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In this report, OKECHUKWU NNODIM discusses the factors that have hindered the commencement of operations at modular refineries in Nigeria, including the prolonged subsidy on Premium Motor Spirit (PMS).

The potential reduction in Nigeria’s reliance on imported petroleum products could have been significant if all the licensed operators of modular refineries had successfully developed these facilities.

Modular refineries represent simplified refinery structures that demand substantially lower capital investments compared to traditional full-scale refineries. These facilities typically begin their refining process with a Crude Distillation Unit, enabling the straightforward separation of crude oil into various products, including low-octane naphtha, diesel, kerosene, and residual fuel oil.

In Nigeria, modular refineries are facilities designed for processing crude oil with capacities of up to 30,000 barrels per day. These refineries are part of a strategy to combat oil theft and promote peace in the oil-producing Niger Delta region.

Back in May 2018, the now-defunct Department of Petroleum Resources disclosed that it had granted licenses to 25 investors for the establishment of modular refineries. The licensing process involved three stages: License to establish, Approval to construct, and License to operate.

To provide some historical context, in 2002, out of a total of 105 applications received, 21 companies were granted the License to Establish petroleum refineries. This license had an initial validity of 18 months. Then, in 2004, following refinery guidelines, an evaluation was conducted to assess the extent of engineering design work.

Of those previously granted the License to Establish, 17 companies were subsequently granted Approval to Construct refineries, with a validity of 24 months.

As of the time of the department’s statement, there were 25 licensed companies, with three slated to construct conventional stick-build plants, while the remaining 22 were pursuing modular refinery projects.

However, despite these licenses being issued since 2018, only around four modular refineries have been successfully completed. These include the OPAC Refinery, Duport Edo Refinery, Walter Smith Refinery, and Niger Delta Refinery.

The Deputy Chairman of the Crude Oil Refinery Owners Association of Nigeria, Mrs. Dolapo Kotun, explained that several modular refineries struggled to commence operations due to unfavorable economic conditions. One major factor was the regulation and capping of product prices, mainly due to subsidies.

Kotun, who also serves as the Executive Director of Operations at Ikwe-Onna Refinery Ltd and Chairperson of Downstream, Women in Energy, Oil, and Gas, highlighted that investments in these refineries were made in foreign currencies, while the products were sold in Nigerian Naira. This currency misalignment made it challenging for many license holders to secure funding within the two-year license timeframe they were given. Consequently, some license holders had to seek re-validation of their licenses, incurring costs similar to the original approval.

Operators further elaborated that the prolonged existence of subsidies on petroleum products, particularly Premium Motor Spirit (PMS), negatively affected the commencement of modular refineries. Subsidies on fuel were only removed at the end of May, thanks to President Bola Tinubu’s actions.

In April 2023, the Nigeria Extractive Industries Transparency Initiative (NEITI) disclosed that an astounding amount of N13 trillion was expended on subsidizing PMS between 2005 and 2021. NEITI’s Executive Secretary, Ogbonnaya Orji, highlighted the substantial economic implications of this subsidy spending, which included diverting funds away from crucial sectors such as health, education, and technology infrastructure.

“Other adverse effects of fuel subsidies highlighted by CORAN include the deterioration of the downstream sector, particularly the declining performance of Nigeria’s refineries, which recorded zero production in 2020. Subsidies also discouraged private sector investments in the downstream and mid-stream petroleum sector. Moreover, since refining processes were conducted outside Nigeria, this hindered employment generation within the country.

The consequences extended to worsening national debt, declining balance of payments, foreign exchange pressures, and the depreciation of the Nigerian Naira. Product losses, inefficient supply arrangements, scarcity, and the associated long queues at fuel stations were additional issues.

CORAN acknowledged that while the government had genuine reasons for subsidizing fuel, this initiative had unintentionally impeded the progress of modular refineries. However, the recent implementation of a fully deregulated downstream oil sector, including the removal of fuel subsidies, has rekindled interest among investors in the modular refinery sector.

The CORAN deputy chairman indicated that as a result of deregulation and discussions with the Ministry of Petroleum Resources, the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA), and the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), many licensees are returning to initiate their modular refinery projects. Currently, about four modular refineries are in production, with numerous others in various stages of development.

Chinedu Ukadike, the National Public Relations Officer of the Independent Petroleum Marketers Association of Nigeria, emphasized that the emergence of functional modular refineries in Nigeria is long overdue. He called for the government’s support to reduce the country’s dependence on imported petroleum products and enable modular refineries to refine Nigerian crude oil. Ukadike noted that the removal of subsidies has created an opportunity for these refineries to operate more effectively and contribute to Nigeria’s energy security.

CORAN affirmed that modular refineries remain viable and essential in addressing Nigeria’s energy needs, both now and in the future. Unlike the Dangote Refinery, which is concentrated in a single location, modular refineries are dispersed across multiple sites in the Niger Delta region. This decentralization allows them to quickly provide high-quality refined petroleum products to local markets near their respective refinery sites.

CORAN emphasized that even with the substantial capacity of the Dangote Refinery, it alone cannot meet Nigeria’s current demand for refined products. Furthermore, there is uncertainty about when the Dangote Refinery will begin production, despite its “commissioning.” CORAN’s goal is not merely to meet domestic demand but to eventually surpass it, creating a surplus that can make petroleum products more affordable and position Nigeria as an export hub for these products.

Billy Gillis-Harry, the President of the Petroleum Retail Outlet Owners Association of Nigeria, echoed CORAN’s sentiments, stating that modular refineries can coexist with full-scale refineries. Nigeria’s existing full-scale refineries in Port Harcourt, Warri, and Kaduna have been inactive for extended periods, despite government promises to bring them back online. Gillis-Harry advocated for the simultaneous operation of modular refineries alongside full-scale refineries, which, he believed, would transform Nigeria into a petroleum products exporter, aligning with the aspirations of many stakeholders.

Other challenges
The challenges faced by holders of refinery licenses are substantial, as outlined by the CORAN deputy chairman. These challenges include:

1. Lack of access to intervention funds for modular refineries.
2. The need for guaranteed feedstock, which was not provided by the Nigerian National Petroleum Company Limited (NNPCL).
3. Delayed implementation of recommendations from committees established by the former Minister of State for Petroleum Resources to address these issues.

To address these challenges and promote the development of modular refineries, several steps should be taken:

1. The Central Bank of Nigeria (CBN) should establish an intervention fund to provide funding support to genuine modular refineries. This fund can be crucial for advancing these critical projects.
2. Ensure that feedstock payments are transacted in the same currency as the products’ sales (Naira). This alignment can simplify financial transactions and reduce currency risks.
3. Consider providing waivers for pioneer greenfield project developers to incentivize investment in modular refineries.
4. Waive loading and other fees payable upon the commissioning of modular refineries for a specified period. This can encourage more investment in the sector.
5. Implement measures to enhance the security of refinery assets, protecting them from vandalism and destruction.

With the full deregulation of the downstream sector, CORAN recommends:

1. Providing loans with single-digit interest rates to support modular refineries’ development.
2. Ensuring that holders of ATC (Authority to Construct) licenses have access to single-digit intervention funding, covering up to 20% of the total project cost.
3. Prioritizing domestic feedstock obligations before considering crude oil exports abroad.
4. Establishing an implementation framework for waivers, allowing license holders to access them through an agreed-upon process.
5. Waiving the re-validation of license fees, recognizing the financial investments made by companies and investors to obtain these licenses and work towards project implementation.

.”Conduct a thorough reassessment and adjustment of fees imposed on already operational modular refineries. It is imperative that the government promptly acts upon the recommendations outlined in the former petroleum minister’s steering committee white paper,” emphasized the CORAN leader.

Furthermore, the organization stressed the importance of extending the same waivers, benefits, and support granted to the Dangote Refinery to all holders of refining licenses. They firmly believe that with proper backing, modular refineries could play a pivotal role in eliminating the long-standing issue of fuel scarcity in the country.