Crude Oil Refining or Petroleum Product Importation: Which Is Economical for Nigeria

CRUDE rock fossil embrocate colour nicety OR vernacular mathematical mathematical productS importing WHICH IS stinting FOR NIGERIA? ABSTRACT unit of measurementy(a) of the closely pivotal ch apiece(prenominal)enges facing Nigeria is being capable to foregather the verve strike of the energy starved populace the exponential population gain discombobulates it eve very much challenging. The approach adoptive to meeting this need has forceed badly on the economy of the nation as reflected in the year-on-year stinting figures. This so-and-so be attributed to her choice of net importer of rock rock unmannered oil harvests office to the much much stinting municipal cultivation selection.This paper analyses the best economic option amidst refining rasp viper vipery c e trulywhere and importing the products in Nigeria, at the end making probable suggestions. bow OF CONTENT ABBRECIATIONS 1. NTRODUCTION. 4 2. CRUDE c everyplace shade AND flatulen cyeum IMPORTATION IN NIGERIA 5 2. 1 Overview 5 2. Challenges of rock embrocate Product civilization in Nigeria 6 3. CRUDE rough oil REFINING AND oil color PRODUCTS ECONOMICS .. 8 3. 1 The political economy of Crude fossil anele color Refining .. 8 3. 2 The Economics of fossil oil Products.. 9 4. CRUDE OIL REFINING, PETROLEUM PRODUCTS IMPORTATION AND THE ECONOMY.. 0 5. CONCLUSION 11 BIBLIOGRAPHY. 13 ABBREVIATIONS BPSD Barrels per Stream day duration B/D Barrels per twenty- iv hours CBN Central Bank of Nigeria GDP unrefined Domestic ProductNNPC Nigerian guinea pig fossil oil association NPRC Nigerian oil color Refining smart set PHRC Port Harcourt Refinery guild 1. INTRODUCTION The role of bleak oil remains key among the energy stocks, accordingly we view to still live with the consequences that argon associated with it, one of which is economical. This obviously is an aspect no coarse, importer and exporter own been able to all everywherecome, though its impact on some countries is little than in some others.Nigeria is definitely one of those countries whose economy has been monumentally impacted, ironically though, a leading uncivil oil scramr and exporter in the world. However, this is not to pick out away crude oils enormous contribution to the Nigerian macro-economy over the years it holds sway. The discovery of oil in Nigeria was thought to be a vainglorious respite to the evolution energy grant challenges facing her and to bring economical gains, in particular as the toll of oil has a great deal been on the increase. Hence, should have do colossal sums of money from it.Incidentally, this is not to be, as oil suddenly took shine off the still major sources of the rudes GDP. Sectors permutationable agriculture and manufacturing went moribund, making Nigeria a mono-economy, with oil being the mainstay of the economy. It provides 95% of distant exchange earnings and roughly 80% of government budgetary r fifty- fiftyues1. The Nigeria economy plays into the detention of the volatility of exceedingly vulnerable away shocks, particularly the vicissitude of world oil trade expenses, and the consequent inflations that characterise it most of the times.With the work of 229,008,126 lay of crude oil and condensates increased in the third make of 2010 with an average of 2. 49 million casks per day of national production in recent years, cardinal refineries of 445,000 b/d refining efficacy, the issue of meeting municipal oil pick up should have been well addressed. However, with the 0 15% refining susceptibility in 20092, which is often the case over the years, consequence became the only available alternative. Hence, Nigeria though a leading exporter of crude oil in the world is in addition, ironically, a net importer of oil products.This paper is divided into four chapters chapter 2 looks at crude oil refining in Nigeria, offering an overview and challenges that confronts it. In chapter 3, crude oil refining and crude oil products economics is examined and chapter 4 looks at the implications of twain crude oil refining and import vis a vis the economy. The chapter 5 concludes the paper with hardly a(prenominal) suggestions as to what the best economic option should be in meeting the oil color products exact in Nigeria. 2. CRUDE OIL REFINING IN NIGERIA 2. 1OVERVIEWThe fossil oil products consumed in Nigeria had been imported from refineries abroad this continued even a join of years by and by the discovery of crude oil in a commercial quantity in the estate. However, as the demand for the products increased and with the availableness of the feed billet, the two Multinationals direct in the rural area wherefore saw it as a viable bloodline to establish refinery that would dish out the domestic demand. This lead to the 50/50 joint venture refining bon ton between Shell Darcy oil colour Company and British Petroleum called the Nigerian Petrole um Refining Company (NPRC) in 1960.The saying of the refinery took two years to complete by 1965 it commenced operation at an tacked refining cognitive content of 38,000 bpsd3 to refine local crude into phoebe bird crude products. It was locate at AlesaEleme, rough Port Harcourt, some kilometres away from the crude oil production post. In enounce to meet the ever increasing demand for the products, the refinery was debottlenecked to increase its production capacity from the initial 38,000 bpsd to 60,000 bpsd. Running as a esoteric entity, the attach to was able to run efficiently, scratchably and met the omestic product consumption demand. In 1970, the federal official carryd and paid for a 60 per centum equity shargon in all secret international companies working in the Upstream and Downstream spheres of the Petroleum exertion in the country4, NPRC inclusive. Despite been the major sh arholder, the federal official political sympathies allowed NPRC to ope site wit hout interference. It was only correspond by its own corporation, the Nigerian field rock oil Corporation (NNOC), on which the sh atomic number 18s were directed on to represent it at the board meetings of NPRC.Hence, the lodge was commercially clamsable, well maintained and ran very efficiently. A decree in 1977 gave stomach to the Nigerian National Petroleum Corporation (NNPC), which was later to appoint the Chairman of NPRC, and then acquired the remaining 40 percent spike in NPRC. This in effect make the NPRC a sufficient political relation entity at a lower place the Refinery parting of the NNPC, headed by a frequent manager. The name was changed to NNPC Refinery, AlesaEleme, now headed by a managing director and having a new guidance structure.It was under the general manager of NNPC Refinery Division at the headquarters. A wholly Government strengthened Refinery commenced operation in 1978, after(prenominal) a 30month construction. It was located at Warri, and had an installed refining capacity of 100,000 b/d. But was de bottlenecked in 1985 to have a total capacity of125, 000 b/d. The Warri Refinery was basically built to process crude oil products and to add entertain to some of the refinery by-products such(prenominal) as propylene rich stock and decant oil5. Soon after, in 1980, other refinery, the Kaduna Refinery came on stream.It was meant to cope with the ever growth demand for petroleum products, e peculiar(prenominal)ly in the Northern axis of the country. The refinery consisted of two streams, 50, 000 b/d force out units and 50, 000 b/d lubes, Asphalt plants. It was designed to produce 3,857mt/d of Premium Motor Spirit (PMS), 1,686mt/d of Kerosene, 3,000mt/d of Automotive shove along Oil (AGO), 1,796mt/d of Asphalt, 91mt/d of LAB, 657mt/d of tail Oils, 620mt/d of Liquefied Petroleum Gas (LPG), 2,100mt/d of Fuel Oil. The existing products crease linking Warri Refinery to Kaduna was converted to pump crude oils for put out to the new Kaduna Refinery.Again, resembling the previous refineries, the fuel section of Kaduna Refinery was de-bottlenecked from the 50, 000 b/d to 60, 000 b/d. This brought the Kaduna Refinery to overall 110, 000 b/d capacity6. The quaternary and final refinery was a new grassroots refinery, adjacent to the existing Port Harcourt Refinery, with an install capacity of 150, 000 bpsd. With this, Nigeria total installed refining capacity is 445, 000b/d, which was originally built to serve both the domestic and international petroleum product demand.Unfortunately, the purpose for these refineries were short-lived, serving only for a couple of years before each began to experience various man-made challenges that made them make up centres instead of the originally intend commercially profitable centres. The ever growe domestic product demands were no to a greater extent met, as acute scarcity became a prescript phenomenon. This led, unfortunately to the light of spunky pr su bjectsity of petroleum product implication in order to meet the energy need of the nation. 2. 2 CHALLENGES OF PETROLEUM PRODUCT REFINING IN NIGERIAThe Nigerian state-owned four refineries have undergone, and still undergo several(prenominal) man-made challenges that have made it more of a liability to the country than an asset. unrivaled of the issues that reduced the refineries to follow centres is bureaucracy. Immediately NNPC took over the runway of the first refinery, bureaucracy subdue the commercial cultures that make a business thrive. Tens of signatures would have to be appended on a letter seeking to fix or compass working materials. These unnecessarily break maintenance and impact the efficient running of the refineries.Also, being fully under the restrain of Government, all the funds for running the refineries would have to come from Government coffers. This occasioned delays and outright stingy funding. Working capital especially meant to procure the needed spa rgon parts, chemicals and all other necessary items for operations was not forthcoming, at that placefore leading to the continues breakdown often experienced in the various refineries. The recommended 24-36 months normal manufacturing Turnaround Maintenance (TAM) was hardly through with(p)7.It took years, farthest above the recommended time in between for TAM at the various refineries. The results were failures, die and tear of the equipment, frequent shutdowns and complete non operations. strength of the refining patience is such that postulate well trained manpower. However, most of the refinery round like any other state- ran enterprisingness were employed or appointed on ethnic or political sentiment. In such case, proper management and efficacy is thrown to the wind. Dedication and commitment to handicraft is hardly there, and the consequence is obvious. The big one is corruption.The refineries have over the years beat conduit pipes of siphoning tax payers money. slightly individuals in Government seem to have become rich by the comatose state of these refineries, hence would do everything at heart their powers to make them remain so. These challenges have rendered the refineries confused and never operating at the capacity custom. Because of these, the country never really enjoyed product sufficiency with its vast reserve and refineries it ordinarily should have. Hence, Nigeria has always been a net importer of petroleum products. 3.CRUDE OIL REFINING AND PETROLEUM PRODUCT ECONOMICS 3. 1CRUDE OIL REFINING ECONOMICS The overall economics or viability of a refinery depends on the interaction of iii key elements the choice of crude oil used (crude slate), the complexity of the refining equipment (refinery configuration) and the craved type and tonus of products produced (product slate). Refinery operating cost, role rate and environmental considerations also find out refinery economics8. The type of crude used would witness whether there would be investment in the upgrading processes of the refinery.Light, sweet crude require less upgrading, expectant crude do need more upgrading. Also, the product demand in the food securities patience place determines the configuration of the refinery. For instance, the U. S. refineries ar piece to process a large lot of great(p), high sulphur crude and to produce large quantities of gasoline and low add togethers of heavy fuel oil. The Canadian refineries are piece for light, sweet crude, hence would upgrading to process heavy crude. Most of the European refinery configuration favours the production of diesel gasoline accounts only 20% production9.Obviously, the Nigeria refineries were configured for the light crude the country produces and produces a wide range of products meant for her trade and other markets. The refinery usage rate is a very critical component of refining economics. High percentage capacity utilization is needed for a refinery to increase operating efficiency and reduce cost per unit of output. A utilization rate of about 95% is considered optimum as it allows for normal shutdown required for maintenance and seasonal adjustments. The operable capacity of Nigerian refineries has on average 0 15% utilization, which make them grossly under utilized.High utilization capacity is one of the things that make for profit margin scenario for refineries. The refinery industry has historically been a high- volume, low- margin industry, characterised by low return on investments and fickle profits. Profitability is careful by return on investment, specify as the net income contributed by refining/merchandising as a percentage of net fixed assets (net property, plant, and equipment plus investments and advances)10. One way to represent the economics of a refinery is to calculate its Refinery Gross strand11.For example, if a refinery receives $80 from the sales agreement of the products refined from a drum of crude oil that costs $70/bbl, then the Refinery Gross Margin is $10/bbl. The Net or Cash Margin is equal to the gross margin deduction the operating costs (excluding income taxes, depreciation and fiscal trip. If a refinery experiences operating costs of $2 per barrel, then the Net Margin is $8/bbl12. The refinery margins are normally set on a competitive market, where the market is open. The opposite word is the case in the Nigerian environment, the refineries are not working, and whenever they do, profit is never the aim. 3. PETROLEUM PRODUCT ECONOMICS Refined products market is different from crude oil market in a number of ways, owing to the scale of operation ( much smaller for refined products a typical crude oil transaction involves 500,000 or even one million set of oil, darn a typical refined products sale may involve only 5,000 to 10,000 bbls), quality considerations, legal injury differentials and market size. In a competitive market, refined product monetary values are determine d by supply, demand and arsenal conditions at a given location and time13. International (border) price comes to play in the economics of refined products.The exchange rate used to convert the dollar value of imports into the domestic currency is the interbank exchange market rate, which is market determined. A freight charge (including insurance margin) is added to the value to get the arrive cost. Import duty, domestic dispersal, storage, marketing, and transportation margins are then added to obtain the order price at retail level14. Imported petroleum products also has additional cost like Port charges, taxes and export duties at source country, insurance costs for transportation and securities firm costs for agents.The obvious reality is that there exists a wide range of domestic prices for petroleum products, determined mainly by the market and subject only to taxes and special charges in the developed countries. However, in underdeveloped countries like Nigeria, the price s are fixed by the government. Hence, the products are bought at the international price with a very high interbank exchange rate, and sold at a severely subsidized, domestic rate, which has serious implications to the economy. 4. CRUDE OIL REFINING, PETROLEUM PRODUCTS IMPORTATION AND THE NIGERIAN ECONOMY. For a start, the estimated daily crisis-free demand for petroleum products in Nigeria today, are 30 million litres of petrol (PMS), 12 million litres of kerosene (DPK), 18 million litres of diesel oil (AGO), and 780 mensural tons (1. 4 million litres) of homework gas (LPG). (Braide, 2003)15. Nigeria with a population of 158. 2 million (UN, 2010) and increment to workers salary in the recent years, which have empowered kind of a number of people to acquire some petroleum products demanding appliances, is much more pent-up now than in the ultimately ten years.This makes it more challenging to satisfy. Government have obviously chosen a very hard alternative, importation, to have the demand met. With a weak currency (of N153 = $1), at a current price of crude on the international market and to a great extent subsidized domestic price of petroleum products. For instance, PMS have been at N65 ($42 cents)/litre in Nigeria for a couple of years now, as against the expected open market price of N131. 32 ($84 cents)/litre16. importation, though the only alternative to the non-functional refineries, is economically catastrophic.For instance, Government spent $1. 34billion17 from January to March, 2011 to import petroleum products to the country. In a year, this go forth amount to $5. 36 billion for importation alone, this excludes importations from marketing companies in Nigeria, tax waivers, demurrage and other implied costs that makes the total amount of importing the commodities extremely high. Government Petroleum Support ancestry (PSF), which was established to disburse funds to the importing companies and the NNPC have between January, 2006 and July 2008 spent US$ 9. 2 billion18 for subvention alone.The fund also spent over US$ 3 billion from 2009 to the first quarter of 201019 for subsidising the importation of PMS and HHK within the period. The Year-on-year importation of petroleum products keep depleting the countrys outside(a) reserve, thereby putting the economy in bad standing. On the other hand, the KRPC, WRPC and PHRC (new) were built with lump sums of $525 million, $478 million, and $850 million respectively20. Unfortunately, with the poor management, the refineries from every statistics available have become liabilities to the country.With extremist low capacity utilization, a huge staff, high operating cost, no profit from NNPC year-on-year accounts21, the refineries at present state are not economical. The implication of these is that the cost of crude oil, refining, importation, and distribution of the products are borne by the countrys treasury. A private sector run refinery industry is the only come for meeting domestic demand at a very huge economic gain and energy security to the country.This will also revive the ailing petrochemical industry, which has a long ripple effect on job creation, directly and through other dependent industries like Paint and charge card industries. But before this can be realised the unavoidable deregulation has to wee place. Little wonder why the over 18 private licensed refinery companies are yet to mobilise to site. Therefore, Government should return the issue of deregulation, and then privatise the state-run refineries. This massive importation does no good at all to the country, and should be reduced to ascend zero minimum. 5.CONCLUSION Government should be commended for taking up the challenge of build the capital intensive refineries, being beyond the ability of any local company at the time. It created energy security, jobs, averted looming crisis arising from massive paucity of supply of petroleum products and saved so much cost. But its contin ual running of the refineries is, to say the least wasteful and denigratory to the economy. Refineries are commercial ventures, with huge monetary implications, and do not provide much employment opportunities to warrant such protectionism by Government22.Obviously, it is only a few that benefits in a State-run refinery at the expense of many. Privatisation of the refineries holds more prospects economically to the country than what obtains. At the time being, the unenviable net importer position of the country is no more sustainable. Less Importation would save so much cost and the Nigerian economy shielded from the unstable, volatile international petroleum price. Subsidy has caused large loss of revenue and a speedy growth in domestic oil consumption as low price does not reflect real cost for consumption.It has contributed to the collapse of local refineries, as price of fuel do not portray cost of supply. Reluctance of private players to invest in refineries, persistent fuel shortages at filling stations, dilapidated supply and distribution infrastructures, smuggling, and product adulteration, all of which impact considerably on the economy are the consequences of the continues subsidy regime in place. Everything should be done to encourage a functional refinery industry to check the crippling importations. An efficient refinery industry in Nigeria would have massive market both within the country and in the neighbouring ountries, and this brings immeasurable economic gains that are able to change the economic outlook of the country. BIBLIOGRAPHY elementary SOURCES NATIONAL LEGISLATIONS The Nigerian National Petroleum Corporation Act, 1977 The Petroleum Products Pricing restrictive Act, 2003, No 8, Laws of the Federal Republic of Nigeria inessential SOURCES BOOKS Gary, J. H. , Handwerk, G. E. , Kaiser, M. J. , Petroleum Refining Technology and Economics, (5th Edition) (United States of America, Florida, CRC Press, 2007). OTHERS earnings SOURCES Bra ide, K. M. The Mechanics of Fuel scarceness in Nigeria, http//www. nigerdeltacongress. com/marticles/mechanics_dynamics_fuel_scarc. htm. (assessed 13/04/2011). CBN, http//www. cenbank. org/ bulge out/2011/pressrelease/gvd/CommuniqueforMPCMeetingofMarch 21 22 2011_21st Mar_. pdf (assessed 01/05/2011). CIA, The World Factbook, http//www. cia. gov/library/Publications/the-world-factbook/geos/ni. html (assessed 18/04/2011). Hossain, M. S. , Taxation and Pricing of Petroleum Products in Developing Countries A Framework for analysis with Application to Nigeria, http//www. imf. rg/external/Pubs/ft/wp/2003/wp0342. pdf (assessed 20/04/2011). Iba, L. , Fuel Crisis Still waiting for private refineries, http//64. 182. 172/webpages/news/2010/july/12//busines-12-2010. 001. htm (assessed 09/05/2011). Nigerian Refineries History, Problems and assertable solutions, http//www. businessdayonline. com/NG/index. php/oil/3256-nigerian-refineries-history-problems-and-possible-solutions-1 (assessed 09/0 5/2011). NNPC, Annual Statistics Bulletin, http//www. nnpcgroup. com/Portals/0/MonthlyPerformance/2009ABS Web. pdf (assessed 01/05/2011). NNPC, Subsidiaries, http//www. npcgroup. com/NNPCBusiness/Subsidiaries/ (assessed 09/05/2011). PPPRA, Report on the Administration of the Petroleum Support Fund (PSF), http//www. pppra-nigeria. org/briefonadministrationofPSF. pdf (assessed 01/05/2011). Refinery Economics, http//nrcan. gc. ca/eneene/sources/petpet/refraf-eng. php (assessed 19/04/2011). Refining & Product Specifications Overview, http//www. petroleumonline. com/content/overviemCont. asp? mod=8&ord=10 (assessed 19/04/2011). 1CIA-The World Factbook, at http//www. cia. gov/library/Publications/the-world-factbook/geos/ni. tml (assessed 18/04/2011) 2 NNPC 2009 annual report and EIA Nigeria Energy Data, Statistics and outline-oil, Gas, Electricity, burn 3 This is the maximum number of barrels of excitant that a distillation facility can process when running at full capacity under opt imal crude and product slate condition with no allowance for downtime. 4 Nigerian Refineries History, Problems and Possible solutions, at http//www. businessdayonline. com/NG/index. php/oil/3256-nigerian-refineries-history-problems-and-possible-solutions-1 (assessed 09/05/2011) 5 Ibid 6 Ibid 7 Ibid 8 Refinery Economics, at http//nrcan. gc. a/eneene/sources/petpet/refraf-eng. php (assessed 19/04/2011) 9 Ibid 10Ibid 11 The difference in dollars per barrel between its product revenue (sum of barrels of each product multiplied by the price of each product) and the cost of naked as a jaybird materials (primarily crude, but also purchased additives like butane and ethanol) 12 Refining & Product Specifications Overview, at http//www. petroleumonline. com/content/overviewConti. asp? mod=8&ord=10 (assessed 20/04/2011) 13Gary, J. H. , Handwerk, G. E. , Kaiser, M. J. , Petroleum Refining Technology and Economics, (5th Edition) (United States of America, Florida CRC Press, 2007) at 18-19. 14H ossain, M. S. , Taxation and pricing of Petroleum Products in Developing Countries A Framework for Analysis with Application to Nigeria, at http//www. imf. org/external/pubs/ft/wp/2003/wp0342. pdf (assessed 20/04/2011) 15 Braide, K. M. , The Mechanics of Fuel Scarcity in Nigeria at http//www. nigedeltacongress. com/martiles/mechanics_dynamics_of_fuel_scarc. htm (assessed 20/04/2011). 16 Ibid 17CBN, http//www. cenbank. org/Out/2011/pressrelease/gvd/CommuniqueforMPCMeetingofMarch21 22 2011_21stMarch_. pdf (assessed 02/05/2011). 18PPPRA, Report on the