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

b be-ass rock oil color melio roll OR oil yieldS IMPORTATION WHICH IS ECONOMICAL FOR NIGERIA? ABSTRACT single of the most crucial challenges liner Nigeria is beingness able to meet the null demand of the energy hungry populace the exponential population mathematical crop makes it as yet much challenging. The approach adopted to meeting this need has impact severely on the economy of the nation as reflected in the year-on-year scotch figures. This can be attributed to her choice of net importeeer of oil colour intersections status to the lots more frugal house servant refining option.This write up analyses the best economic option between refining vegetable oil oil and importing the crops in Nigeria, at the end making probable suggestions. TABLE OF CONTENT ABBRECIATIONS 1. NTRODUCTION. 4 2. CRUDE OIL refinement AND PETROLEUM IMPORTATION IN NIGERIA 5 2. 1 Overview 5 2. Challenges of oil colour overlap subtlety in Nigeria 6 3. CRUDE OIL REFINING AND PETROL EUM PRODUCTS ECONOMICS .. 8 3. 1 The political economy of Crude oil refinement .. 8 3. 2 The Economics of vegetable oil Products.. 9 4. CRUDE OIL REFINING, PETROLEUM PRODUCTS IMPORTATION AND THE deli very(prenominal).. 0 5. CONCLUSION 11 BIBLIOGRAPHY. 13 ABBREVIATIONS BPSD Barrels per Stream daytime B/D Barrels per Day CBN Central Bank of Nigeria gross domestic product Gross Domestic ProductNNPC Nigerian National Petroleum throne NPRC Nigerian Petroleum Refining Comp some(prenominal) PHRC Port Harcourt Refinery Company 1. mental hospital The role of crude oil remains key among the energy sources, whence we induct to still live with the consequences that be associated with it, one of which is economical. This obviously is an conniption no agricultural, importer and exporter afford been able to all everywhere become a go at it, though its impact on more or less countries is less than in separates.Nigeria is definitely one of those countries whose economy has been monu mentally impacted, ironically though, a leading crude oil releaser and exporter in the world. However, this is non to present a appearance crude oils enormous contribution to the Nigerian macro-economy over the days it holds sway. The discovery of oil in Nigeria was thought to be a declamatory respite to the ontogenesis energy supply challenges facing her and to bring economical gains, especially as the legal injury of oil has oftentimes been on the change magnitude. Hence, should have do huge sums of money from it.Incidentally, this is non to be, as oil suddenly took shine off the hitherto major sources of the countrys GDP. Sectors equivalent agriculture and manufacturing went moribund, making Nigeria a mono-economy, with oil being the mainstay of the economy. It provides 95% of foreign exchange earnings and about 80% of government budgetary tax incomes1. The Nigeria economy plays into the hands of the volatility of extremely endangered out-of-door shocks, particular ly the vicissitude of world oil commercialize prices, and the event inflations that characterise it most of the times.With the output of 229,008,126 barrel of crude oil and condensates change magnitude in the third quarter of 2010 with an average of 2. 49 gazillion barrels per day of domestic production in recent years, foursome refineries of 445,000 b/d refining force, the issue of meeting domestic oil train should have been substantially addressed. However, with the 0 15% refining force in 20092, which is often the case over the years, importation became the only available alternative. Hence, Nigeria though a leading exporter of crude oil in the world is also, ironically, a net importer of fossil oil products.This paper is divided into four chapters chapter 2 looks at crude oil refining in Nigeria, offering an overview and challenges that confronts it. In chapter 3, crude oil refining and vegetable oil products economics is examined and chapter 4 looks at the implica tions of both(prenominal) crude oil refining and importation vis a vis the economy. The chapter 5 concludes the paper with few suggestions as to what the best economic option should be in meeting the petroleum products postulate in Nigeria. 2. CRUDE OIL REFINING IN NIGERIA 2. 1OVERVIEWThe petroleum products consumed in Nigeria had been imported from refineries abroad this continued even a couple of years after the discovery of crude oil in a mercenary quantity in the country. However, as the call for for the products increased and with the availability of the feedstock, the twain Multinationals direct in the country whence saw it as a viable business to establish refinery that would erect the domestic demand. This lead to the 50/50 joint venture refining company between Shell Darcy Petroleum Company and British Petroleum called the Nigerian Petroleum Refining Company (NPRC) in 1960.The construction of the refinery took two years to complete by 1965 it commenced operation at an installed refining expertness of 38,000 bpsd3 to refine topical anesthetic crude into five petroleum products. It was located at AlesaEleme, near Port Harcourt, well-nigh kilometres away from the crude oil production location. In order to meet the ever increasing demand for the products, the refinery was debottlenecked to increase its production capacity from the initial 38,000 bpsd to 60,000 bpsd. Running as a mysterious entity, the company was able to run efficiently, profitably and met the omestic product utilisation demand. In 1970, the federal official acquired and paid for a 60 share equity piece of land in all private internationalist companies working in the upstream and Downstream sectors of the Petroleum Industry in the country4, NPRC inclusive. Despite been the major shareholder, the Federal establishment allowed NPRC to operate without interference. It was only represented by its own corporation, the Nigerian National Oil friendship (NNOC), on which the s hares were invested on to represent it at the board meetings of NPRC.Hence, the company was commercially profitable, well maintained and ran very efficiently. A decree in 1977 gave birth to the Nigerian National Petroleum Corporation (NNPC), which was later to appoint the Chairman of NPRC, and then acquired the remaining 40 percent stake in NPRC. This in accomplishment made the NPRC a rise Government entity on a lower floor the Refinery Division of the NNPC, headed by a general manager. The ready was changed to NNPC Refinery, AlesaEleme, now headed by a managing director and having a new instruction structure.It was under the general manager of NNPC Refinery Division at the headquarters. A all in all Government built Refinery commenced operation in 1978, after a 30month construction. It was located at Warri, and had an installed refining capacity of 100,000 b/d. further was de bottlenecked in 1985 to have a integral capacity of125, 000 b/d. The Warri Refinery was basically built to action crude oil products and to add harbor to some of the refinery by-products such as propylene rich stock and decant oil5. shortly after, in 1980, another refinery, the Kaduna Refinery came on stream.It was meant to cope with the ever growing demand for petroleum products, especially in the Northern axis of the country. The refinery consisted of two streams, 50, 000 b/d fuel units and 50, 000 b/d lubes, Asphalt plants. It was designed to pee 3,857mt/d of Premium Motor Spirit (premenstrual syndrome), 1,686mt/d of Kerosene, 3,000mt/d of self-propelled Gas Oil (AGO), 1,796mt/d of Asphalt, 91mt/d of LAB, 657mt/d of Base Oils, 620mt/d of Liquefied Petroleum Gas (LPG), 2,100mt/d of Fuel Oil. The existing products parentage linking Warri Refinery to Kaduna was converted to pump crude oils for supply to the new Kaduna Refinery.Again, handle the front refineries, the fuel section of Kaduna Refinery was de-bottlenecked from the 50, 000 b/d to 60, 000 b/d. This brought th e Kaduna Refinery to overall 110, 000 b/d capacity6. The fourth and final refinery was a new grassroots refinery, contiguous to the existing Port Harcourt Refinery, with an install capacity of 150, 000 bpsd. With this, Nigeria total installed refining capacity is 445, 000b/d, which was originally built to serve both the domestic and international petroleum product demand.Unfortunately, the purpose for these refineries were short-lived, serving only for a couple of years before each began to experience several(a) man-made challenges that made them embody centres instead of the originally intended commercially profitable centres. The ever growing domestic product demands were no more met, as acute scarceness became a approach pattern phenomenon. This led, unfortunately to the reach of exalted propensity of petroleum product importation in order to meet the energy need of the nation. 2. 2 CHALLENGES OF PETROLEUM PRODUCT REFINING IN NIGERIAThe Nigerian state-owned four refineries have undergone, and still undergo several man-made challenges that have made it more of a liability to the country than an asset. One of the issues that reduced the refineries to make up centres is bureaucracy. Immediately NNPC took over the running of the first refinery, bureaucracy silenced the commercial cultures that make a business thrive. Tens of signatures would have to be appended on a letter seeking to fix or reach working materials. These unnecessarily delay maintenance and impact the efficient running of the refineries.Also, being fully under the control of Government, all the funds for running the refineries would have to come from Government coffers. This occasioned delays and outright insufficient funding. Working capital especially meant to procure the needed spare parts, chemicals and all other necessary items for operations was not forthcoming, hence leading to the continues breakdown often experienced in the various refineries. The recommended 24-36 months norm al assiduity Turnaround Maintenance (TAM) was hardly done7.It took years, far supra the recommended time in between for TAM at the various refineries. The results were failures, acquire and tear of the equipment, frequent shutdowns and complete non operations. Efficiency of the refining industry is such that needs well trained manpower. However, most of the refinery staff like any other state- ran enterprise were employed or appointed on heathen or political sentiment. In such case, proper management and expertness is thrown to the wind. Dedication and commitment to duty is hardly there, and the consequence is obvious. The big one is corruption.The refineries have over the years wrench conduit pipes of siphoning tax payers money. Some individuals in Government seem to have become rich by the comatose state of these refineries, hence would do everything inside their powers to make them remain so. These challenges have rendered the refineries helpless and never operating at the c apacity utilization. Because of these, the country never really enjoyed product sufficiency with its ample reserve and refineries it ordinarily should have. Hence, Nigeria has always been a net importer of petroleum products. 3.CRUDE OIL REFINING AND PETROLEUM PRODUCT ECONOMICS 3. 1CRUDE OIL REFINING ECONOMICS The overall economics or viability of a refinery depends on the fundamental interaction of three key elements the choice of crude oil used (crude slate), the complexity of the refining equipment (refinery configuration) and the desired type and bore of products produced (product slate). Refinery operating address, utilization rate and environmental considerations also influence refinery economics8. The type of crude used would con whether there would be investment in the upgrading processes of the refinery.Light, sweet crude consider less upgrading, heavy crude do need more upgrading. Also, the product demand in the grocery determines the configuration of the refinery. For instance, the U. S. refineries are put together to process a large percentage of heavy, high sulphur crude and to produce large quantities of gasoline and low amounts of heavy fuel oil. The Canadian refineries are configured for light, sweet crude, hence would upgrading to process heavy crude. Most of the European refinery configuration favours the production of diesel gasoline accounts only 20% production9.Obviously, the Nigeria refineries were configured for the light crude the country produces and produces a abundant range of products meant for her commercialize and other foodstuffs. The refinery utilization rate is a very critical segment of refining economics. High percentage capacity utilization is needed for a refinery to increase operating efficiency and reduce cost per unit of output. A utilization rate of about 95% is considered optimum as it allows for normal shutdown required for maintenance and seasonal adjustments. The operable capacity of Nigerian refineries has on average 0 15% utilization, which make them grossly under utilized.High utilization capacity is one of the things that make for profit brink scenario for refineries. The refinery industry has historically been a high- volume, low- margin industry, characterised by low return on investments and volatile profits. Profitability is measured by return on investment, defined as the net income contributed by refining/marketing as a percentage of net fixed assets (net property, plant, and equipment plus investments and advances)10. One way to represent the economics of a refinery is to calculate its Refinery Gross Margin11.For example, if a refinery receives $80 from the sale of the products refined from a barrel of crude oil that costs $70/bbl, then the Refinery Gross Margin is $10/bbl. The Net or Cash Margin is equal to the gross margin minus the operating costs (excluding income taxes, depreciation and fiscal charge. If a refinery experiences operating costs of $2 per barrel, the n the Net Margin is $8/bbl12. The refinery margins are normally set on a competitive market, where the market is open. The contrary is the case in the Nigerian environment, the refineries are not working, and whenever they do, profit is never the aim. 3. PETROLEUM PRODUCT ECONOMICS Refined products market is different from crude oil market in a number of ways, owing to the scale of operation ( practically smaller for refined products a typical crude oil dealings involves 500,000 or even one million barrels of oil, while a typical refined products sale may involve only 5,000 to 10,000 bbls), quality considerations, price differentials and market size. In a competitive market, refined product prices are determined by supply, demand and inventory conditions at a given location and time13. International (border) price comes to play in the economics of refined products.The exchange rate used to convert the dollar value of imports into the domestic currency is the interbank exchange mar ket rate, which is market determined. A onus charge (including insurance margin) is added to the value to get the landed cost. Import duty, domestic distribution, storage, marketing, and transferral margins are then added to obtain the order price at retail level14. Imported petroleum products also has additional cost like Port charges, taxes and export duties at source country, insurance costs for transportation and brokerage costs for agents.The obvious reality is that there exists a wide range of domestic prices for petroleum products, determined mainly by the market and subject only to taxes and special charges in the developed countries. However, in underdeveloped countries like Nigeria, the prices are fixed by the government. Hence, the products are bought at the international price with a very high interbank exchange rate, and sold at a heavily subsidized, domestic rate, which has serious implications to the economy. 4. CRUDE OIL REFINING, PETROLEUM PRODUCTS IMPORTATION AN D THE NIGERIAN ECONOMY. For a start, the estimated daily crisis-free demand for petroleum products in Nigeria today, are 30 million litres of petrol (PMS), 12 million litres of coal oil (DPK), 18 million litres of diesel oil (AGO), and 780 metric tons (1. 4 million litres) of cooking gas (LPG). (Braide, 2003)15. Nigeria with a population of 158. 2 million (UN, 2010) and increment to workers salary in the recent years, which have empowered instead a number of people to acquire some petroleum products demanding appliances, is more than more pent-up now than in the last ten years.This makes it more challenging to satisfy. Government have obviously chosen a very hard alternative, importation, to have the demand met. With a weak currency (of N153 = $1), at a current price of crude on the international market and heavily subsidized domestic price of petroleum products. For instance, PMS have been at N65 ($42 cents)/litre in Nigeria for a couple of years now, as against the expected open market price of N131. 32 ($84 cents)/litre16. importation, though the only alternative to the non- practicable refineries, is economically catastrophic.For instance, Government fagged $1. 34 cardinal17 from January to March, 2011 to import petroleum products to the country. In a year, this impart amount to $5. 36 billion for importation alone, this excludes importations from marketing companies in Nigeria, tax waivers, demurrage and other implied costs that makes the total amount of importing the commodities extremely high. Government Petroleum Support origin (PSF), which was established to disburse funds to the importing companies and the NNPC have between January, 2006 and July 2008 spent US$ 9. 2 billion18 for premium alone.The fund also spent over US$ 3 billion from 2009 to the first quarter of 201019 for subsidising the importation of PMS and HHK within the period. The Year-on-year importation of petroleum products keep depleting the countrys external reserve, thereby put ting the economy in bad standing. On the other hand, the KRPC, WRPC and PHRC (new) were built with lump sums of $525 million, $478 million, and $850 million respectively20. Unfortunately, with the poor management, the refineries from every statistics available have become liabilities to the country.With ultra low capacity utilization, a huge staff, high operating cost, no profit from NNPC year-on-year accounts21, the refineries at present state are not economical. The implication of these is that the cost of crude oil, refining, importation, and distribution of the products are borne by the countrys treasury. A private sector run refinery industry is the only answer for meeting domestic demand at a very huge economic gain and energy security to the country.This will also revive the ailing petrochemical industry, which has a massive ripple effect on job creation, directly and through other dependent industries like Paint and Plastic industries. But before this can be complete the una voidable deregulation has to take place. Little wonder why the over 18 private licensed refinery companies are yet to mobilise to site. Therefore, Government should revisit the issue of deregulation, and then privatise the state-run refineries. This massive importation does no good at all to the country, and should be reduced to near zip minimum. 5.CONCLUSION Government should be commended for taking up the challenge of build the capital intensive refineries, being beyond the ability of any local company at the time. It created energy security, jobs, averted looming crisis arising from massive shortage of supply of petroleum products and saved so much cost. But its continual running of the refineries is, to ordinate the least wasteful and harmful to the economy. Refineries are commercial ventures, with huge financial implications, and do not provide much employment opportunities to warrant such protectionism by Government22.Obviously, it is only a few that benefits in a State-run refinery at the expense of many. Privatisation of the refineries holds more prospects economically to the country than what obtains. At the time being, the ungainly net importer position of the country is no more sustainable. Less Importation would save so much cost and the Nigerian economy screen from the unstable, volatile international petroleum price. Subsidy has caused considerable loss of revenue and a rapid growth in domestic oil consumption as low price does not reflect real cost for consumption.It has contributed to the collapse of local refineries, as price of fuel do not show cost of supply. Reluctance of private players to invest in refineries, glum fuel shortages at filling stations, dilapidated supply and distribution infrastructures, smuggling, and product adulteration, all of which impact substantially on the economy are the consequences of the continues subsidy regime in place. Everything should be done to encourage a functional refinery industry to check the cr ippling importations. An efficient refinery industry in Nigeria would have massive market both within the country and in the neighbouring ountries, and this brings limitless economic gains that are able to change the economic outlook of the country. BIBLIOGRAPHY firsthand SOURCES NATIONAL LEGISLATIONS The Nigerian National Petroleum Corporation Act, 1977 The Petroleum Products price Regulatory Act, 2003, No 8, Laws of the Federal Republic of Nigeria SECONDARY SOURCES BOOKS Gary, J. H. , Handwerk, G. E. , Kaiser, M. J. , Petroleum Refining Technology and Economics, (5th Edition) (United States of America, Florida, CRC Press, 2007). OTHERS INTERNET SOURCES Braide, K. M. The mechanism of Fuel Scarcity in Nigeria, http//www. nigerdeltacongress. com/marticles/mechanics_dynamics_fuel_scarc. htm. (assessed 13/04/2011). CBN, http//www. cenbank. org/Out/2011/pressrelease/gvd/CommuniqueforMPCMeetingofMarch 21 22 2011_21st Mar_. pdf (assessed 01/05/2011). CIA, The World Factbook, http//www. cia. gov/library/Publications/the-world-factbook/geos/ni. html (assessed 18/04/2011). Hossain, M. S. , Taxation and Pricing of Petroleum Products in Developing Countries A fabric for Analysis with Application to Nigeria, http//www. imf. rg/external/Pubs/ft/wp/2003/wp0342. pdf (assessed 20/04/2011). Iba, L. , Fuel Crisis button up waiting for private refineries, http//64. 182. 172/webpages/news/2010/july/12//busines-12-2010. 001. htm (assessed 09/05/2011). Nigerian Refineries History, Problems and Possible solutions, http//www. businessdayonline. com/NG/index. php/oil/3256-nigerian-refineries-history-problems-and-possible-solutions-1 (assessed 09/05/2011). NNPC, Annual Statistics Bulletin, http//www. nnpcgroup. com/Portals/0/MonthlyPerformance/2009ABS Web. pdf (assessed 01/05/2011). NNPC, Subsidiaries, http//www. npcgroup. com/NNPCBusiness/Subsidiaries/ (assessed 09/05/2011). PPPRA, Report on the Administration of the Petroleum Support Fund (PSF), http//www. pppra-nigeria. org/brie fonadministrationofPSF. pdf (assessed 01/05/2011). Refinery Economics, http//nrcan. gc. ca/eneene/sources/petpet/refraf-eng. php (assessed 19/04/2011). Refining & Product Specifications Overview, http//www. petroleumonline. com/content/overviemCont. asp? mod=8&ord=10 (assessed 19/04/2011). &8212&8212&8212&8212&8212&8212&8212 1CIA-The World Factbook, at http//www. cia. gov/library/Publications/the-world-factbook/geos/ni. tml (assessed 18/04/2011) 2 NNPC 2009 annual report and EIA Nigeria heartiness Data, Statistics and Analysis-oil, Gas, Electricity, coal 3 This is the maximum number of barrels of input that a distillment facility can process when running at full capacity under optimal crude and product slate condition with no allowance for downtime. 4 Nigerian Refineries History, Problems and Possible solutions, at http//www. businessdayonline. com/NG/index. php/oil/3256-nigerian-refineries-history-problems-and-possible-solutions-1 (assessed 09/05/2011) 5 Ibid 6 Ibid 7 Ibid 8 Refinery Economics, at http//nrcan. gc. a/eneene/sources/petpet/refraf-eng. php (assessed 19/04/2011) 9 Ibid 10Ibid 11 The difference in dollars per barrel between its product revenue (sum of barrels of each product multiplied by the price of each product) and the cost of raw materials (primarily crude, but also purchased additives like butane and ethanol) 12 Refining & Product Specifications Overview, at http//www. petroleumonline. com/content/overviewConti. asp? mod=8&ord=10 (assessed 20/04/2011) 13Gary, J. H. , Handwerk, G. E. , Kaiser, M. J. , Petroleum Refining Technology and Economics, (5th Edition) (United States of America, Florida CRC Press, 2007) at 18-19. 14Hossain, M. S. , Taxation and pricing of Petroleum Products in Developing Countries A theoretical account for Analysis with Application to Nigeria, at http//www. imf. org/external/pubs/ft/wp/2003/wp0342. pdf (assessed 20/04/2011) 15 Braide, K. M. , The Mechanics of Fuel Scarcity in Nigeria at http//www. nige deltacongress. com/martiles/mechanics_dynamics_of_fuel_scarc. htm (assessed 20/04/2011). 16 Ibid 17CBN, http//www. cenbank. org/Out/2011/pressrelease/gvd/CommuniqueforMPCMeetingofMarch21 22 2011_21stMarch_. pdf (assessed 02/05/2011). 18PPPRA, Report on the