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Optimal model for privatizing Nigerian national refineries

By Chijioke Nwaozuzu
An announcement has been made by the government regarding the privatization of national refineries whose implementation is slated for 2014. No doubt, the announcement has received mixed reactions from the public, depending on relative perception of the would-be ultimate winners and losers from this exercise.

There are some citizens who believe that a clique of individuals is about to buy up national assets based on their selfish interests. Similar views were expressed by a section of the populace when telecommunication licenses were awarded, and when moribund power stations were privatized. However, when infrastructure and systems operate efficiently everybody wins.

A McKinsey Report (2003), reveals that privatization results in significant operational and financial improvements; access to finance; ownership stability; access to technical skills; and a shift in accountability from public sector to private sector.

The Nigerian experience with running state-owned enterprises and infrastructure facilities has been poor. For example, Eleme Petrochemicals was operated (as one of the NNPC subsidiaries) at low capacity utilization levels until Indorama bought the process plant, and it now operates at over 90% of installed capacity.

The National Fertilizer Company (NAFCON) was run down and later sold. The new owners have revamped the plant and ramped up production. It is doubtful if the NLNG could have remained as efficient as it is today if it were operated solely by NNPC.

Quite frankly, few, if any, industry analysts will dispute the fact that our refineries have not been operating efficiently in the past 15-20 years. Consequently, the country has been importing massive volumes of lighter petroleum products (i.e. petrol, diesel, and kerosene) for nearly 20 years. There are several reasons why the operations of our ageing national refineries should be run by the private sector.

The cost structure of our refineries is high owing to salaries, administrative costs, and overheads not being co-related to profitability, and so these refineries are financially unsustainable. Personnel structure is top-heavy, particularly at the managerial levels. The plant integrity is frequently compromised by equipment failures and irregular turn-around maintenance (TAM).

The poor state of supply and distribution infrastructure (pipelines and pumps) has led to unreliable feedstock supply to the refineries. Likewise, irregular product evacuation results in frequent downtimes. The decision making process for funding is extremely slow and so urgent repair work cannot be carried out on ‘just-in-time’ basis. There is also a lack of maintenance and performance culture.

Perhaps, the worst nightmare confronting the refinery managers is the lack of control over their business because they operate a flawed business model. Refinery failures arise because the major causes of refinery shutdowns are out of the control of the managers. Another subsidiary of NNPC, the Pipelines and Products Marketing Company (PPMC) acts as the single crude oil supplier, single products off-taker, and sole products seller.

The refineries only get paid a processing fee based on volumes of products refined, and so are volume rather than value driven. The consequences of this aberrant business model are high transaction costs and cost control/profitability risks. Given this situation, it is obvious that the efficiency of our national refineries has ‘gone south’ and the decision to privatize these refineries is the correct call and that this exercise can be concluded in six months to one year ‘tops’.

Therefore, the aims of this privatization exercise will be to increase capacity utilization, optimize the yield for lighter products (i.e. petrol, diesel, and kerosene), and to achieve profitable operations. It is also noteworthy that privatization exercises have been a veritable source of government revenue, particularly governments facing financial pressures. To achieve these aims will entail rehabilitation and debottlenecking (i.e. expansion) of existing refineries, enhancing operational capabilities, and a radical change in the business model. Realistically, these can be better achieved under a private sector setting.

Another McKinsey Report (2012) identifies six models of partnerships that are equally applicable to privatization of Brownfield refineries (i.e. existing refineries) and the design of Greenfield (i.e. new refineries) refinery partnerships. First model: the National Oil Company (NOC) owns and operates the refineries. This is the current case with Nigerian refineries, whereby NNPC has 100% ownership of all the national refineries and operates them.

Second Model: Joint Ownership & Operatorship of the refinery between the NOC and an International Oil Company (IOC) or an Independent Oil Company. For example, the Melaka II refinery in Malaysia is jointly owned and operated by Petronas (45%) and ConocoPhilips (50%). The government retained ‘golden shares’ of 5%.

Third Model: Joint Ownership, but the IOC or independent acts as the operator. For example, SPRC refinery in Thailand is jointly owned by PTT (state-owned and the largest oil company in Thailand) and Chevron based on 36%: 64% split respectively. Chevron is the operator.


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