Why Not Build More Refineries?

INTRODUCTION
 
A reader (and he knows himself!), on reading my latest essay, wrote to me as follows:

QUOTE

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.

UNQUOTE

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 billion.

http://www.gasandoil.com/goc/contract/cox11269.htm

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

http://www.eia.doe.gov/emeu/cabs/nigeria.html

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-Ibom’s own an export refinery:

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 licence.

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:

http://www.gasandoil.com/goc/company/cna22414.htm

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 Atlantic Petroleum.

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:
Mbendi Oil
Africa: Oil And Gas Industry - Refining
- Overview

http://www.mbendi.co.za/reaf.htm

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 tonnes 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 closed.

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:

http://www.bizjournals.com/albuquerque/stories/2003/01/06/story7.html

Holly Corp. acquires Utah refinery
Eric Billingsley
NMBW Staff

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."

ebillingsley@bizjournals.com | 348-8302
 
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:

http://www.valero.com/apps/corp/refineryViewer/default.aspx

Corpus Christi – 347,000 bpd

Denver – 27,000 bpd

Houston – 135,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?

ON BITUMEN

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:

http://fr.allafrica.com/stories/200306160728.html

BPIC Threatens To Withdraw Bitumen Blocs From Firms

Vanguard (Lagos)

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.

EPILOGUE
 
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.