Why Not Build More Refineries?
Mobolaji E. Aluko, Ph.D.
Burtonsville, MD, USA
July 7, 2003
A reader (and he knows himself!), on reading my
latest essay, wrote to me as follows:
Please educate me on this. How much does it really
cost to build a brand new and economically viable oil refinery? My uneducated
guess is that the money spent on the failed attempts to rehabilitate the
existing refineries since 1999 is probably sufficient to build a new one. Also,
what is stopping the SW governments in collaboration with private investors (or
preferably these governments enabling private investors to do this) from
commercially developing the bitumen resources in these states? These are
rhetorical questions, since my guess is that something in our military
constitution has taken these rights away from the people of these states..
Have a good one.
I responded to him privately, but I have now
decided to share my response as a Monday-quarter-backing.
MY RESPONSE WITH SOME EDITORIAL CHANGES
These are tough questions with no easy answers.
The cost of a new refinery is pretty nebulous, but my best estimates (from so
many disparate sources, I could faint!) is about $1,000 - 5,000 per (barrel per
stream day capacity), depending on the capacity of the refinery. The lower the
capacity the lower the unit bpd cost.
For example, a 20,000 bpd capacity refinery may cost $20 million, while a
100,000 bpd capacity refinery might cost $500 million.
For example, in Nigeria, I recently read that the 12,000 bpd topping modular
refinery for Akwa-Ibom is for $10 million, while the 100,000 bpd complex
refinery being touted for Tonwei Refinery in Bayelsa is estimated at $1.2
Nigerian private oil refinery awards contract to Ventech
05-03-01 Amakpe International Refineries has awarded a contract to Ventech
Engineers, Pasadena, Texas, for what Ventech says is Nigeria's first privately
held and privately financed oil refinery. Ventech is responsible for the
design of the 12,000 bpd refinery and construction of pre-assembled modules
for shipment to Eket, Akwa Ibom state.
The plant will be adjacent to ExxonMobil's Qua Iboe terminal, said Ventech,
and will process Qua Iboe crude into naphtha, gasoline, kerosene jet fuel,
diesel, gas oil, and fuel oil. Start-up is expected in December.
Official encouragement of private investment of the oil and gas industry was a
factor in the project, said Ventech. The country has four refineries, but
mechanical problems often keep them from operating at peak capacity, creating
chronic shortages of oil products.
Source: Oil &Gas Journal
While Nigeria's state-held refineries are slated for privatization,
plans for several small, independently-owned refineries are being developed.
Nigeria has awarded 18 private refinery licences after opening up the
country's downstream sector to private investment. President Obasanjo laid the
foundation stone of the $1.5 billion Tonwei Refinery (in October 2002) in a
ceremony marking the start of construction of Nigeria's first private
refinery. The Tonwei Refinery will have an initial capacity of 100,000 bbl/d
and it can be expanded to 200,000 bbl/d.
The government of Lagos State has announced that it is studying the
possibility of establishing a refinery. Lagos is estimated to consume more
than 50% of Nigeria's petroleum products. The refinery, if built, will serve
not only Lagos but also Nigeria's other southwestern states.
The Akwa Ibom state government announced that it had concluded plans to build
a 12,000-bbl/d refinery. U.S.-based Ventech announced that design and
construction of the refinery, to be built in prefabricated modules in the
United States and then shipped to Nigeria for assembly, had begun. The
facility will be located in Eket, adjacent to the Qua Iboe crude terminal.
The Edo State government has obtained approval from the federal government to
build an oil refinery. Capacity is expected to be 50,000 bbl/d, and a
consortium of Nigeria's independent, local petroleum marketers stated that the
government had approved their plan for the construction of a refinery in
Nigeria's Federal Capital Territory
With respect to the economics of private oil
refining in Nigeria, however, an interview with Akwa Ibom's governor Obong
Attah is instructive as to why he is concentrating on making Akwa-Iboms own an
Q: ... Do you now own a right to set up a Refinery?
Attah: That's the irony of it. The federal government still has to know what is
going on because in the final analysis, it owns the oil. It owns every mineral
asset in the country, So, we still have to buy the oil from them and they have
to tell me all the whys and wherefores of selling this thing. They will allow me
to set up this Refinery but they will not agree to sell oil to us at the
subsidised price. You need to get to that level of dialogue and understanding
before you can move on. And we said fine because in any case we will be
exporting whatever we produce until there's deregulation. If you deregulate and
it becomes meaningful and profitable to sell refined products here in the
country even with the crude we bought at world market price, then we will sell
locally. But up till that point we will export. So I am quite happy with the
Q:: I understand there's a second refinery coming up in Akwa Ibom?
A: They are two different things. One is just a topping plant. That basically
refines and produces diesel and kerosene with a capacity of 12,000 barrels a
day. Then there is the one that is a full Refinery with a cracking unit and that
would refine 100,000 barrels a day.
Now from one of the reports above, you can see that 18 private licences have
been issued, including one to Lagos State that if built will serve the
south-western states. More information is provided below:
Meanwhile, the government has granted preliminary licences to 18 private
companies to build refineries, the Office of the Presidential Adviser on
Petroleum and Energy announced in Abuja.
The companies were shortlisted out of 31 applications received for preliminary
licences to establish the refineries, Mr. Sam Dimka, Assistant Director, Press
and Public Relations in the Office said. The successful companies are expected
to meet other requirements within the next two years if their licences must
remain valid, Mr. Dimka said.
Nigeria currently owns four refineries with combined capacity to process
445,000 bpd of crude oil. Companies that got the preliminary approval were
Akwa Ibom Refining and Petrochemicals, Badagry Petroleum Refinery, Clean
Waters Refinery, Ilaje Refinery and Petrochemicals, Niger-Delta Refinery and
Petrochemicals, and NSP Refineries and Oil Services. Also included are
Ode-Aye Refinery, Orient Petroleum Resources, Owena Oil and Gas, Rivgas
Petroleum and Energy, Sapele Petroleum, and Southland Associates. Yet others
were Southwest Refineries and Petrochemicals, Starex Petroleum Refinery, The
Chasewood Consortium, Tonwei Refinery, Total Support Refineries and Union
He said with the release of the result, successful applicants should submit
their basic design package prior to the granting of "Approval to Construct",
and Licence to Operate the Plant."
So we still have two to four years to go before we hear from these companies,
and since it takes two to four years to build a refinery, we may be looking at
four to six years before most of these companies come on board!
Realistically, the investment costs of new
refineries and the emergency situation that we are in suggest that we in Nigeria
should get into the low end of the capacity business that is mini-refineries,
of the order of 5,000 - 60,000 barrels per day, that is 5 - 60 tbpd, just good
for quick modular building and easy operational costs, rather than the high end
of it (100,00 200,000 bpd ie 100 200 tpd). That is still roughly $5 60
million or at US$1/N125, that is N0.625 N7.5 billion. This does not
include operating costs.
So in fact, spending the purported $700 million on
TAM on new refineries could have given us quite a number of them. Maybe not 10,
but at least 5 in four years.
Personally, I think that 30 - 60,000 bpd
refineries in each geopolitical zone that does not have one right now (that is
South-West, North-East, North-Central, South-East) would go a long way to
ameliorating our situation. Government should not build them, but should do
EVERYTHING possible to quickly encourage private players to do so without
specifying fuel prices for them that is liberalization and deregulation.
That would still have been fine, except that there
is this slight problem: a recent World Bank report discourages low-capacity
refineries in Africa:
Africa: Oil And Gas Industry - Refining
Refining in Africa
Oil refineries convert crude oil into fuel products, lubricating oils, bitumen
and chemical feedstocks.There are 43 operating and 4 mothballed oil refineries
in Africa which range from small topping and reforming refineries to
sophisticated complex refineries which can compare with the best in the world,
and 4 synfuel plants. The total distillation capacity for the continent is
142,700 ktonnes per annum (2,854 thousand barrels per calendar day) or an
average of 3,400 ktonnes per annum (68 tbpd) per refinery.
The major refining nation is South Africa with four complex refineries. Caltex
has a 5500 ktonnes per annum (110 tbpd) refinery in Cape Town. Shell and BP
have joint ownership of the 8250 ktonnes per annum (165 tbpd) Sapref refinery
in Durban where Engen owns the 5250 ktonnes per annum (105 tbpd) Enref
refinery. Sasol and Total are joint owners of the Natref refinery in Sasolburg
which has a capacity of 4250 ktonnes per annum (85 tbpd). All the South
African refineries have undergone major expansions and upgrading since 1990.
Nigeria also has four refineries, all of which are owned by the parastatal
Nigerian National Oil Company, NNPC . The refineries are situated at Kaduna in
northern Nigeria with a capacity of 5500 ktonnes per annum (110 tbpd), at in
the south at Warri with a capacity of 6250 ktonnes per annum (125 tbpd) and
Port Harcourt which has two refineries of capacity 3000 ktonnes per annum
(60,000 bpd) and 7500 ktonnes per annum (150 tbpd). The Nigerian oil industry
has been seriously impacted by operational problems during recent years with
production well below capacity.
The third major refining centre in Africa is in Egypt which has 8 refineries
and another 100,000 bpd refinery under construction.The other African country
which can boast modern refineries is Algeria.
As a result of a study conducted by the Italian consultants Cuneo et Associati,
the World Bank is pressing for the smaller refineries of sub-Saharan Africa to
be closed or converted to storage facilities. On the East coast, these would
include the Tiper refinery in Tanzania, the Solima refinery in Madagascar and
the Indeni refinery in Zambia, while on the West coast the refineries
threatened with closure include the Luanda refinery in Angola, the Pointe
Noire refinery in Congo, the Port Gentil refinery in Gabon, the Sonara
refinery in Cameroon, the Muanda refinery in the DRC and the Tema refinery in
Ghana. The SAR's Dakar refinery in Senegal is already in the process of being
Two other refineries which might not be affected by the World Bank plans are
the SIR refinery in Cote d'Ivoire and the Mombasa refinery in Kenya which have
capacities of approximately 3550 and 3300 ktonnes per annum respectively.
So that is a dilemma right there, particularly for African countries which
always look to the West for financing and advice!
The irony, however, is that an oil company recently acquired a 25,000 bpd
refinery in Utah, USA:
Holly Corp. acquires Utah refinery
Recently freed from a four-year, $1 billion lawsuit, Dallas-based Holly
Corporation, parent of Artesia-based Navajo Refining, has acquired a Utah
refinery for $25 million.
Holly signed a definitive agreement on Dec. 20 with ConocoPhillips to acquire
the Woods Cross Refinery near Salt Lake City and related assets. The refinery
is capable of producing 25,000 barrels per day of refined petroleum products.
Holly also acquired pipelines and other assets for transporting refined
products, and 25 retail gas stations in Utah and Wyoming. As part of the
agreement, Holly signed a 10-year license to market fuels under the Phillips
brand name in Utah, Wyoming and Montana.
The acquisition comes a month after Holly settled a legal dispute with
Longhorn Partners Pipeline Company. The suit, filed by Longhorn in 1998,
alleged that Holly attempted to delay Longhorn from opening a 700-mile-long
refined petroleum products pipeline. Analysts claimed that the threat of
losing a $1 billion lawsuit limited investment in Holly.
"The key thing with this acquisition is the value," says Jacques Rousseau,
analyst for Arlington, Va.-based Friedman, Billings, Ramsey. Rousseau says
Holly paid a low price for the Woods Cross Refinery. He estimates that the
refinery could generate approximately $8 million to $10 million in actual
earnings per year. Holly Corp. reported revenues of $888.9 million for its
fiscal year 2002.
Friedman, Billings, Ramsey upgraded Holly's stock from "underperform" to
"outperform" and increased the company's 12-month stock price target from $19
per share to $27 per share. Credit Suisse First Boston also recently upgraded
the stock from "underperform" to "neutral."
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So we always have ironical issues to contend with: if it is good in Utah, why
not in Nigeria?
By the way, one small refining system in the US Valero Energy Systems, which
is reportedly hot on Wall Street has the following system of 11 refineries of
almost 2 million bpd total running at virtually 96% capacity:
Corpus Christi 347,000 bpd
Denver 27,000 bpd
Krotz Springs 85,000 bpd
Jean Gaulin 250,000 bpd
McKee 170,00 bpd
Paulsboro 195,000 bpd
St. Charles 185,000 bpd
Texas City 245,000 bpd
Three Rivers 98,000 bpd
Wilmington 140,000 bpd
So why can we in Nigeria not run a four-system one of 0.445 million bpd total?
With regard to Bitumen, it is a capital-intensive prospect and fraught with
financial risks, probably even more challenging than crude oil refining. This
is why we have the following report recently:
BPIC Threatens To Withdraw Bitumen Blocs From
16 June 2003
Barely five months after the flagging off of
the exploration and exploitation of Bitumen by President Olusegun Obasanjo, the
Bitumen Project Implementation Committee (BPIC) has threatened to withdraw the
blocs allocated to two companies if they fail to commence operation next month.
President Obasanjo had on February 17 this year performed the ground breaking to
flag off the official commencement of the exploration and exploitation of the
vast deposit of the mineral resources in the country. But, in an interview over
the weekend, the chairman of BPIC Professor Julius Ihonvbere told newsmen in
Akure that the committee is disappointed over the slow pace of work by the
companies that were allocated the blocs.
Professor Ihonvbere said the companies
include BEECON Consortium and NISSAN Limited. The chairman noted that the
committee has set up a three man ad-hoc committee which include a renowned
Geologist, Professor Idowu Odeyemi and the secretary of BPIC Alhaji Goni Sheiks
to look into the earlier agreement reached between the government and the two
companies. According to him, the ad-hoc committee is expected to monitor the
implementation of the terms of agreement reached with the two companies.
Professor Ihonvbere stated that six-month
deadline was given to the companies after the agreement was signed to enable
them move to the field so as to commence operations. The allocation of the bloc,
located in Ondo State was done before the President performed the ground
breaking. According to the chairman, the committee has mandated the ad-hoc
committee to demand for an explanation from the two companies a week after the
expiration of the six month deadline.
However, provided we concentrate on using it for road asphalt and not as an
alternative energy source, it should be possible for state governments in the
South-West to get together with private investors to make something of it.
Finally, I believe that government should fund a major study to put together
complete financial plans for setting up new refineries from mini- to major
ones and then encourage private investors and state governments to get into
the act at whatever point that they can, complete with government incentives.
There is simply too much focus on selling off our existing refineries, which
should be charged to our indigenous engineers to turn around.
I hope that helps.