Analysis mini refining investment opportunities in nigeria (preview)

Analysis: mini refining investment opportunities in Nigeria Africa’s Barrel Equations

C H I J I O K E K . M A M A

Analysis: mini refining investment opportunities in Nigeria

September 2015

A F R I C A’ S B A R R E L E Q UAT I O N S

2 Analysis: mini refining investment opportunities in Nigeria Africa’s Barrel Equations

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© 2015. Chijioke Kevin Mama

A f r i c a ’ s m o s t p o p u l o u s n a t i o n a n d l a r g e s t e c o n o m y i s f a c i n g a

h u g e t h r e a t ; i t ’ s a b o u t e n e r g y s e c u r i t y !


Contents

C o v e r p a g e

D i s c l a i m e r 2

C o n t e n t s 3

A b b r e v i a t i o n s 6

A n o l d c h a l l e n g e , a n e w s o l u t i o n 7

M i n i r e f i n i n g : e s s e n t i a l e l e m e n t s 7

O p p o r t u n i t i e s a n d c h a l l e n g e s 8

I n s e r t : s t r a t e g i c c o n s i d e r a t i o n ; a h y p o t h e t i c a l m i n i r e f i n e r y i n

L a g o s . 1 1

R i s k s , m i t i g a t i o n s a n d v i a b i l i t y 1 2

I n s e r t : s o m e i d e n t i f i e d r i s k s i n r e f i n e r y o p e r a t i o n 1 3

I n s e r t : P r i c e c o n s i d e r a t i o n s 1 4

I n s e r t : s o m e i d e n t i f i e d r i s k i n r e f i n e r y c o n s t r u c t i o n a n d o p e r a -

t i o n 1 5

P r o j e c t r i s k s 1 6

I n f r a s t r u c t u r a l r i s k s 1 7

I n s e r t : s p e c i f i c c h a l l e n g e s o f o p e r a t i n g a r e f i n e r y i n N i g e r i a 1 7

I n s e r t : p r o j e c t r i s k a n a l y s i s 1 8

C o n s u m p t i o n p r o j e c t i o n s 1 9

A u t o m o t i v e G a s O i l ( A G O ) a n d P r e m i u m M o t o r S p i r i t ( P M S ) 1 9

I n s e r t : p e t r o l e u m p r o d u c t s d e m a n d p r o j e c t i o n s ( 2 0 0 9 t o 2 0 3 5

( o p t i m i s t i c s c e n a r i o ) ) 1 9

I n s e r t : p e t r o l e u m p r o d u c t s d e m a n d p r o j e c t i o n s ( 2 0 0 9 t o 2 0 3 5

( r e a l i s t i c s c e n a r i o ) ) 2 1


L o c a t i o n d e c i s i o n s a n d a n a l y s i s 2 2

Regional analysis 23

South - West & South - South 24

South - East 24

North - Central & Federal Capital Territory (FCT) 26

North - East 27

North - West 27

L o c a l c o m p e t i t i o n a n d u p c o m i n g c a p a c i t i e s 2 8

Dangote group’s refinery and four state -owned refineries 28

Insert : state-owned refineries, capacities and location 29

West African market 30

Insert: s u p p l y a r r a n g e m e n t s a n d l o g i s t i c s i n f r a s t r u c t u r e i n W e s t

A f r i c a 30

P e t r o l e u m p r o d u c t s s u b s i d y a n d p o l i t i c a l e n v i r o n m e n t 3 1

I n s e r t : s o m e f a c t s a b o u t s u b s i d y 3 4

D P R a n d r e g u l a t o r y l a n d s c a p e 3 5

N i g e r i a n G o v e r n m e n t ‘ s i n c e n t i v e s f o r r e f i n e r i e s i n v e s t o r s 3 6

“ P e t r o c r a c y ” i n N i g e r i a 4 1


D o w n s t r e a m f i n a n c i n g 4 3

U s i n g S p e c i a l P u r p o s e V e h i c l e s ( S P V s ) 4 4

D y n a m i c s o f S p e c i a l P u r p o s e V e h i c l e 4 6

E q u i t y t h r o u g h l i c e n s e e c o n t r i b u t i o n s 4 7

F i n a n c i n g c o n s i d e r a t i o n s 4 8

S e c u r e d l o a n s 4 9

G o i n g f o r w a r d : s o m e s t r a t e g i e s 5 0

E n g a g e a n d i n t e g r a t e e a r l y 5 0

C o s t s a v i n g l i n k a g e s e s t a b l i s h e d a t t h e o n s e t 5 2

F o c u s o n g r o w i n g c a p a c i t y i n t h e s h o r t a n d l o n g - t e r m 5 4

S t a y o p e r a t i o n a l l y l e a n i n t h e m e a n t i m e 5 4

D a t a s o u r c e s 5 6

A b o u t t h e a u t h o r 5 8


A b b r e v i a t i o n s

b b l B a r re l s

b p d B a r re l s p e r d ay

B c f B i l l i o n c u b i c fe e t

D P R D e p a r t m e n t o f Pe t ro l e u m R e s o u rc e s ( N i g e r i a )

E & P E x p l o ra t i o n a n d P ro d u c t i o n

I O C I n t e r n a t i o n a l O i l C o m p a ny

L N G L i q u e f i e d N a t u ra l G a s

L P G L i q u e f i e d Pe t ro l e u m G a s

M F M a rg i n a l F i e l d s

M O F M a rg i n a l O i l f i e l d ( S a m e a s M F )

m m b o p d M i l l i o n b a r r e l s o f o i l p e r d ay

N N P C N i g e r i a n N a t i o n a l Pe t ro l e u m C o r p o ra t i o n

O M L O i l M i n i n g L e a s e

O P L O i l P ro s p e c t i n g L i c e n s e

O P E X O p e ra t i o n a l E x p e n d i t u r e

P I B Pe t ro l e u m I n d u s t r y B i l l ( N i g e r i a )

P P M C P i p e l i n e s a n d P ro d u c t s M a r ke t i n g C o m p a ny

Tc f Tr i l l i o n c u b i c fe e t

2 P R e s e r v e s P ro v e d a n d P ro b a b l e R e s e r v e s

E D C Ef fe c t i v e D i s t i l l a t i o n C a p a c i t y

C P R C C o s t Pe r R e f i n i n g C a p a c i t y

H H K H o u s e H o l d Ke ro s e n e

S P V S p e c i a l P u r p o s e Ve h i c l e


T h e m u c h a w a i t e d p o l i c y m o v e o n p e t r o l e u m r e f i n i n g i n A f r i c a ’ s

b i g g e s t e c o n o m y h a s c o m e . D e c a d e s o f d e p e n d e n c e o n i m p o r t e d r e -

f i n e d p r o d u c t s h a s t a k e n a h u g e t o l l o n N i g e r i a ’ s e c o n o m y . I t t e c h -

n i c a l l y m o v e d N i g e r i a n j o b s a b r o a d , p u t e n o r m o u s p r e s s u r e o n t h e

N i g e r i a n n a i r a d u e t o f o r e i g n e x c h a n g e a n d p r o m o t e d c o r r u p t i o n

t h r o u g h s u b s i d i e s , w h i l e e n c o u r a g i n g p r o d u c t s m u g g l i n g i n t o

n e i g h b o r i n g W e s t A f r i c a . I n l a t e M a y , N i g e r i a ’ s D e p a r t m e n t o f P e -

t r o l e u m R e s o u r c e s ( D P R ) c a r r i e d o u t a s e r i e s o f w o r k s h o p s t o p r o -

m o t e a n e w p o l i c y t h a t e n c o u r a g e d i n v e s t m e n t i n m o d u l a r r e f i n i n g

i n N i g e r i a . T h i s i s i n d e e d a g o o d i n v e s t m e n t w i n d o w t h a t h o l d s

e c o n o m i c , s o c i a l a n d d e v e l o p m e n t a l v a l u e f o r N i g e r i a a n d p o t e n -

t i a l i n v e s t o r s . H o w e v e r , m i n i r e f i n i n g h o l d s a t r i c k y m a r g i n , w h i c h

c a l l s f o r t h e m o s t s k i l l e d a n d s u r g i c a l a p p r o a c h i n o r d e r t o g u a r a n -

t e e p r o f i t a b i l i t y . T h e f o l l o w i n g i s a n a n a l y s i s o f s o m e o f t h e e s s e n -

t i a l c o n s i d e r a t i o n s o f m i n i - r e f i n i n g ; i n t h e c o n t e x t o f N i g e r i a ’ s

b u s i n e s s e n v i r o n m e n t .

T h e n e w r e f i n i n g o p p o r t u n i t y i n N i g e r i a i s a g r e a t i n i t i a t i v e . I t s i m -

p a c t s t r a n s c e n d e c o n o m i c g a i n s f o r i n v e s t o r s a n d e n t r e p r e n e u r s w i t h

r e s p e c t t o i t s p o t e n t i a l c o n t r i b u t i o n s t o n a t i o n a l d e v e l o p m e n t . T h e

m o s t i n t e r e s t i n g e l e m e n t o f m i n i r e f i n i n g i s t h e r e l a t i v e l y l o w s e t u p

c o s t , w h e n c o m p a r e d w i t h f u l l c o n v e r s i o n r e f i n e r i e s ( w i t h c a p a c i t i e s

o f a b o u t 2 0 0 , 0 0 0 b p d ) a n d c o s t s t h a t r a n g e f r o m U S $ 2 - 9 b i l l i o n . F o r

e x a m p l e , T h e T u r k i s h S o c a r r e f i n e r y .

AN OLD CHALLENGE, A NEW SOLUTION

M I N I R E F I N I N G : E S S E N T I A L E L E M E N T S


i s a U S $ 5 b i l l i o n m o d e r n r e f i n e r y f u n d e d b y t h e I n t e r n a t i o n a l F i -

n a n c e C o r p o r a t i o n ( I F C ) . M i n i - r e f i n e r i e s c a n b e e s t a b l i s h e d w i t h

a b o u t $ 1 0 0 - $ 2 5 0 m i l l i o n . D e p e n d i n g o n t h e c o n f i g u r a t i o n , m a n u -

f a c t u r e r a n d p l a n t l o c a t i o n t h e c o s t c a n b e l o w e r o r h i g h e r .

F u r t h e r m o r e , m i n i r e f i n e r i e s o f f e r t h e p o s s i b i l i t y o f p h a s e d c o n -

s t r u c t i o n a n d t h e f l e x i b i l i t y o f q u i c k a n d e a s y u p g r a d e t o r e f l e c t

c h a n g e s i n p r o d u c t d e m a n d ( a n a d v a n t a g e f o r a n e w p l a n t i n N i g e -

r i a ) F o r e x a m p l e , a n i n i t i a l 3 0 , 0 0 0 b p d c a p a c i t y r e f i n e r y c a n b e

u p g r a d e d t o d o u b l e o r t r i p l e t h e c a p a c i t y w i t h e a s e a n d s p e e d . I n

a d d i t i o n , i t s l o w c a p i t a l r e q u i r e m e n t s & b e i n g s k i d m o u n t e d ,

m e a n s c o n s t r u c t i o n t i m e i s c o m p r e s s e d a n d t h e q u a l i t y o f e n g i -

n e e r i n g i s i m p r o v e d . N e w p r o d u c t d e m a n d s c a n b e e a s i l y m e t w i t h

t h e a d d i t i o n o f n e w m o d u l e s .

D i f f e r e n t p l a n t s c a n s e r v e d i f f e r e n t m a r k e t s ( s u c h a s t h e s i x g e o p o -

l i t i c a l z o n e s i n N i g e r i a ) . R a t h e r t h a n f e e d a w h o l e n a t i o n o r r e g i o n

w i t h a s i n g l e p l a n t , t o g e t h e r w i t h t h e a s s o c i a t e d r i s k s o f c r e a t i n g

a n e l e p h a n t - s i z e d s u p p l y c h a i n a n d o p e r a t i o n s m a n a g e m e n t s y s t e m

( a h u g e c h a l l e n g e i n N i g e r i a ’ s p r e s e n t s u b - o p t i m a l i n f r a s t r u c t u r a l

c o n d i t i o n ) . H o w e v e r , m i n i r e f i n e r i e s c a n n o t b o a s t o f t h e s a m e s c a l e

a n d e f f i c i e n c y o b t a i n a b l e f r o m a f u l l c o n v e r s i o n p l a n t a n d w i l l t y p -

i c a l l y r e q u i r e m o r e p e r s o n n e l p e r E f f e c t i v e D i s t i l l a t i o n C a p a c i t y

( E D C ) .

T h e m o s t c o n s p i c u o u s o p p o r t u n i t y i n t h i s n e w i n v e s t m e n t v i s t a

i s t h e r e n e w e d i n t e r e s t o f N i g e r i a ’ s g o v e r n m e n t , [ l e d b y P r e s i -

d e n t B u h a r i ] i n t h e g r o w t h o f l o c a l r e f i n i n g a n d m i n i r e f i n e r y a s

w e l l . T h e g e n e r a l r e f o r m s o f a d m i n i s t r a t i v e s t r u c t u r e s , g o v e r n -

a n c e a n d f i s c a l r e g i m e s i n N i g e r i a ’ s o i l a n d g a s i n d u s t r y i s a

OPPORTUNITIES & CHALLENGES


d e v e l o p m e n t t h a t i s c a p a b l e o f l o w e r i n g o r e l i m i n a t i n g t h e u n p l e a s -

a n t a n d h i g h c o s t a n d r i s k s a s s o c i a t e d w i t h d o i n g b u s i n e s s i n N i g e -

r i a . W i t h t h e r i g h t s t r a t e g i e s a n d t e a m , p r o j e c t o w n e r s w i l l b e g u a r -

a n t e e d r e a s o n a b l e p r o f i t a b i l i t y .

N i g e r i a ’ s D e p a r t m e n t o f P e t r o l e u m R e s o u r c e s ( D P R ) h a s o u t l i n e d a

n u m b e r o f i n c e n t i v e s f o r i n v e s t o r s i n r e f i n e r i e s i n N i g e r i a . A n a l y s t

a n d e x p e r t s a r e a d v o c a t i n g f o r m o r e r o b u s t s u p p o r t s y s t e m s , w h i c h

t h e g o v e r n m e n t m a y i m p l e m e n t i n t h e f u t u r e , g i v e n t h e u r g e n t /

c r u c i a l n a t u r e o f t h e n e e d t o g r o w l o c a l r e f i n i n g c a p a c i t y .

H o w e v e r i t i s n o t e w o r t h y t o m e n -

t i o n t h a t o n g o i n g r e f o r m s i n N i g e r i a

h a s t h e p o t e n t i a l t o i n t r o d u c e s i g -

n i f i c a n t e l e m e n t s o f f l u x i n t h e r e g -

u l a t o r y l a n d s c a p e ; a t l e a s t i n t h e

n e a r - t e r m .

O w n e r s w i l l t h e r e f o r n e e d t o a r t i c u -

l a t e f l u x r e s i l i e n t s t r a t e g i e s a n d p r o -

c e d u r e s f o r d e a l i n g w i t h t h e e n v i r o n -

m e n t i n i t s c u r r e n t s t a t e .

I n v i e w o f t h e p o o r e c o n o m i c c o n d i t i o n

o f N i g e r i a a n d t h e l e v e l o f r e f o r m s t h a t t h e g o v e r n m e n t i s d e s i r -

o u s o f a c h i e v i n g i n t h e l i f e o f t h i s a d m i n i s t r a t i o n ; t h i s s t a t e o f

a n t i c i p a t e d r e g u l a t o r y f l u x m a y a s w e l l c o n t i n u e b e y o n d t h e

s h o r t - t e r m .

O f t h e t h r e e m a j o r

m e a n s o f p e t r o l e u m

p r o d u c t t r a n s p o r t ;

P i p e l i n e i s t h e c h e a p e s t

m e a n s o f t r a n s p o r t , f o l -

l o w e d b y R a i l a n d

T r u c k . P r e s e n t l y , p r o d -

u c t s a r e p r e d o m i n a n t l y

d i s t r i b u t e d i n N i g e r i a

v i a t h e m o s t e x p e n s i v e

m o d e : R o a d T r u c k s .


F u r t h e r m o r e , w i t h m a n y r e f i n i n g p l a n t s p r o p o s e d t o c o m e o n -

s t r e a m i n N i g e r i a i n t h e c o m i n g y e a r s ( b o t h m i n i a n d f u l l c o n v e r -

s i o n r e f i n e r i e s ) i t ’ s e a s y t o e n c o u n t e r c o m p e t i t i o n e s p e c i a l l y i n

s p e c i f i c g e o g r a p h i c a l s u b - r e g i o n s .

A l t h o u g h t h e g e n e r a l o u t l o o k f o r c o n s u m p t i o n g r o w t h i s p o s i t i v e ,

e x c e s s c a p a c i t y c a n e a s i l y b e b u i l t i n s p e c i f i c r e g i o n s w i t h t h e c o n -

s e q u e n t f i e r c e c o m p e t i t i o n f o r t h e o p e r a t o r s i n v o l v e d .

T h i s i s s p e c i f i c a l l y i m p o r t a n t f o r s m a l l v o l u m e p r o d u c e r s w h o m a y

n o t b e c a p a b l e o f c o m p e t i n g o u t s i d e t h e i r i m m e d i a t e m a r k e t o r r e -

g i o n ( d u e t o t h e a d d i t i o n a l c o s t t h a t m i g h t a r i s e f r o m m a r k e t i n g ,

d i s t r i b u t i o n a n d s t o r a g e ) . A n a l l r o u n d s t r a t e g i c c o n s i d e r a t i o n o f

m a r k e t f o r e a c h i n d i v i d u a l p r o j e c t i s k e y t o p r o f i t a b i l i t y .


S t r a t e g i c c o n s i d e r a t i o n s

A h y p o t h e t i c a l m i n i r e f i n e r y i n L a g o s S t a t e

Can ship feedstock using either Pipeline, Vessels or Railway

With pipeline: products may move 441.2km from a producing field in Delta

state to Lagos (Via Benin, Shagamu)

With vessels: products may be moved 147 nautical miles (272km) from

Escravos to Apapa.

Might incur between $6-10 per barrel to move product by vessel within con-

tinental shelf.

Yields of 50 liters/barrel for PMS can be expected (output is estimated to

range from 50 - 90 liters. depending on the configuration of the refinery and

crude slate)

With high API crude (available in Nigeria) product yield may range between

1,500,000 liters/day and 2,700,000 liters/day for a 30k bpd capacity plant.

T h e r e a r e h o w e v e r a n u m b e r o f i l l e g a l r e f i n e r i e s i n t h e N i g e r D e l t a .

T h e r e a c t i v i t i e s a r e b e i n g c l a m p e d d o w n b y r e g u l a t o r s d u e t o t h e e n -

v i r o n m e n t a l a n d s a f e t y r i s k w h i c h t h e y p o s e t o b o t h t h e o p e r a t o r s

a n d t h e c o m m u n i t i e s f r o m w h i c h t h e y s u r r e p t i t i o u s l y o p e r a t e .

W h i l e t h i s i l l e g a l s e c t o r i s b o o m i n g , t h e i r c r u d e m o d e o f o p e r a t i o n

a n d h i g h l y s u b s t a n d a r d p r a c t i c e s m a k e s i t d i f f i c u l t t o l e v e r a g e t h e i r

k n o w l e d g e , s k i l l o r m a n p o w e r i n a s t a n d a r d , l e g a l , m i n i r e f i n i n g o p -

e r a t i o n . H o w e v e r p o s s i b l e a r e a s o f l i a i s o n m a y e x i s t o n c l o s e r

e x a m i n a t i o n .


T h e p r o f i t a b l e o p e r a t i o n o f m i n i r e f i n e r i e s r e q u i r e s c a r e . I n v e s t o r s

s h o u l d h a v e a g o o d k n o w l e d g e a n d v i s i o n o f w h a t i s t o b e a c h i e v e d .

T h e v i a b i l i t y a n d o p e r a t i o n a l e c o n o m i c s o f m i n i - r e f i n e r i e s d e p e n d s

o n a n u m b e r o f f a c t o r s a s w e l l a s t h e i r i n t e r p l a y , n a m e l y ;

1 ) P r o d u c t s l a t e , 2 ) C r u d e s l a t e 3 ) R e f i n e r y ’ s c o n f i g u r a t i o n 4 )

P r o x i m i t y t o s i z e a b l e m a r k e t 5 ) P r o x i m i t y a n d a c c e s s t o c r u d e 6 )

G o v e r n m e n t i n c e n t i v e s t o s u p p o r t l o w m a r g i n s f o r m i n i -

r e f i n e r i e s ( d u e t o l a c k o f e c o n o m i e s o f s c a l e ) 7 ) L o g i s t i c a l i s s u e s

a n d o t h e r s .

A p r o s p e c t i v e i n v e s t o r s h o u l d u n d e r s t a n d e a c h o f t h e s e e l e m e n t s

a s s t a n d a l o n e f o r c e s , a s w e l l a s , h o w t h e y i n t e r r e l a t e w i t h o n e a n -

o t h e r i n t h e c o n t e x t o f t h e N i g e r i a n i n v e s t m e n t e n v i r o n m e n t . M i n i

r e f i n i n g h a s b e e n e m b r a c e d i n m a n y r e g i o n s o f t h e w o r l d . E m i r a t e s

N a t i o n a l O i l C o ’ s ( E N O C ) s u b s i d i a r y ; C y l i n g a s , a n d U K - b a s e d P y r a -

m i d E n g i n e e r i n g p l a n s t o b u i l d a 7 , 5 0 0 b p d m o d u l a r r e f i n e r y i n F u -

j a i r a h , U A E . I r a n i s a l s o b u i l d i n g e i g h t ( 8 ) n e w m i n i - r e f i n e r i e s t o

s e r v e t h e S o u t h P a r s g a s f i e l d .

T h e t e c h n o l o g y i s a v a i l a b l e i n t h e M i d d l e E a s t a n d N o r t h A m e r i c a

w h e r e t u r n k e y e n g i n e e r i n g s e r v i c e s c a n b e o b t a i n e d . T h e c o n f i g u r a -

t i o n o f t h e r e f i n e r y a n d i t s e c o n o m i c v i a b i l i t y d e p e n d s l a r g e l y o n t h e

s p e c i f i c a t i o n o f t h e f e e d s t o c k i t w i l l b e p r o c e s s i n g . W i t h h i g h A P I

c r u d e , t h e r e w i l l b e l i m i t e d n e e d f o r f u r t h e r i n v e s t m e n t s i n s y s t e m s

l i k e

RISKS, MITIGATIONS & VIABILITY


Type of Risk Risk Allocated to Mitigation Metric

Management Risk - Operating Risk - With-

drawal

Sponsor Sponsor

Experience/O&M contractor ND Undertakings

Pre-completion Risks - Land Availability - Time

Overrun - Cost Overrun -

Funding

Project Co/Govt. EPC Contractor EPC Contractor Sponsor

Notification/Sale Deeds/Lease Fixed time, Fixed Price contracts

Equity & Debt Agreements

Post-completion Risks

Feedstock Supply -

Feedstock Tpt. -

Environmental -Plant

Availability, Evacuation

Feed Supplier/Project Co. Supplier/Transporter Project Co. O&M contractor Project Co./Off-taker

LD Provisions/Alternate sources LD Provisions Requisite Approvals Penalties LD Provisions

d e - s a l t e r s ( u s u a l l y f o r c r u d e h a v i n g s a l t c o n t e n t a b o v e 1 k g p e r

1 0 0 0 / b b l ) a n d / o r d e - s u l f u r i z a t i o n u n i t s ( f o r h i g h s u l f u r c o n t e n t

c r u d e ) I n c o n t r a s t , w i t h h e a v y ( c h e a p e r ) c r u d e – i f i t c a n b e e c o -

n o m i c a l l y s o u r c e d – f u r t h e r i n v e s t m e n t w i l l b e r e q u i r e d i n t h e

f o r m o f o t h e r p r o c e s s i n g u n i t s t o b o t h b r i n g s u l f u r c o n t e n t t o a c -

c e p t a b l e u n i t s a n d

S o m e i d e n t i f i e d r i s k s i n r e f i n e r y o p e r a t i o n

S o u r c e : G i r i s h G h a l d i v a l


t o e n h a n c e t h e o c t a n e v a l u e o f N a p h t a p r o d u c t s a n d i n t u r n g e t

g o o d q u a l i t y u n l e a d e d g a s o l i n e . M a x i m u m a l l o w a b l e s u l f u r i s s p e c i -

f i e d b y d i f f e r e n t r e g u l a t o r y r e g i m e s i n d i f f e r e n t c o u n t r i e s s o c o m p l i -

a n c e i s c r u c i a l . G a s o l i n e ( P e t r o l ) i s t h e t o p c o n s u m e d p e t r o l e u m

p r o d u c t i n N i g e r i a w i t h a g o o d g r o w t h p r o j e c t i o n t o w a r d s 2 0 3 5 .

I n v a r i a b l y , i n v e s t m e n t s i n t h e s e e x t r a u n i t s d o b r i n g a d d i t i o n a l

c o s t s t h a t i f n o t c a r e f u l l y c o n t r o l l e d , c o u l d e r o d e l e a n m a r g i n s .

A l l t h e p o s i t i v e e l e m e n t s o f a m i n i r e f i n e r y - w h e n j u x t a p o s e d

w i t h a f u l l c o n v e r s i o n h i g h c a p a c i t y r e f i n e r y - i n d i c a t e s t h e n e e d

f o r a c a r e f u l a p p r o a c h a n d a g o o d u n d e r s t a n d i n g o f t h e t e c h n i c a l ,

e c o n o m i c a n d o p e r a t i o n a l e l e m e n t s r e q u i r e d t o m a k e i t c o m m e r -

c i a l l y v i a b l e .

T h e r e i s l i m i t e d l e s s o n s t o l e a r n f r o m t h e p r o d u c t r e f i n i n g , m a r -

k e t i n g a n d d i s t r i b u t i o n a c t i v i t i e s i n N i g e r i a – e s p e c i a l l y a t t h e

m i n i s c a l e . A s a c t i v i t i e s i n t h i s a r e a h a s b e e n u n c o o r d i n a t e d

a n d i n f l u e n c e d b y m u l t i p l e c h a l l e n g e s .

T h e r i s k s i n h e r e n t i n t h e N i g e r i a n m a r k e t c a n b e m a p p e d a n d d o c u -

m e n t e d a s a d e c i s i o n a i d i n c e r t a i n c r i t i c a l s c e n a r i o s . O p e r a t o r s

s h o u l d b e r e a d y t o c o m p e t e i n i n a f r e e m a r k e t o n t h e l o n g - t e r m .

P r i c e C o n s i d e r a t i o n s

In a deregulated downstream Nigeria, the price of petroleum product will become

fully responsive to the forces of demand and supply and the other identified factors

that affect the price of petroleum products.

A World Bank Report on petroleum products markets in Sub -Saharan Africa identi-

fied the below factors as capable of affecting the price of petroleum products.

Market size, geography (coastal or landlocked) overall local refining

capacity, level of sector liberalization including pricing and econom-

ic development.


S o m e i d e n t i f i e d r i s k i n r e f i n e r y c o n s t r u c t i o n a n d

o p e r a t i o n


Type of Risk Party Mitigation Metric

Market Risks -Off-take - Payment.

Project Co./Off-taker Off-taker/Guarantor

Suitable agreements Credit Enhancement

Technology - Availability - Facility

Design & Performance -

Damage

EPC Contractor EPC Contractor

Project Co.

Continuing Support Guarantee, Warranty

Insurance

Financial - Interest Rate - Inflation

- Fx Fluctuation

Project Co. Project Co.

Project Co.

Continuing Support Guarantee, Warranty

Insurance

Force Majeure Project Co. Insurances Back to back clauses of Agreements


P r o j e c t R i s k s

Te c h n i c a l R i s k s

O p e r a t o r m a y f a c e a n u m b e r o f t e c h n i c a l

r i s k a t t h e o n s e t . T h i s w i l l r a n g e f r o m t h e

c h a l l e n g e o f l i m i t e d t e c h n i c a l s k i l l s /

e x p e r t i s e f o r r u n n i n g t h e p l a n t [ w h i c h

m a y b e s e v e r e o r r e q u i r e e x p e n s i v e e x p a t r i -

a t e s s k i l l s ] i n t h e e a r l y s t a g e . A l t h o u g h

p l a n t s u p p l i e r s w i l l t y p i c a l l y p r o v i d e

t e c h n i c a l s u p p o r t u p t o a d e f i n e d l i m i t ,

p o s t i n s t a l l a t i o n .

O t h e r s i n c l u d e t h e r i s k o f p l a n t f a i l u r e i n

t h e s h o r t - t e r m ; f a i l u r e s t h a t m a y d i s r u p t

o p e r a t i o n f o r a r e a s o n a b l y l o n g t i m e .

P l a n t s u p p l y c o n t r a c t s w i l l n o r m a l l y i n -

c l u d e w a r r a n t i e s , b u t t h e t i m e f o r a t t e n d -

i n g t o m a j o r p l a n t f a i l u r e s o r m a l f u n c t i o n

w i l l b e h a r d l y a v a i l a b l e t o m i n i r e f i n e r y

o p e r a t o r s ( w h o a r e f r a n t i c a l l y t r y i n g t o

m a x i m i z e u p t i m e ) . P l a n t d e s i g n c o n c e r n s

a n d t h e i r s u i t a b i l i t y t o o p e r a t o r s ’ s p e c i f -

i c c o n t e x t n e e d s t o b e t h o r o u g h l y r e -

v i e w e d .

P r e s e n t l y , t h e r e i s o n l y o n e m i n i r e f i n i n g

p l a n t r u n n i n g i n N i g e r i a a s r e p o r t e d b y

D P R . W h i c h i s t h a t i n s t a l l b y a m a r g i n a l o i l

f i e l d o p e r a t o r ; N i g e r D e l t a P e t r o l e u m R e -

s o u r c e s .


I n f ra s t r u c t u ra l R i s k s

F o r o p e r a t o r s t h a t a r e l o o k i n g t o t r a n s p o r t p r o d u c t s o u t s i d e t h e

i m m e d i a t e l o c a t i o n o f t h e p l a n t - s u c h a s n e a r b y s t a t e s - t h e n t h e

o p e r a t o r ’ s d i s t r i b u t i o n n e t w o r k w i l l c o n t e n d w i t h p o o r r o a d c o n d i -

t i o n s i n s o m e s t a t e s i n N i g e r i a , a s w e l l , a s t h e t o t a l a b s e n c e o f

r o a d s t o r e a c h s o m e m a r k e t s .

G e n e r a l l y , t h e s t a t e o f i n f r a s t r u c t u r e i n N i g e r i a i s p o o r a n d p o s e s

s i g n i f i c a n t r i s k t o s u p p l y c h a i n m a n a g e m e n t i n s e v e r a l i n d u s t r i e s .

W i t h r e s p e c t t o p o w e r f o r r u n n i n g t h e p l a n t , i n d e p e n d e n t p o w e r

g e n e r a t i n g u n i t s w i l l b e c r u c i a l t o t h e s m o o t h r u n n i n g o f t h e p l a n t .

A l t h o u g h N i g e r i a ’ s p o w e r s e c t o r i s r e a s o n a b l y i m p r o v i n g ,

[ e s p e c i a l l y i n t h e p a s t f e w m o n t h s ] d o u b t s h a s b e e n r a i s e d a s t o

i t s s u s t a i n a b i l i t y a n d a r e c e n t r e p o r t h a s i n d i c a t e d t h a t i t m a y t a k e

u p t o a d e c a d e s b e f o r e N i g e r i a w i l l b e c a p a b l e o f g e n e r a t i n g s u f f i -

c i e n t p o w e r f o r i t s c o n s t a n t l y g r o w i n g p o p u l a t i o n a n d a n t i c i p a t e d

i n d u s t r i a l i z a t i o n . I t i s g e n e r a l l y e x p e c t e d t h a t t h e o v e r a l l b u s i n e s s

e n v i r o n m e n t i n N i g e r i a w i l l i m p r o v e o v e r t i m e , a l o n g w i t h t h e e a s e

o f d o i n g b u s i n e s s ( i n t h e s t r i c t s e n s e o f i t s d e f i n i t i o n b y W o r l d B a n k ’ s

D o i n g B u s i n e s s ) t h e r e b y l o w e r i n g t h e c o s t s a n d r e d u c i n g r i s k s .

S p e c i f i c c h a l l e n g e s i n o p e r a t i n g a r e f i n e r y i n N i g e r i a

1 . C a p i t a l i n t e n s i t y o f r e f i n e r y p r o j e c t s

2 . M a r g i n a l p r o f i t a b i l i t y

3 . O n s e t o f s t r i c t e r p r o d u c t s q u a l i t y r e g u l a t i o n s

4 . C r u d e o i l a v a i l a b i l i t y a n d p r i c i n g

5 . T e c h n o l o g y g a p

6 . M a i n t e n a n c e c u l t u r e

S o u r c e : D e p a r t m e n t o f P e t r o l e u m R e s o u r c e s ( D P R )


P r o j e c t R i s k A n a l y s i s

S o m e o f t h e p r o j e c t r i s k s t h a t m a y b e a s s o c i a t e d w i t h t h e i n s t a l l a t i o n o f a

n e w p l a n t a r e l i s t e d i n t h e t a b l e b e l o w . A d a p t e d f r o m t h e o r i g i n a l w o r k o f

G i r i s h G h a l d i y a l .


S u p p l y R i s k

Availability, sourcing and

transportation. Strategy and

flexibility.

Water flow Risks

M a r k e t R i s k

Demand/Supply situa-

tion.

Guaranteed Offtake

Price, Demands and Taxes

Infrastructure and

Utilities

Access Roads

Logistics (port, evacua-

tion)

Water (Environmental

Impact)

Land (Social Impact)

C o n s t r u c t i o n R i s k

E P C / p r o j e c t M a n

a g e m e n t a p p r o a c h

C o n t r a c t o r ( T o p T i -

e r )

G u a r a n t e e d O p e r a -

t i o n a l p a r a m e t e r s

Technical Risks

Technology of vendor , use

of proven vendor.

Proven Design

Train / unit configuration

Adaptability to local condi-

tions

Independent Review

Market Demand

Project Cost

Environmental Issues


I f t h e r e i s a g o o d m a r k e t f o r A u t o m o t i v e G a s O i l ( A G O - D i e s e l ) -

a n d t h e r e i s i n N i g e r i a ! – i t w i l l b e i n v e s t m e n t s a v v y t o i n s t a l l a

s i m p l e a t m o s p h e r i c t o p p i n g p l a n t , w h i c h c o m p r i s e s o f t h e d i s t i l l a -

t i o n u n i t i n i t s s i m p l e f o r m a n d p r o d u c e s A G O , K e r o s e n e ( w i t h

h i g h g r o w t h p r o j e c t i o n ) , N a p h t a a n d F u e l O i l . I n N i g e r i a A G O c o n -

s u m p t i o n h a s b e e n o n t h e r i s e f o r o v e r 3 0 y e a r s . E n e r g y c o n s u m p -

t i o n p r o j e c t i o n s a l s o i n d i c a t e e v e n m o r e i n c r e a s e i n t o t a l n a t i o n a l

c o n s u m p t i o n b e t w e e n 2 0 1 5 a n d 2 0 3 5 , a c c o r d i n g t o N i g e r i a n E n e r -

g y C o m m i s s i o n ( E C N )

P e t r o l e u m p r o d u c t s d e m a n d p r o j e c t i o n s ( 2 0 0 9 t o 2 0 3 5 )

S o u r c e : I A E A / E C N

CONSUMPTION PROJECTIONS

A G O & P M S ( D I E S E L A N D P E T R O L )

13% Optimis-

tic (GDP)

Scenario

20O9 2010 2015 2020 2025 2030 2035

AGO (ML) 1130.44 2353.90 7296.76 12532.32 22799.80 42667.57 83580.46

PMS (ML) 9505.62 16579.54 36385.46 66368.75 103429.80 164805.40 294224.30

HHK (ML) 306.06 782.00 6599.00 22050.61 43266.41 75631.97 119400.00

ATK (ML) 50.0 120.00 440.00 653.88 1019.02 1623.71 2898.79

LPG (ML) 40.09 71.84 1011.46 3099.20 6947.16 12380.38 22066.68

FO (ML) 120.01 270.00 3380.00 9277.94 20797.42 45443.4-0 95569.90


B u t t h e c o n s u m p t i o n p r o j e c t i o n s a n d a n a l y s i s p r o v i d e d b y t h e

( E C N ) d i d n o t f a c t o r t h e a n t i c i p a t e d i m p r o v e m e n t s i n e l e c t r i c i t y

s u p p l y ( s e e P e t r o c r a c y b e l o w ) w h i c h w i l l l e a d t o r e d u c e d d e m a n d

f o r b o t h A G O a n d P e t r o l .

A c c o r d i n g t o a r e c e n t s t u d y b y I s a e t a l . o n p r o j e c t e d p r o d u c t d e -

m a n d i n N i g e r i a , o v e r 2 0 p e r c e n t o f t h e p e t r o l a n d A G O c o n s u m p -

t i o n i n N i g e r i a i s u s e d i n t h e g e n e r a t i o n o f c a p t i v e e l e c t r i c i t y i n

h o u s e h o l d s a n d s e r v i c e s e c t o r s .

T h i s i m p l i e s t h a t a t o p p i n g p l a n t o r i g i n a l l y c o n f i g u r e d t o m a x i m -

i z e A G O p r o d u c t i o n m i g h t s o o n n e e d t o i n c l u d e P M S i n t h e d e s i r e d

p r o d u c t s l a t e t o c a p t u r e t h e P M S m a r k e t , i n t h e e v e n t o f a p o s s i -

b l e r e d u c t i o n i n A G O d e m a n d a r i s i n g f r o m i m p r o v e d p o w e r s u p p l y

t o i n d u s t r i e s .

T h e r e d u c t i o n i n A G O c o n s u m p t i o n c a n b e e x p e c t e d t o b e s h a r p e r

( i n t h e e v e n t o f s t a b i l i z e d p o w e r s u p p l y ) s i n c e i t s p r i m a r y a p p l i -

c a t i o n ( e l e c t r i c i t y ) i s s u b s t i t u t i o n e l a s t i c . T h e u s e o f P M S i n

t r a n s p o r t a t i o n ( c a r s a n d t r u c k s ) o n t h e o t h e r h a n d i s s u b s t i t u t i o n

i n e l a s t i c , t h e r e b y o f f s e t t i n g t h e d e m a n d r e d u c t i o n a r i s i n g f r o m

i m p r o v e d p o w e r g e n e r a t i o n a n d s u p p l y t o h o u s e h o l d s .

T o s w i t c h t o P M S , a n e x t r a c o s t w i l l b e i n c u r r e d f o r t h e i n s t a l l a -

t i o n o f a c r a c k i n g u n i t t o f u r t h e r c o n v e r t t h e N a p t h a a n d F u e l O i l

t o P M S .

C o n s u m p t i o n i s a l s o p r o j e c t e d t o r i s e e x p o n e n t i a l l y b e t w e e n n o w

a n d 2 0 3 5 . P r o j e c t i o n s s h o w a v e r y h i g h p e r c e n t a g e i n c r e a s e s i n

e a c h o f t h e i n t e r v a l s b e t w e e n 2 0 2 0 , 2 0 2 5 , 2 0 3 0 a n d 2 0 3 5 a c c o r d -

i n g t o I A E A / E C N d a t a .


P e t r o l e u m p r o d u c t s d e m a n d p r o j e c t i o n s ( 2 0 0 9 t o 2 0 3 5 )

S o u r c e : I A E A / E C N

R o a d t r a n s p o r t a t i o n v e h i c l e s a r e i n c r e a s i n g l y u s i n g A G O a n d

p e t r o l f o r f u e l a n d t h e i r d e m a n d i s c u r r e n t l y s u b s t i t u t i o n i n e -

l a s t i c . T h i s r e p r e s e n t s a n o t h e r g o o d d e m a n d s o u r c e i n a s e c t o r

t h a t i s a l s o p r o j e c t e d t o g r o w g i v e n N i g e r i a n s g r o w i n g p o p u l a -

t i o n a n d r e q u i r e m e n t s f o r m a s s m o v e m e n t . ( N o t e : L N G f u e l e d

l o c o m o t i v e t r a i n s a n d c a r s h a s b e e n t e s t e d r e c e n t l y )

T h e s e a r e s o m e o f t h e f i n e c o n s i d e r a t i o n s t h a t m u s t g o i n t o t h e

f e a s i b i l i t y w o r k o f a m i n i - r e f i n e r y . A f u l l c o n v e r s a t i o n r e f i n e r y

i s s o m e w h a t s h i e l d e d f r o m t h e s e v e r y c o n s i d e r a t i o n , g i v e n t h e

l a r g e r a r r a y o f p r o d u c t s o b t a i n a b l e a n d t h e a d v a n t a g e o f e c o n -

o m i e s o f s c a l e c o u p l e d w i t h b e t t e r m a r g i n s . O n c e a r m e d w i t h

t h i s u n d e r s t a n d i n g , a n i n v e s t o r i s b o u n d t o b e n e f i t f r o m t h e

n u m e r o u s a d v a n t a g e s o f a m i n i r e f i n i n g f a c i l i t y .

7% Realistic

(GDP) sce-

nario

20O9 2010 2015 2020 2025 2030 2035

AGO (ML) 1130.44 1582.18 4600.29 8347.29 12454.38 17791.56 27816.03

PMS (ML) 9505.62 11525.48 26967.39 52536.75 74168.61 105290.60 143080.50

HHK (ML) 306.-06 389.00 3510.00 8521.10 14354.21 21027.58 33277.09

ATK (ML) 50.00 75.00 278.00 517.61 730.73 1037.35 1409.67

LPG (ML) 40.09 50.38 598.38 1547,30 2607.55 3799.58 5691.54

FO (ML) 120.01 160.00 1800.00 4632.07 7806.10 11374.64 17038.51


Ngozi Okonjo Iweala. 2011. “Brief on Fuel Subsidy” Federal Ministry of

Finance, Nigeria.

Isa, Hamisu, Lamin, Yau, and Olayande. 2013. “The perspectives of Ni-

geria’s projected demand for petroleum products” Journal of Petroleum

and Gas Engineering. Www.academicjournals.org/JPGE

Mathew Adagunodo. 2013. “Petroleum Products Pricing Reforms in Nige-

ria: Welfare Analysis from Household Budgets” International Journal of

Energy Economics and Policy. www.econjournals.com

Ben Naanen and Patrick Tolani. 2014. ‘Private Gain, Public Disaster; the

social context of illegal oil bunkering and artisanal refining in the Niger

Delta’ . Niger Delta Environment and Relief foundation. (NIDEREF)

DPR (Department of Petroleum Resources). 2007. “Guidelines for the es-

tablishment of Hydrocarbon Processing plants (Petroleum refinery and

petrochemical in Nigeria)” https://www.dprnigeria.com/

Report of the National Refineries Special Task Force (Nigeria) https://

www.dprnigeria.com/

Christopher Ehinomen and Adepoju Adeleke. 2012. “An assessment of the

distribution of petroleum products in Nigeria “ Journal of business man-

agement and economics. Available online http://www.e3journals.org.

Scan Oil and Gas. Mini refineries. Www.scanoildubai.com/mini -

refinery.html.

Chijioke Mama (2015) ”An Investors Guide to marginal Oil field acquisi-

tion in Nigeria” http://www.afroginvestmentsconference.com/#!an -

investors-guide-to-marginal-oil-fiel/c3qg

Data sources


DPR (Department of Petroleum Resources). 2013. “Achieving domestic and

regional capacity requirement for refined petroleum prod-

ucts” (presentation at the 3rd downstream stakeholders project).

Masami Kojima, William Mathews and Fred Sexsmith. 2010. Petroleum

markets in Sub-Saharan Africa. World Bank.

Nigeria: Fuel Subsidy. (A desktop study by the Center for Public Policy

Alternatives)

PWC Report. 2011. “The next chapter | Creating an understanding of Spe

cial Purpose Vehicles”

Ghirish Ghildiyal. 2010. “Financing of Downstream Projects in Oil and Gas

Sector”. National Conference on Project Finance Management for Energy

Sector, India.


C h i j i o k e K . M A M A

P prolific energy researcher and analyst, he has authored extensive analytical works on diverse

issues in Africa’s hydrocarbon economies. He has special research interests in upstream petro-

leum policy, small/ marginal oil fields, solid minerals in Africa, Mergers & Acquisitions (M & A)

in Oil and Gas and refining in Africa. .

He founded the column “Africa’s Barrel Equations” featured on major energy media platforms such as

BusinessDay West-Africa Energy and SweetCrude Reports, where he offers research-based insights and

empirical views on Africa’s energy Sectors.

He has a Master’s degree in Business Administration (MBA) from the University of Lagos, Nigeria and

currently works as project manager/analyst at Ralmuof Konsult Limited (RKL) in Lagos, Nigeria. In this

role, he leads client engagements and project execution in both the upstream and downstream sectors.

His short article “Nigeria’s marginal oil fields - open fields, closed gates” published in 2014, received

much acclaim as a good discuss on the thrust and solutions of marginal field acquisition & operation in

Nigeria. He gathers and structures data on diverse issues around energy in Africa for productive analy-

sis.. Chijioke independently advises a number of potential investors on the green and red elements of

investing in Nigeria’s energy sector and was a keynote speaker in the maiden Africa Small and Marginal

Oil Fields Development Conference, London 2015.

He has advanced skills in business reporting/development, investment advisory and policy evaluation.

He Has published over 30 analytical writings in major dailies in Africa & executed multiple energy pro-

jects in Nigeria. Including petroleum asset maintenance, Enterprise Resource Planning (ERP) projects,

bill payment systems for power companies and vessel surveys.

E m a i l : C h i j i o k e . m a m a @ y a h o o . c o m | M o b i l e : + 2 3 4 7 0 6 1 0 1 3 3 3 3

A F R I C A’ S B A R R E L E Q UAT I O N S

w w w. a f r i c a s b a r r e l e q u a t i o n s . c o m

* i n v e s t m e n t Re s e a r c h & A d v i s o r y +

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