Building a brand new refinery today would cost the country about $12 billion, the Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Mele Kyari has said.
Kyari who defended last week’s decision by the Executive Council of the Federation (FEC) to approve the release of $1.5billion for the rehabilitation of the Port Harcourt Refinery said the Federal Government does not have the financial capacity to fund the construction a new refinery for the country at this time.
Announcing the approval of the refinery rehabilitation in Abuja at the end of the FEC meeting, Minister of State for Petroleum Resources, Timipre Sylva, said the exercise would be carried out in three phases spanning 18, 24 and 44 months.
The minister said the rehabilitation was to ensure the resuscitation of the country’s moribund refineries to reduce the cost of processing petroleum products, cut down on the volume of fuel imports and boost the country’s economy.
Criticisms by Nigerians
Since the announcement, not a few Nigerians have criticized the decision by the government to spend $1.5billion (about N570billion at the official exchange rate of N380 to the dollar) on the rehabilitation of an old refinery that has not functioned for a long time.
Apart from the Chairman of the Nigerian Governors Forum (NGF) and Ekiti State governor, Kayode Fayemi, who asked the government to rescind the decision, the Chairman of Stanbic IBTC Bank and former Chairman, Technical Committee of the National Privatization Council (NCP), Atedo Peterside, said the exercise should be subjected to a national debate.
“The Federal Government should halt $1.5billion approval for the repair of Port Harcourt refinery and subject this brazen and expensive adventure to an informed national debate,” Peterside said in a comment on his personal twitter handle, @AtedoPeterside.
“Many experts prefer that this refinery is sold “as is” by BPE (Bureau for Public Enterprises) to core-investors with proven capacity to repair it with their own funds,” he added.
The leading opposition political party in the country, the Peoples Democratic Party (PDP) also criticized the decision, describing it as another display of monumental and reckless wastefulness of the country’s scarce resources by the Buhari administration.
NNPC defends decision
However, reacting to the debate in Abuja on Monday in Abuja, the NNPC GMD said as a result of the current economic situation in the country, the government can ill-afford the huge financial burden to continue importation of petroleum products as well as spend $12 billion to build a brand refinery at this time.
Current cost estimate for new refinery
He said even if the country could afford to spend $10bilion to build a new refinery, it would mean the country would have to live with the burden of continuing the importation of petroleum products, especially Premium Motor Spirit (PMS), popularly called petrol, for another four years.
“We have people saying why not build a new refinery? Why would the NNPC repair an old refinery with $1.5 billion?
“The fact about what it takes to build a refinery of this status today is available even by Google search. It will be difficult for the country to build a new refinery at this time as it will take four years for it to commence production.
“It is around $7 billion and $12 billion to construct a refinery like the Port Harcourt refinery. This is the estimate you see in public space, and there are things you do outside the construction limits like the utilities that are never accounted for when estimates of this nature are done.
“Typically, there is an additional 25 percent cost for construction limits. So, when you say a refinery can be built at $7 billion or even $10 billion, also think of that 25 percent additional cost.
“With today’s estimate, one cannot build a refinery at any cost below these amounts. That means the option one has is to scrap this and build a new one. And we all know that we don’t have that much resources to do that at this time.
“If we start a new refinery of this nature today, it cannot work in less than four years. Therefore, it means we will continue to import petroleum products in the next four years or more,” Kyari explained.
Poor maintenance culture
The country, he said, has not done well in maintaining the refineries in the past 25 years as the last turnaround maintenance (TAM) of the Port Harcourt refinery happened 21 years ago.
The huge cost of rehabilitation of the refinery witnessed in this present time, the NNPC GMD noted, was as a result of poor maintenance of the plant over a period of time
“What we are seeing today is the cumulative effect of our lack of proper maintenance of the refineries over a period of time. But something has changed today, and this is why we are proud to tell Nigerians that we have done something different in the background.
“This is because we have a government that allowed us to play our role without interference in terms of our procurement exercises and this made the process go unhindered.
“This has also allowed us to involve every stakeholder, including NUPENG (the National Union of Petroleum and Natural Gas workers) and NEITI (Nigerian Extractive Industries Transparency Initiative), to ensure openness and accountability of the process.”
Rehabilitation, not turnaround maintenance
The planned exercise, Kyari, said would be different from what used to obtain in the past, pointing out that rather than turnaround maintenance, the NNPC is going to undertake a complete rehabilitation of the refinery to make it work at optimal capacity on completion of the rehabilitation programme.
“We are not doing turnaround maintenance. We are doing complete rehabilitation of the refinery. It is very different from what used to happen in the past. It means we are going to replace certain major components of the plant.
“We are introducing some items that ordinarily we won’t need to if we were doing turnaround maintenance. There is a major shift in the status of the plant that we have to do and it is not done during turnaround maintenance,” Kyari said.
During the rehabilitation, he said by the 18th month, part of the plant would begin to produce petroleum products, particularly the gasoline part.
In rehabilitation, he said normally the refinery would not be shut down completely, as segments of the plant would continue to function while the repairs are ongoing, adding that once that segment is completed, the repair work would move to the other segments.
“As the repairs continue within the four-year period, the contractor would continue to scale up until the rehabilitation exercise is completed.
“What it means in a technical sense is that in 18 months, we will see normal production of products coming from that plant. We will follow the process plant by plant until we are completely done,” Kyari said.
Ongoing repairs
The NNPC GMD also said the process of rehabilitation of the refineries, which has been ongoing, started about 10 years ago, but was slowed down by a number of mistakes along the line, including delays due to lots of interferences by the previous administrations.
With an Italian firm, Tecnimont, SPA, contracted to handle the rehabilitation exercise, with $1billion financing arrangement from the AFREXIMBANK, Kyari said he was optimistic that at the end of the exercise the refinery would work optimally for the next 15 years.
Options considered
“Initially, we thought that the best way to go was to go to the original builder. But we found it was not the right strategy.
“Another way of making this project work was the introduction of borrowing for the repair work because when you borrow, the lenders will put conditions and one of the conditions is that it should be maintained under ‘own and earn’.
“This means that the NNPC will not operate this plant as a basic requirement of the financing institution. The financing partner will ensure that the contractor will work efficiently.
“Importantly is that the contractor O&M gave a guarantee that the facility will operate for the duration of the loan and the fact the project will be done under a financing structure supported by AFREXIMBANK.
“The bank has promised a $500 million loan in the first instance, and an additional $500 million making it $1 billion. The condition is for the loans to be repaid from the operations and proceeds of this plant,” Kyari said.
