also to determine the optimum size and location for an
export oriented refinery, which would also supply the domestic market as required.
The several options considered included, new refineries and/or expansion of existing
plants. The Federal Government decided to expand the capacities of the fuels units in
the existing refineries at Warri and Kaduna by “debottlenecking”. The
debottlenecking route was quicker but capacity increases were moderate. The
debottlenecking projects were completed in 1985. The new capacities at Warri
Refinery and Kaduna Refinery became 125,000b/d and 110,000b/d respectively. In
addition, a new grassroots refinery with a capacity of 150,000b/d would be
constructed adjacent to the existing refinery at Port Harcourt. The total additional
refining capacity added from the result of the new study became 185,000 b/d. This
would bring the total refining capacity in Nigeria on completion of the projects in
1989 to 445,000b/d, which is still the current total installed refining capacity in
Nigeria.
The new Port Harcourt refinery with a capacity of 150,000b/d was designed to include
facilities to export products in excess of domestic demand. The contract for the design
and construction was awarded to a consortium of JGC Corporation/ Marubeni
Corporation both of Japan and Spibatignolles of France in October 1985 at a total cost
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equivalent of US$ 850million. The construction was completed and the refinery was
successfully commissioned in October 1989. However, the exportation of petrol and
diesel from refinery lasted only a few shipments during 1990 and 1991. The increase
in domestic demand coupled with decreasing production from Warri and Kaduna
refineries had put an end to the idea of exportation of petroleum products, except fuel
oil.
THE DECISION BY THE FEDERAL GOVERNMENT TO CONSTRUCT
NEW REFINERIES.
It is important to make the following comments on the policy decision by the Federal
Government to undertake these refinery projects from 1974 to 1989.
I believe the Federal Government took the correct decisions at that time, to undertake
the projects because;
a) The investment and operating costs of any refinery project were too high for
any local private company to undertake, regardless of the profitability of the
enterprise. Moreover, none of the international oil companies operating in
Nigeria was interested in establishing any new refineries in Nigeria at that
time.
b) The economic stability of the country was seriously threatened by the acute
shortage of the crucial fuel products.
c) There are many other additional benefits realizable from that decision, such as
the creation of new jobs and potential cost savings for the country’s economy.
The feasibility studies for the new Port Harcourt refinery project had clearly
demonstrated the potential savings to be earned from refining Nigerian crude
oils at refineries located on the coastal areas of the country, when compared to
the importation of the products for domestic consumption.
d) Fortunately, the Federal Government had the financial resources and the will
to act promptly according to expert advice.
However it is one thing for the Federal Government to preserve the economic and
social stability of the country, by investing in these projects in response to the
looming crisis. It is a completely different matter to continue to own, manage and
operate such strictly commercial assets as cost centres. With the benefit of hind sight,
the Federal Government should have divested all or majority of its equity to a
competent private company at the earliest opportunity. That would have ensured the
refineries would be run efficiently and profitably at all times like the NPRC refinery
had been a decade earlier. Unfortunately it did not do so. I am not aware such advice
was given to the Federal Government at that time.
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ANALYSIS OF THE PERFORMANCE OF THE NIGERIAN REFINERIES
There are standard criteria used in the industry for measuring the performance of
petroleum refineries. These include:
o The percentage capacity utilisation. This is the most common parameter used
and it essentially measures the overall efficiency of the refinery.
o
The products yield vis-à-vis design yields. This measures the efficiency of the
processing units of the refinery.
o Historical safety records. Such records include the number, frequency and
severity of different causes of accidents
o The refinery on-stream factor. This is measured for individual process units, as
well as the entire refinery. These factors measure the continuity and reliability
of the operations.
o
The design turn down ratio of 60% is the minimum percentage of design
capacity throughput recommended to operate the crude oil distillation column
by process engineering designers, industry wide. If the crude distillation
column is operated below this value the products yield pattern and quality may
be different from the design specifications.
On the basis of the parameters described above I have reviewed the performance
of the Nigerian Refineries from inception up till the recent times. Some of the
results of my findings are presented in the attached Tables and Graphs.
ALL NNPC REFINERIES AVERAGED CAPACITY UTILIZATION 1997-2008
YEAR
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
CAPACITY
UTILIZATION
%
48.0
33.4
40.9
22.3
50.2
49.0
27.6
23.4
43.5
20.2
14.8
24.11
Table 1a
NEW PORT HARCOURT REFINERY ONLY
YEAR
1989
1990
1991 1992 1993 1994 1995 1996 1997 1998
CAPACITY
66
UTILIZATION
%
YEAR
1999
93
90
2000
2001 2002 2003 2004 2005 2006 2007 2008
CAPACITY
55.7
UTILIZATION
%
31.1
60.7
76
51.4
85
50.5
58
30.7
76
38.1
58.4
45.7
69
23.8
54.3
48.5
Table 1
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As a result of capacity underutilization, the yield, hence production efficiency
also declined.
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THE PROBLEMS OF NIGERIAN REFINERIES
The problems are presented as follows:
Inadequate Funding and Autonomy
From the inception of each of the NNPC Refineries, the Managing Director and his
management team have faced serious perennial challenges in terms of:
1) Securing adequate Working Capital from the NNPC Corporate Headquarters.
2) Their autonomy to commit the required funds, as when necessary to procure
chemicals, and catalysts, equipment spare parts, other plant consumables and
sub-contract services from outside experts.
3) The bureaucratic process of approvals, which in some instances required as
many as 27 signatures to get critical maintenance spend signed off.
These problems originated from the centralisation of powers at the NNPC Corporate
Headquarters in Lagos and later in Abuja. In turn the Corporate Headquarters derive
their powers from the Minister of Petroleum and Chairman of NNPC Board. These
problems affect all activities of the refineries directly or indirectly in varying degree
of severity, depending on how each MD can navigate his/her ways through the slow
bureaucratic corporate headquarters’ approval process and continually expedite
actions. The approval processes do not have time limits. They may take a long (up to
6months) or relatively short time (within a few weeks).
Lack of proactive governance
The ultimate driving force for any products manufacturing company is the profit
motivation for the company and its shareholders. This crucial incentive which was
quite noticeable in the NPRC slowly vanished when the NNPC took over the
company. The NNPC Refineries became cost centres instead of a profit centres and
were operated like Federal Government ministries.
Sustaining staff morale in environment of an operating refinery is crucial to achieve
safe and efficient production. This has always been a serious challenge for the
management of the NNPC refineries because of the bureaucratic pressures from the
Corporate Headquarters.
Excessive Political Interference by the Federal Government.
This can take any form from staff matters (appointments, recruitments and
promotions), procurement issues, award of contracts etc. These undue influences
which constitute a heavy burden and distraction to the management would not exist or
become so serious, if the refineries were privately owned.
Plant Operations and Maintenance.
At the initial commissioning of each refinery, staff had been carefully recruited,
properly trained theoretically, practically and on the job in similar refineries, locally
or abroad. These staff had imbibed operating cultures from the initial training
environments which were always quite disciplined and commercially oriented.
However with time and operating under a more bureaucratic owner’s influence, the
staff and managers tended to become less disciplined and accountable in their duties.
This affected their productivity negatively compared to their counterparts in the
international industry. For instance, the computerized materials management and
maintenance system recommended to replace the outdated system has not been
installed for many years. These situations combined with inadequate funding, the
reasons for the poor maintenance of the facilities in the refineries can be explained.
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The Technical Services Department
This department has not functioned effectively for many years. It is grossly
understaffed with only one or two relatively inexperienced engineers per discipline.
This was not the situation in the first few years of operation. The department’s
services are critical for monitoring and introducing improvements for the performance
of the various equipment and systems to ensure compliance with design. After several
years of operations, process improvements and upgrades to meet additional capacities
and new product specifications are outstanding.
Delayed TAM’s
Turnaround maintenance is normally recommended in the industry to be carried out
after every 24 - 36 months of continuous operations. The first TAM was usually
carried out on schedule. However, subsequent TAM’s were delayed for several years
(up to 6 years in some cases). These delays have resulted in serious equipment wear
and failures experienced on the run.
For example, PHRC TAM’s history reads as follows: The first TAM was carried out
in 1991 (on time), the second was in 1994 (1 year late), the third was in 2000 (3 years
late). The next TAM was planned for 2003/2004, but was again postponed to 2007....
Frequent Emergency Shutdown of Units or Entire Refinery
Frequent emergency shutdowns create thermal shocks on major equipment. These
normally operate at high temperatures. Thermal shocks cause metallurgical stress
failures in the equipment, leading to serious unscheduled shutdowns. This translates to
loss of production and decreased plant utilisation. In some cases, quick repairs may
not be possible, if replacements are not available and have to be procured abroad. The
main causes of the frequent shutdowns are failure of the power and utilities units. The
problem of poor power plants is most serious at the PHRC. Warri refinery is most
susceptible to shutdown caused by wilful damage of the crude oil supply pipeline.
PROPOSED SOLUTION TO THE REFINERIES’ PROBLEMS
First, I wish to emphasize the fact that these problems are well known. They have
been documented and presented to the NNPC Corporate management and Board
repeatedly since 1995. Also the basic solution I am about to recommend has been
proposed by no less an international adviser than the World Bank, since then. In fact
there is an Act of the National Assembly in 2003 which directed the previous
administration to privatize a list of government owned companies. The Refineries are
listed in the third schedule.
However the political will of the Federal Government to privatise the refineries was
lacking until the last Administration took the gauntlet to initiate the process in June
2005. The Bureau of Public Enterprises, BPE on behalf of the Federal Government
engaged the services of capable international engineering ( Purvin & Gertz Inc.),
financial and management(Credit Suisse First Boston) consultants to design and
implement the processes to privatize the NNPC’s Eleme Petrochemical Company
Ltd., Port Harcourt refinery, and later Kaduna refinery. The exercises were concluded
for the EPCL and PHRC. The KRPC’s process was not handled through public
tendering and although the plant was sold to a Chinese Government nominated
company, the deal eventually collapsed. In the case of PHRC the apparent lack of
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transparency in which the final choice of the Federal Government was announced on
the eve of its departure, coupled with the public outcry afterwards, forced the
cancellation of the PHRC award. However, the EPCL exercise was completed
successfully. The success of the EPCL exercise has prompted me to adopt it as a
satisfactory model for the privatisation exercise, if only to demonstrate that a similar
exercise is possible. If the Federal Government is willing to resume the process, this
model can be used again.
The transparency of the privatization process
This is crucial not only for the most competent buyer to succeed. It is also important
for the new owner to be able to meet all the conditions agreed prior to the sale. The
production of petroleum products in sufficient quantities to satisfy the domestic
market at all times is the ultimate dividend to be reaped by the public. The new
Owners should always be able to expand the capacities or invest in additional capacity
and/ or upgrade the facilities to meet the ever increasing demands. I am confident
from the robustness of the original design and installation of the refineries that they all
can be refurbished and operated satisfactorily.
The EPCL Model for Privatization of the Nigerian Refineries
In my humble opinion, the only solution that can bring a profitable outcome to all
stakeholders (the Nigerian public included) of the refineries is to privatize the
ownership as soon as possible. This is by no means a new suggestion, this is a
successful precedent. That is why I am recommending what I will call the EPCL
Privatization Model.
EPCL was fully owned by NNPC on behalf of Government up till August 2006. The
original cost to the federal government in 1993 was US$ 1.3 billion. The EPCL is
located at about 12km from PHRC. The problems of EPCL prior to its privatization
were common in many respects to the Nigerian Refineries.
After the successful and apparently transparent tendering process was concluding in
2005, the best bidder, Indorama of Indonesia bought 75% of the company for US$
225m. The remaining equity is held as follows;
NNPC – 10%
Rivers State Government - 10%
Local Communities – 2.5%
Staff/Workers – 2.5%
Indorama took over the Company and Petrochemical complex in August 2006.
Production which had virtually stopped in 2005 resumed in August 2006.
Products sold after the first 3 months under private ownership was more than the
quantity produced for the previous 28 months under the NNPC (Government)
ownership.
The Company is currently producing at 270,000metric tones/yr
The highest production ever recorded under NNPC management was 58,000 metric
tons/yr (2001)
Sales
The main products from EPCL are:
Polyethylene pellets
Polypropylene pellets
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All products currently manufactured in the Eleme Plant are sold locally. The company
has established two new large warehouses in Lagos and Kano from where all its
customers collect and pay for the products. 95% of Nigerian market demands are met
by EPCL- Indorama Ltd.
Change in Management Policies and Procedures
The total staff strength, and consequently the overhead costs have been reduced
considerably. There have been major changes in management policy and procedures,
especially in the procurement and materials management. However, the most radical
improvements are in the level of authority given to the Managing Director. The MD is
allowed to spend as necessary to operate and maintain the plant. The approvals for
major expenditures are obtained from the Chairman in Indonesia, by email and
telephone.
Staffing
Indorama’s local recruitment and staffing policy have allayed the fears of the EPCL
staff and Nigerian Unions which they perceived before privatization.
In August 2006, as part of the agreement with BPE, 350 NNPC staffs were retained,
during a transition period to assist the new owner to start production, while new
recruitment and training were embarked upon.
EPCL-Indorama recruited 1000 new Nigerian staffs and brought in about 180
experienced staff from Indonesia. The new Nigerian staffs were trained by the old
NNPC staff and the Indonesian team. By the end of 2007 the NNPC staffs were
reduced to 30. The remaining 29 except 1, the Manager Operations were released in
August 2008. The Indonesian staffs also have been reduced to 140 and the process
may continue as the new Nigerian staffs become more experienced.
Dividends to Shareholders
In 2008 Indorama paid N
= 1billion each to NNPC and the Rivers State Government in
Dividends.
Final Foot Note
This success story has been shared with all the stakeholders, the BPE, NNPC, and
senators of the Republic of Nigeria during visits to the EPCL-Indorama complex.
RECOMMENDATION
I therefore strongly recommend the use of this model for the privatization of all the
Nigerian Refineries as soon as possible. I further recommend that as a minimum and
in order to avoid the political interference that arose during the last privatisation
exercise that at least the Port Harcourt and Warri refineries should be slated for
simultaneous sale.
I was privileged to participate in the last tendering process as a management
consultant to one of the consortiums of bidders in 2005. This gave me the opportunity
to revisit the facilities again after about 13 years’ absence. All the foreign experts and
I who toured and inspected the plants for several days were convinced the PHRC
could be restored back to full capacity utilization within 12 to 18 months after
privatization.
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