Nigerian Refineries: History, problems and possible solutions

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 20 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 (NPRC) in 1960.

The NPRC built a 38,000b/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-BPs 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 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 the sea to Lagos and the remaining by road tankers. The refinery
was de-bottlenecked 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 to 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 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 Refinery 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 Refinery
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 Refinery Division was appointed chairman, NPRC Board, following the federal
governments 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 percent 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 general manager Refineries Division of NNPC. While the refinery
continued to produce and maintain its facilities as before.

With a few years, the NPRC managements commercial culture had been replaced with a more
bureaucratic style on 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 center instead of a profit center. The same fate would soon befall the other
refineries subsequently constructed by the NNPC.

The Refinery project at Warri, Kaduna & Port Harcourt

The acute and prolonged nationwide shortage 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-
1970s. 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 an 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 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 $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 $525 million, for a project completion period of 36 months. The refinery was completed on
schedule and was commissioned in later 1979. 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 de-bottlenecking. The de-bottlenecking
route was quicker by capacity increases were moderate. The de-bottlenecking 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 150,000 b/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 equivalent of US$850 million. 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 and demand couple 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 refinery

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 countrys 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 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 centre. 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 ensure 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.

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:

a) The percentage capacity utilization. This is the most common parameter used and it essentially
measures the overall efficiency of the refinery.

b) The products yield vis-a-vis design yields. This measures the efficiency of the processing unit of the
refinery.

c) Historical safety records. Such records include the number, frequency and severity of different causes
of accidents.

d) 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.
e) 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.

f) On the basis of the parameters described above I have reviewed the performance of the Nigerian
Refineries from inception up till the recent times.

However, the exportation of petrol and diesel from refinery lasted only a few shipments during 1990
and 1991. The increase in domestic and demand couple with decreasing production from Warri and
Kaduna refineries had put an end to the idea of exportation of petroleum products, except fuel oil.

Decision of the Federal Government to construct new refinery

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:

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.
The economic stability of the country was seriously threatened by the acute shortage of the
crucial fuel products.
There are many other additional benefits realizable from that decision, such as the creation of
new jobs and potential cost savings for the countrys 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.

Fortunately, 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 center. 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 ensure 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.

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:
 The percentage capacity utilization. This is the most common parameter used and it essentially
measures the overall efficiency of the refinery.
The products yield vis-a -vis design yields. This measures the efficiency of the processing unit of
the refinery.
Historical safety records. Such records include the number, frequency and severity of different
causes of accidents.
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.
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.

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:

- Securing adequate working capital from the NNPC corporate headquarters.

- 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.
- The bureaucratic process of approvals, which in some instances required as many as 27
signatures to get critical maintenance spend signed off.

The problems originated from the centralization of power at 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 problem affect all activities of the refineries directly or indirectly in varying degree of
severity, depending on how each managing director 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 6 months) 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 centers instead of a
profit 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.

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 owners 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 computerised 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.

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 departments 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

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 TAMs 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 TAMs history reads as follows: The first TAM was carried out in 1991 (on time), the
second was in 1994 91 year later), the third was in 2000 93 years later). The next TAM was planned for
2003/2004, but was again postponed to 2007.

Frequent 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 utilization.

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 willful damage of the crude oil supply pipeline.

Proposed solution to refineries problems

First, I wish to emphasize the fact 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 privatize 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 NNPCs Eleme Petrochemical Company Ltd., Port Harcourt
refinery, and later Kaduna refinery. The exercise was concluded for the EPCL and PHRC. The KRPCs
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 transparency in which the final choice of the federal
government announced on the eve of its departure, couple with the public outcry afterwards, forced the
cancellation of the PHRC award. However, the EPCL 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 the 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
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 $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, diorama of Indonesia bought 75 percent of the company for $225 million. 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. 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 270,000 metric tons/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

Polyprophylene pellets
All products currently manufactured in the Eleme plant are sold locally. The company has established
new large warehouse in Lagos and Kano from where all its customers collect and pay for the products.
95 percent of Nigerian market demand is met by EPCL Indorama Ltd.

Change in management policies and procedures

The total staff strength, and consequently the overhead cost have been reduced considerably. There
have been major changes in management. However, the most radical improvements are in the level of
authority given to the managing director. The managing director 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

Indoramas 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 staff members 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 staff 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 staff members 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 N1 billion each to NNPC and the Rivers State government in dividends.

Final footnote

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 privatization 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 13 years
absence. All the foreign experts and I who toured and inspected that plant for several days were
convinced the PHRC could be restored back to full capacity utilization within 12 to 18 months after
privatization.
 N300bn waste: Dirty details of rot at Nigerias refineries

Until last January when the administration of President Jonathan Goodluck announced the fuel subsidy
removal, the parlous state of the countrys refineries was not on the front burner. But the subsidy
removal and the subsequent protest have shifted attention to the Nigerian refineries, which are in
decrepit situation.

Although the removal of subsidy has been reversed to increment in fuel pump price, the issues its
protest raised, among them the ugly situations in the refineries, still resonate. It is on record that
exploration of crude oil in Nigeria began in 1908 but it was in 1935 that Shell Darcy Petroleum Company
(SPDC) started what could be described as real operations in the country. After about two decades,
SDPC proclaimed that it had discovered crude oil in commercial quantities in Oloibiri (in present-day
Bayelsa State) in 1956.

Investigations revealed that until sometime between 1964 and 1965, all the leading foreign oil
companies in Nigeria made importations for the purposes of refining oil overseas and subsequently
marketed the refined products locally. Before long, there was the overwhelming need for the
establishment of refinery in the country. To make this lofty dream a reality, Shell and the then British
Petroleum (BP) now African Petroleum (AP) came together in 1960 in a mutual joint venture that gave
birth to Nigerian Petroleum Refining Company ( NPRC). This process led to the construction of the now
popular Alesa-Eleme in the outskirts of Port Harcourt with a capacity of a 38,000b/d. The construction
started in 1963 and was completed in 1965. As the demand for local consumption increased rapidly, the
refinerys capacity was raised to 60,000b/d.

The administration of General Olusegun Obasanjo (retd), in order to enhance the performances of the
oil sector, promulgated Decree 77 of 1978 establishing the Nigerian National Petroleum Corporation
(NNPC). The NNPC initially had five bodies, each with a managing director. They were all supervised by a
group general manager. The number of subsidiaries rose to nine and later 11, following the creation of
the second Port Harcourt, Warri and Kaduna refineries, there were nine companies. Following the
indiginisation policy of the Federal Military Government under the Obasanjo regime, the name NPRC
was changed to NNPC and its equity totally bought over by the Federal Government in 1978. Therefore,
the NPRC constructed the first refinery in Nigeria generally known as Port Harcourt 1 while the NNPC
built the Port Harcourt 11, Warri and Kaduna refineries.

The Warri Refinery built by Snamprogetti Spa Milan, Italy in 1975 at the cost of $478 million commenced
operation in 1978. It had the design capacity of 100,000 b/d. The Kaduna Refinery was built by Chiyoda
Engineering and Construction Company, a Japanese firm, at the cost of $525 million in 1979. The
capacities of the refineries were expanded to meet increasing demand for petroleum products. But,
sadly, all the four refineries are in bad shape in spite of the fact that more than N300 billion had been
sunk into the bid to resuscitate the collapsed facilities.

Why refineries collapsed

There are several factors that led to the collapse of the Nigerian refineries and most of these problems
have been there since the inception of NNPC and the refineries. According to a material titled History of
Nigerian Refineries, Problems and Solutions, some of the problems were highlighted as: Inability to
secure adequate working capital from the NNPC corporate headquarters.
The failure of NNPC, the supervising agency, to commit the required funds, as (and) when necessary to
procure chemicals and catalysts, equipment spare parts, other plant consumables and sub-contract
services from outside experts. Again, the bureaucratic process of approvals, which in some instances
required as many as 27 signatures to get critical maintenance done is a major problem facing both the
NNPC as well as the refineries. The problems originated from the centralisation of power at NNPC
corporate headquarters in Lagos and later in Abuja. The publication argued that the hierarchical and
bureaucratic arrangement which made the petroleum minister and the chairman of NNPC the overall
boss of the persons at the helm of affairs at the respective refineries had not augured well for the
Nigerias downstream sub sector.

According to it : 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 managing director 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 six months) or
relatively short time. Besides the problem of administrative bottlenecks, it was also established that
another worrisome problem militating against the effective running of the Nigerian refineries is the lack
of proactive governance.

It is stated that 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 profit grounds and were operated like federal government ministries. Again,
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. Interference by the Federal Government was
another clog in the wheel of the refineries as managed by the NNPC. This, according to reports, can take
any form from staff matters (appointments, recruitments and promotions), procurement issues to
award of contracts etc. Industry observers have noted correctly that 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.

Further investigations revealed that lack of efficient plant operations and maintenance is another reason
the refineries are grounded. According to a report made available to this reporter, at the initial
commissioning of each refinery, staff had been carefully recruited, properly trained on the job . 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 influence, the staff and managers tended to become less disciplined and accountable in their
duties.

This, according to findings, affected the refineries productivity negatively. For instance, the
computerised materials management and maintenance system recommended to replace the outdated
system was not installed for many years. The history of the refineries, problems and solutions noted that
the poor activities of the technical services department to function very well was a big problem to the
NNPC and the refineries. It stated that this department has not functioned effectively for many years,
insisting that it is grossly understaffed with only one or two relatively inexperienced engineers per
discipline. This was not the situation in the first few years when the refineries started operations in the
country.

The colossal waste

The rot that milked the Nigerian refineries dry reared its ugly head sometime in 1996 when the
administration of the late Gen Sani Abacha awarded the Turn Around Maintenance (TAM) of the
refineries to local contractors but the job could not return the refineries to glory. According to Ugo
Nwokeji in a research work titled: The Nigerian National Petroleum Corporation and it its Oil & Gas, The
Sani Abachas disregard of recommendations for reorganisation or privatisation of the refineries
submitted to it in 1996 signalled the regimes desire to maintain the status quo.

The regimes creation of PTF for deposition and disbursing towards infrastructure and rehabilitation
from monies realised from increases in refined petroleum products prices was the most notable reforms
of that era. It added that no meaningful result was achieved from the Abacha reforms. The report
quoted a former NNPC Group Managing Director, Edmund Daukoro as saying that governments policies
had never helped both the corporation and the refineries. We never seem to get it right.

Something always seems to be missing between government policy, implementation and public
expectation. On the one hand, policy and its implementation may be either too far or short in scope,
lopsided or mistimed. On the other hand, public perception and expectations may be unrealistic,
utopian and misguided or misinformed. As a result, we stagger from one confederation to the next
between policy makers, regulators and customers, Daukoro said.
In real terms, refineries are structured to generate revenues through the money accruing from the fees
remitted to them by NNPC (as charges for refining oil).

The four refineries controlled by NNPC and their pitiable states depict the ineptitude and rot that have
visited the corporation. Built to produce a daily 445,000 b/d of gasoline, the Nigerian refineries are
currently in a sorry sight as they have continued to produce at grossly beneath capacity levels while
three of them are not functioning at all. This shows that the refineries have suffered what an analyst
described as total disrepair and comprehensive paralysis in the past three decades.

An informed industry commentator Ugo Nwokeji who conducted a research work on Nigerias oil and
gas sector in 2006 for University of California, USA, submitted in his report which was published by the
institution and made available to this newspaper claimed that the finance ministry officials had to cut
NNPCs crude oil supplies, reasoning that it was cheaper by 20 per cent to import Nigerias refined
products than have them through the inefficient mill of the refineries.

The report added: The inability of NNPC to refine its crude has encouraged market inefficiency. Thus,
the corporation has increasingly sold unrefined crude from this allocation in the international market
since the 1980s and it uses the proceeds to import refined petroleum products. With the free allocation,
NNPC is able to subsidise the products, a practice that discourages international oil companies from
involvement in the domestic downstream sector. It is on record that the subsidies have never benefitted
the ordinary Nigerians. Nwokeji argued that the despicable conditions of the refineries had encouraged
black market selling points and equally promoted acute shortages .

He said: Apart from fuelling price increases, this black market promoted stealing of the valuable
commodity just as built in inefficiencies, corruption and sabotage by militant resource agitators and oil
pilferers had caused major crises in the sector. To buttress the point being canvassed here, the former
Chief Executive Officer of Warri Refinery and Petrochemical Company (WRPC), Bazil Idahosa, stated it
very clearly in 2006 when the base was shut down for five months, insisting that following militant
activities which had many a crude oil supply pipeline blown up , the staff situation was so bad that the
refinery would not be operational even if the supply lines were re-fixed.

As it is, the Warri refinery is still grounded till date even after militant activities had drastically reduced
following the amnesty deal which the regime of late President Musa Yaradua brokered. It must be
recorded the Abdulsalami Abubakar administration had taken well tailored measures aimed at reviving
the refineries. First, it took away the importation monopoly which the NNPC had enjoyed over time.
Second, the administration made the mind-boggling $39 million budget allocation for the repairs of the
four refineries.

Third, the privatisation policy of the sector was vigorously pursued by the government. Analysts were
quick to point out that more than $1 billion had been ejected for the repairs of the refineries between
1999 and 2007, that is, during the President Olusegun Obasanjos regime. Perhaps, it was due to the
perception of the NNPC as a potential sleaze bed that prompted the Interim Regime of Chief Ernest
Shonekan to announce the compulsory retirement of Daukoru and three other executive directors,
alongside Kupoloku in 1993.

As the allegation of corruption at NNPC became the other of the day, it was revealed that the sudden
disappearance of about $2.5 billion meant for fuel importation and the GMD of the time was reportedly
fired. As if those were not enough, investigations revealed that a mouth watering $5 billion earmarked
for comprehensive refinery maintenance was again misappropriated in 2007 and it was big
embarrassment to the both the government and people of Nigeria. Recently, the Jetty and Petroleum
Tank Farm Owners of Nigeria ( JEPTFON) in a petition made available to this newspaper accused the
Petroleum Products Pricing Regulatory Agency (PPPRA) of wrong deeds its handling of the newly
introduced SDI.

According to JEPTFON: We, the members of JEPTFON have observed with dismay the PPPRAs
manipulation and non transparency in the administration of the newly introduced Sovereign Debt
Instrument (SDI). This perceived manipulation is largely underscored in the allocation of importation of
petroleum products approvals to portfolio marketers instead of core downstream investors and its
abuse of due process especially in the second and third quarters 2010 allocation.

The PPPRA is a subsidiary of the NNPC and JEPTFON accused it of manipulation in its dealings. In view of
the fact that the refineries are not working effectively, a group known as Executive Councils of NNPC,
NUPENG and PENGASSAN accused BPE of corruption, unfair treatment in its resolve to sell or concession
some business units in the NNPC.

According to the unions group chairman, Comrade F.O. Johnson, We had uncovered a well concealed
ongoing plan by the Bureau for Public Enterprises ( BPE) to surreptitiously transfer ownership and
control of some carefully selected, performing and viable national assets in the NNPC to certain
surrogate foreign fronts that have been arranged by some privileged Nigerians to satisfy their parochial
interests. The Councils do hereby use this medium to alert the teeming unsuspecting Nigerian populace
of this devilish, retrogressive plot of the BPE. We are aware that processes are at advanced stages by the
Nigerian National Petroleum Corporation namely NPDC, NGC, PPMC and the refineries to some Nigerian
politicians using certain entities.
Governments reaction
Apparently worried by the tirade against the NNPC, especially the refineries, the Federal Government
has acted swiftly by carrying out some measures to stem the crisis-ridden sector. To this effect,
successive governments have tried in one way or the other to find a lasting solution to the pyramid
problems of the refineries. For instance, during a one-day workshop for energy reporters on the reform
of Nigerias oil and gas industry (the new regulatory regime) at Abuja recently, a member of the National
Petroleum Directorate and the Establishment of the National Petroleum Research Centre, Dr.
Mohammed Ibrahim, noted that it was time we shifted focus from being a crude petroleum exporter to
being a crude oil and gas producer, processor and thereafter export processed products and excess
crude petroleum.

According to Bolanle Onagoruwa, director general, Bureau of Public Enterprise (BPE), at a forum on the
Petroleum Industry Bill (PIB) and the reforms in the oil and gas sector, Governments direct
intervention via state-owned companies creates additional problems as there are no competitive
pressures for efficient operations. This result, most times, is sub-optimal performance (as witnessed in
the refineries). The reforms driving principle is to ensure the nation obtains maximum benefits from its
hydro-carbon endowments. This necessitated the Federal Government to set up the Oil and Gas Sector
Reform Implementation Committee (OGIC).

It was meant to carry out the functions of synchronising, coordinating and monitoring all activities
relating to the reform; restructuring and privatisation. In a newspaper advertisement, the Minister of
Petroleum Resources, Mrs Diezani Alison Madueke, stated the governments resolve to reform the
sector based on transparency and accountability, hence, she directed the ministry to create a special
task force on governance in NNPC and other parastatals within the ministry. According to her:

Today, we begin a new chapter for the Nigerian petroleum industry as we turn the page for new
beginnings. We have listened to the voices of the people of Nigeria when, over the last few weeks, they
spoke in unison for accelerated reforms in the industry. These reforms will anchor on new Petroleum
Industry Bill (PIB). We are taking further steps towards the passage of PIB to replace all past industry
legislations.

Nigerias Oil\Gas

Nigeria's first oil refinery, at Alesa Eleme near Port Harcourt, began operations in late 1965 with a
capacity of 38,000 barrels per day, enough to meet domestic requirements at the time. The refinery
expanded production to 60,000 barrels per day after the civil war but failed to satisfy the demands of a
rapidly growing economy. An additional refinery, delayed by political maneuvering over its location, was
constructed at Warri, opening in 1978 with a capacity of 100,000 barrels per day. This plant was entirely
owned by a parastatal, the Nigerian National Petroleum Company (NNPC), which starting in 1979 also
held an 80 percent interest in the earlier plant. Technical problems and shutdowns for routine
maintenance reduced production, and the combined total of petroleum processed by the two plants in
1979 averaged 89,000 barrels per day--about 83 percent of the domestic requirement.
In the late 1970s and early 1980s, the NNPC had substantial amounts of oil refined abroad (mostly by
Shell) to make up the shortfall, and some oil was also processed in Cameroon, Ghana, and Ivory Coast. In
October 1980, a third refinery, with a capacity of 100,000 barrels per day, began operations at Kaduna,
but did not become fully productive until the mid-1980s. A fourth refinery was completed in March 1989
at Alesa Eleme, increasing Nigeria's refining capacity to 445,000 barrels per day. Domestic petroleum
demand stood at 250,000 barrels per day, so a portion of the output of the four refineries could now be
exported. However, by the early 1990s gasoline output was sufficiently short of the growing domestic
demand to require that the NNPC still refine some gasoline abroad.

In 1988, about 96 percent of the oil Nigeria produced came from companies in which the NNPC held at
least 60 percent of the equity. The NNPC also was responsible for 75 percent of total investment in
petroleum. In the late 1980s, the major Western oil companies exploring oil resources in Nigeria
(primarily in midwestern, southeastern, and nearby offshore wells) were (in descending order of
importance) Shell, Chevron, Mobil, Agip, Elf Aquitaine, Phillips, Texaco, and Ashland. In 1985-88, 11
percent of all extracted oil (about 66 percent of domestic requirements) was refined in Nigerian
refineries, where the NNPC owned majority equity shares.

From 1974 to 1981, while real oil prices remained high, lending to major oil exporting countries, such as
Nigeria, was considered very safe. Indeed, Nigeria did not borrow extensively abroad until 1978, when a
fall in the price of oil required Lagos to borrow US$16 million on world capital markets. Thereafter,
Nigeria continued international borrowing for an ambitious investment program, anticipating an oil-
price recovery. The world's sixth largest oil exporter and the leader in oil exports in sub-Saharan Africa,
Nigeria nonetheless experienced an external trade surplus only from 1973 to 1975 and 1979 to 1980,
during two oil price peaks, and in the late 1980s, when debtservicing burdens forced import reductions,
especially in services.

Besides oil, Nigeria had substantial reserves of natural gas. Although the consumption of natural gas
increased steadily in the late 1970s and 1980s, and in 1990 constituted more than 20 percent of
Nigeria's total energy from commercial sources, the quantity of gas used was only a fraction of what was
available. In 1988, with the largest natural gas reserves in Africa, Nigeria produced 21.2 billion cubic
meters per day, with 2.9 billion cubic meters used by the National Electric Power Authority (NEPA) and
other domestic customers, 2.6 billion cubic meters used by foreign oil companies, and 15.7 billion cubic
meters (77 percent) wasted through flaring. Small amounts of gas were also consumed by petroleum
producers to furnish power for their own operations and as fuel for some equipment. Domestically,
there remained a large potential market for bottled liquid petroleum gas (LPG), which was produced
primarily at the Kaduna refinery.
In the early 19900, Nigeria was undertaking a major project to market liquefied natural gas (LNG)
(instead of flaring gas produced in the oil fields) by building a gas liquefaction plant on the Bonny River.
Four companies signed an agreement in May 1989 to implementthis plan: NNPC (60 percent share)),
Shell (20 percent), Agip (Azienda generale italiana dei petroli--10 percent), and Elf Aquitaine (10
percent), with plant construction scheduled to begin in 1991. Other aspects of the project involved
Nigerian government construction of gas pipelines for distribution to domestic, residential, and
commercial users and a supply of gas to the NNPC chemical complex at Port Harcourt. Much of the gas
was intended for export, however, and the first LNG tanker was launched in October 19900 through the
cooperative efforts of Nigeria and Japan.