Wednesday, 23 September 2015

REHABILITATION OF MORIBUND REFINERIES: BUHARI ON A FAILURE MISSION

Muhammadu Buhari, President, Federal Republic of Nigeria
Faced with dilapidating state-owned refineries, the President of the Federal Republic of Nigeria, Muhammadu Buhari and the Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Dr.  Emmanuel Ibe Kachikwu, have opted for retrogression.

By stubbornly insisting on holding on to, and throwing more public money at the plants, they have set out on a familiar, treacherous road that headlined the failure of their predecessors to provide locally-refined petroleum products for three decades. Privatization however remains the one sure and tested route to efficiency in the downstream sector of our oil and gas industry.

Dr. Kachikwu disappointed investors when he announced last week that the Nigerian National Petroleum Corporation (NNPC) would not sell, but “will remodel” its four refineries by creating “new modules”, building new ones beside them and infusing new commercial practices, effectively dashing hopes that the new government’s promise of change would see to the transfer of refineries into private hands.

Many may have been overly optimistic that the 30-year nightmare of massive importation of refined products, frequent shortages and a corruption-fuelled subsidy regime would end with the coming of the Buhari government. Indeed, the President has never been enthusiastic about privatisation, persuaded that once corruption and “indiscipline” are rooted out of the system, the refineries and other state enterprises will run efficiently.

The appointment of Dr. Emmanuel Kachikwu as Group Managing Director of the NNPC and the pro-business credentials of Vice-President, Professor Yemi Osinbajo, who chairs the National Council on Privatisation, were expected to temper Buhari’s statist instincts.

A noted legal mind and long-time operator in the oil and gas sector tapped from ExxonMobil, the world’s largest oil major, Dr. Kachikwu has gone the way of his predecessors who, once appointed, dumped their advocacy of privatisation to become apologists for unproductive and corruption-prone state control of the oil downstream.

Nigeria is paying an unbearable price for this monopoly. Massive subsidy payments, most of them dubious, are made annually on petrol and kerosene imports despite an average crude oil production capacity of 2.3 million barrels per day. Shortages have become a permanent reality.

Yet, experts unanimously agree that the refineries in their present state are drain pipes. Dr. Kachikwu too admitted that, being 30 to 40 years old, they were hard to maintain. On a visit to the Kaduna refinery, he declared that the plants “cannot take Nigeria anywhere”, noting that three of Kaduna’s six units had been down and un-serviced for long. The first of Port Harcourt’s two refineries was built in 1965, Kaduna in 1980 and Warri in 1978 but upgraded in 1987-89.

Ben Murray-Bruce, a senator, recently likened pouring more money into them to seeking to rehabilitate a Mercedes 450 SEL salon car which production stopped in 1981, instead of the cost-efficient option of buying a new model. Like the Idika Kalu Presidential Panel recommended in 2012, the Senator said the cost of regular Turnaround Maintenance on the aging plants “is so high that it would make better sense to build a new refinery.” Rather than use scarce public funds to build new refineries, it is better to have a robust liberal regime to open the floodgates to foreign and local investment in refineries, petrochemical plants, pipelines and depots.

Nigerians expect Buhari to translate his pledge made in Washington, United States, in July, to break the NNPC into two – one as an investment vehicle and the other as a truly independent regulator – into concrete action. The last Petroleum Minister, Mrs. Diezani Alison-Madueke, said in 2013 that getting a replacement for the decayed facilities “was not possible as they are obsolete’’ and can hardly produce. Billions of dollars have been allotted for Turn Around Maintenance (TAM) over the years and promptly stolen. The last government said it borrowed $1.6 billion barely three years ago for TAM in a shadowy deal that barely delivered 10 per cent capacity utilisation.

The danger in the rush to put the refineries to optimal use is that they could actually work for a while, but, shortly after, begin to break down, requiring even more infusions of cash. Nigerians have seen this happen in the power sector when the Olusegun Obasanjo administration gave the Liyel Imoke-led committee billions of naira to rehabilitate obsolete power plants, and in the railways sector where the Chinese have for 20 years been given billions of naira to “rehabilitate” rail tracks laid between 1898 and 1964! While the power plants began collapsing one after the other shortly after they were restarted, a rail journey from Lagos to Ibadan (147 km) takes four hours and Lagos to Kano (1,186 km) lasts 28 hours.

President Buhari should hearken to the earlier, and wiser, recommendation of the NNPC and the Kalu panel and quickly privatise the refineries. He should initiate a liberal operating regime that, like the telecoms reform, will energise private capital and create jobs. The private sector can get the job done while the government invests in health care, education, training, water supply and sanitation, roads and institution building. Buhari puts faith in his personal discipline, but should ask himself what happens after he leaves office.

The United States Government owns none of the 140 refineries in the country that process over 17 million bpd. Without domestic crude oil reserves, Singapore’s three major refineries with 1.3 million barrels per day, makes the country the undisputed oil hub in Asia and one of the world’s top three export refining centres. Holding on to the refineries is a bad idea and the government should not throw more money into a sink hole.