Nigeria’s Refining Industry: Case for Resuscitation and Sustainable Operation
WORLDWIDE ENERGY TRENDS
The trend worldwide is towards more dependence on renewable energy and less on fossil fuels. As a result, several countries are by policy deliberately changing their energy mix. Whereas in the past, over 70 per cent of energy needs were met through fossil fuels and derivatives, the percentage is now reducing drastically. A major driver for this is concern about global warming and the impact of release of CO2 into the atmosphere arising from the combustion of fossil fuels and petroleum products. This has led to a situation where the growth in demand for crude oil has steadily declined. It is believed in some quarters that peak oil demand was achieved in 2019. This has dire implications for Nigeria.
From the view point of investment attractiveness, median IRR for the Oil and Gas Industry dropped from 30 per cent (2010-2011) to 15 per cent (2019-2020) impacting the spread between ROIC and cost of capital, a key driver of investment flow from the capital market to the Industry.
Coupled with the steady transfer of invested capital from fossil fuels to green energy by governments of consumer nations, the future of the industry will be largely dependent on capital discipline and operational efficiency.
Nigeria does not rank high in these two critical elements. This also has serious implications for Nigeria.
As a nation, we depend on the sale of crude oil and gas for the financing of our budget each year. This accounts for about 80 per cent of our foreign exchange earnings. In a scenario where there is declining demand for crude oil, it is easy to see that Nigeria will experience increasing difficulty in financing her budget and development plans. Already, the decline in crude oil prices experienced during the pandemic for most of 2020 resulted in serious deficits in our forex earning compared with the budgetary projections. This was worsened by the fact that for several months during the middle of the year, considerable difficulty was experienced in finding buyers for our crude oil. Whatever volumes were sold, were done at deep discounts. While some recovery of prices has occurred this year 2021, it is realistic to expect that both prices and demand will still decline.
Our ability to achieve national developmental plans, and also for the Oil and Gas sector as a whole is under threat. When the demand for our crude oil disappears, a viable upstream sector will also disappear. We currently depend 100 per cent on importation of petroleum products for meeting our domestic demand. The expenditure on fuel imports averages about $30 billion (thirty billion US dollars) per annum. Revenue for this huge cost comes from crude oil sales. With declining volumes of crude oil available for sale, expenditure on fuel imports becomes unsustainable. However, a viable domestic refining industry has the potential of obviating this eventuality while providing a continuing demand for our crude oil, and thus revenue to fund budgets, growth plans and objectives. This is not far-fetched. Brazil as at 2013 had a total crude oil production of 2.5 million BPD. Its refining capacity was also 2.5 million BPSD. Thus, Brazil had the refining capacity to refine all of its crude oil production and meet its fuel needs. It is therefore crucial that we revive the comatose Nigerian refining sector and sustain it in the long run.
By Engr. Tony Ogbuigwe, for the NAE O&G Committee. April 2021