This is the second installment of this conference hall. The first part which was published in yesterday’s edition of Vanguard, focused on Nigeria’s capabilities in the building of refineries
SO, those comparisons are there and I think we missed the point when Gen. Obasanjo sold the refineries at the time he was leaving office.
People have queried the process, because the investor that won the bid for Port Harcourt refinery, offered about 650 or 651 million dollars, for a 51per cent stake in the refinery. That is a refinery of 210,000 barrel capacity per day. Assuming it was even working at 30 per cent capacity, at best you would get 69,000 to 70,000 barrels refined crude.
If you have a refinery and I give you crude oil to process for me, I will pay you four dollars. The net margin to the refineries is not more than one dollar. So really, if they had offered $650 or 651 million for 70,000, barrels a day which is $70,000 you can imagine how many years it will take for the plant to operate and recoup the cost, given the way it was bought.
In my mind, Gen. Obasanjo rushed to sell the refineries to help his friends, it triggered off the public outcry before late president Yar’ Adua took over and reversed the transaction. Up till now, nothing positive has happened.
So, we have really missed it. What is happening is fast becoming like the NITEL story, if we don’t do anything about the refineries now and we give all the concessions that Dangote is asking for, those refineries would not be worth anything tangible.
Maybe we want to adopt the Russian model of privatisation where the government gives out the assets out and stop budgeting for it. But if the investors turn company around and make profit, then they would pay tax to government. That is enough income for the government.
So, there is management and business aspect of it and when you look at it, government would say they want to build a refinery to feed the Nigerian populace in terms of their needs but the infrastructure is just horrible. When I say horrible, it is an understatement because we have 5001 kilometers of pipeline network in Nigeria. If you work out the pipelines network there, it is not more than 2,000 or 2,200 pipelines and that basket itself consume about 70 to 75 per cent of petroleum products that we are talking about.
If we say that the road transporters are a major force we can reckon with, we can beef up the depots in those boundaries so that they can still move products to Sokoto and the far North, but we must make conscious effort to pump products to that boundaries at least, because the cost of revamping the pipelines is less because you don’t have to revamp the extra 80,000 kilometers.
If you go to Gusau and Yola depots, they are just as new because products never get to them. In terms of tank storage, you have little or nothing to upgrade, may be some cleaning and pressure and integrity testing.
Let’s assume Dangote builds a refinery, what would be the logistics of the man in Kano getting refined products? And if you say we want to build a refinery at Epe, are you going to replicate this chaotic traffic in Apapa around such hybro areas like Victoria Island and Ikoyi?
So there is need for some greater thinking and perspective about some of these things. We just have to get it right sothat we don’t make the mistake of the past.
Mistakes of the past
Yes, we want to build refineries, but I believe that we don’t need cooking pot as refineries. People think it is easy to build refineries but you can do so for lower grades that could do AGO. As you know, refineries are graded. You have grades 1,2,3, etc, it is the highest grade that would give you the full portfolio of product, diesel, AGO, PMS, etc.
Of course, AGO has become a very bad example for us, here for the simple reason that the price is higher for all manner of reasons. What was envisaged when AGO was deregulated that it would bring about competition in the market, but there are still constraints. It may interest you to know that if a vessel loaded with AGO is to berth at the port today, all the naval officers at the port would run away and there would be nobody to sign the documents for the vessel to berth. The vessel would be left stranded and it would result in accumulation of demurrage and all sorts of avoidable costs.
Again, all the importers of AGO seem to have converged more or less on a fixed price and there is no competition going on there.
Competition in the environment
Even when new comers enter the market, they would operate with the prices that are already on ground. The old marketers do not bother to give preferences to the new comers to enable them create their own clientele, so that there would be competition in the environment. So, the questions that would be asked are: How can we bring about a competitive atmosphere into petroleum products marketing? Can these refineries stand on their own?
I believe that if we have refineries here, there would bring about job creation. It would add value to the economy. So by all means we should encourage it!
But let’s be careful so that we don’t go and de-couple some discarded old refineries in other places and bring them here.
Moderator: Let me turn to Mr. Henry Boyo. Sir, Mr. Cole talked about some constraints in building refineries here in Nigeria, but he endorsed the idea eventually, do you think it is possible to build refineries here. Let’s not forget that some 35 licences have been given out to people to build refineries, but nothing has happened. What do you think went wrong?
Henry Boyo: In the last 30 years or so since I started advocating for some change in the approach of managing our economy, It has become clear to me that even if you have the solution in front of Nigerians, they would not recognise it because in my mind, it is quite clear that I have been proposing a solution that has not been challenged for 14 years. At least not formally, but officially challenged in the sense that nobody has said Mr. Boyo what you are saying does not make sense.
What you find is an unusu
al problem that nobody wants to address, nobody wants to speak about it, and we continue in this manner. I listened very carefully to Ladi and I ask my self: How can this be happening when we have enlightened men with international exposure and it really bothers me but I have also discovered that when you don’t charge people for what you are doing, those who are getting the benefits would not treasure it, or give meaningful value to it. The issue of petroleum refining and the ancillary industries that should go with it is very simple.
If we want a situation where there would be competition in the market,then we must realise that the main problem is that of the exchange rate.
You might want to ask, what does the exchange rate has to do with this? But the reality is that of the exchange rate.
Let us look at what Dangote has said, though am not aware of some of the concessions Ladi have mentioned. I don’t think he that he needs to demand for any concession. What he clearly said is that “I am going to set up a refinery with the ancillary industries for the value of $9 billion or there about. And in the same manner that we have all been worried that how come so many people have been given licenses in the past, to set up refineries but somehow, they did not perform. What gives Dangote the confidence to say he would spend $9 billion of his own money as well as borrowed money, to do this? We all know that he is a very intelligent business person. So, we know that Dangote would not take a foolish business decision.
A journalist had asked him whether he “would make a success of this when a lot of people that were given licences to build refineries. And I said in my mind that if I meet this gentle man, I would ask him the same question.
Indeed, I wrote an article
entitled:”Dangote to the Rescue in the Refinery Business” At the bottom of the article I asked: “Are there things we don’t know that Dangote knows that gives him this confidence to want to put his money on such a huge project into the refinery business?”
His answer was very simple. Dangote said he would build a world class refinery, that would produce the petrol and the other ancillary products, then he would ask marketers in Nigeria to buy from him. Normally, these marketers used to import at ‘X’ price which is the international price for petrol,which is what he is also going to charge them.
It is therefore left for the marketers to buy at international price in his refinery and decides how and when to collect their subsidy from government, which is an excellent business model.
Then I said to myself, ‘Why didn’t any of these other people think about this in the first place? We now have a situation where if the marketers refuse to buy from him, he would export his products to the international market at the prevailing price. You can’t ask him to sell below his own production price, because he is not in the subsidy game.
As far as he is concerned, the marketers would buy his product then, sell to us and and wait to collect their subsidy from government as they are doing at the moment. The bottom line is that we should recognise the unacceptability of any price regime that accommodates subsidy. Let me give you an example to drive my point home.
The issue of petrol and refineries is that of exchange rate from the word ‘Go’ but Nigerians have never been encouraged to look at it this way. All the other options of trying to address this problem I can tell you confidently will fail if we don’t address the issue of exchange. Let me tell you why!
If the international price of fuel for example is $1 per liter, that means that one liter of fuel anywhere in the world before you start adding taxes and transportation charges from the refineries to the market is $1 per litre. That is one liter is $1 equal N160 that is what it means basically, before you start adding your taxes and other charges. That N160 accommodate 50 per cent subsidy, that is to say you are expected to pay 50 per cent to the common man through SURE-P and other avenue.
Now, imagine that instead of the naira being N160 to a dollar, naira is N180 to a dollar and the international price of fuel has not changed, it is still $1 =1 one liter, but to us it is now N180, immediately what happens? You cut out subsidy and there is no need of saying that you are consciously removing subsidy.
I can understand that because you think that there is no option but if the option is to consciously bring down the price of petro to N80 per liter, would you be talking of subsidy?
No! You would be talking
of N97 per liter there would be no need to reduce it and you would still have N17 per liter as sales tax. So you can start under
standing that it is the issue of exchange rate because once that happens and you have no need for subsidy, what happens?
Any Tom, Dick and Harry who has capital, can come up and set up a refinery because he knows that there would be no problem for him selling products at government control or manipulated price.
So at the end of the day, whether you like it or not, if you divorce the mechanism of determining the exchange rate of the naira to the dollar, from any solution that you are proposing in order to be able to jump start or expand the refineries business in Nigeria, I can confidently tell you that it will fail even before you start.
Except you are using the Dangote model, which is; to buy your crude at the international price, refine and sell at international price and export to other places.
Gas cylinder and gas
Look at the issue of kerosene that you mentioned, I am very concerned about it. There is absolutely no reason why the SURE-P funds could not have been devoted to providing every household in Nigeria with a gas cylinder and gas.
Rather than this one that the Minister of Finance is doing by donating N10 million to school children, then she gives N10 million or N8 million to youths who have no practical business experience. My very humble submission is that we must not fail to recognise that the nucleus of this problem is that of exchange rate. The fact that you accept the exchange rate of N160 to a dollar shows that you don’t understand what is going on in the system.
In 1996, we only had $4billion worth of reserve and we were told that the amount would give us four months import cover. So, don’t tell me that we are spending more now because in 2010 , or thereabout our reserves was as much as $60 billion worth and we were told that it would give us 20 months or more import cover.
My brothers, we are all intelligent people we all went to school, should your exchange rate be below N80 when you had four months import cover or should it be stronger when you have 20 months import cover? how come you have a weaker exchange rate with a longer import cover?
That should immediately tell you that something is inherently wrong and until you address that problem, we will not have peace in the economy of this country and I say this with all clarity and confidence.
You will find that at the end of the day, the more dollars we earn from higher crude oil prices, the poorer we become. This is the reality. I don’t have to prove anything because all of you can see.
A lot of people will tell you that we were better off in 1996 in terms of welfare and things like that but take away telecoms that a common man can attest to. What we have now is a situation where the government is engineering a weaker exchange rate of the naira against the dollar, when our exchange rate should be stronger than N80 to a dollar.
Then you may wonder if I am telling the truth. I am telling the truth because if you notice again, whenever the CBN reserve is rising, that is when we end up being labeled the poorest in the world because the two things are the same. In order for CBN’s reserve to be high, Nigerians have to be poorer for a very simple reason. If the dollars that you are earning is captured by the CBN, and instead of allowing government agencies to have access to use those dollar earnings, CBN goes into the printing of naira, to create local currency for domestic transaction. It means that the higher the price of crude oil, the more oil revenue you get, the greater excess liquidity that you would have as a result of CBN printing more naira.
The higher the dollar value you earn the weaker the naira value you would get because the CBN is creating the naira, through printing of the national currency. This creates disequilibrium that results in excess liquidity and inflation in the economy.
Inflation in the economy
This is a situation where you have some much naira chasing fewer goods. So the more dollars that you earn, the more naira you will have then you have inflation, high interest rate is used to curb the inflow of money into the economy, this high interest rate prevents the real sector from accessing funds to expand productive activities. These are things that debilitate the economy.
The solution is if the CBN in line with the constitutional arrangement, when we earn dollars probably 60 to 70 per cent, let us assume that our dollar earning is 70 percent, the CBN captures the dollars earnings. The more it captures the greater its own reserve, then you must wonder how can CBN be boasting of reserve meanwhile we are going outside to borrow money at 70 per cent yet, CBN has $40 billion reserves that is lying idle.
So, whenever we have high crude oil prices, CBN reserve and it will issue more naira. So, we now have a situation where we have to pray to God that the price of crude oil does not rise, or that we must not receive more dollars into the economy, because the more dollars we receive, the poorer we become, because of the weaker position of our exchange rate and all the trends that goes with it.
I am putting it before you that if you had a dollar certificate issued in place of CBN unilateral capturing the dollar and printing the naira, what would happen? You will suddenly have a situation where each beneficiary of the federal account going to the Central Bank every month with its dollar certificate, not to meet freshly minted naira, there would be no excess liquidity and there is no need for government to borrow back money its own money as it does confidently tells Nigerians that it borrows its own money at 13% interest rate when the money was deposited at zero interest rate in the first place.
The former Governor of Central Bank, Lamido Sanusi said so a few months ago that he has beengiving government money at zero per cent interest rate to the banks and goes back to borrow the money backs at 13 to 14 per cent.” He can conveniently tell us this because he assumes that we are foolish
So, am not making up stories, it took me 12 years to be saying this before the CBN admitted that this is what they have been doing and nobody including PENGASSN could challenge them and ask for how long would you continue with this mess? How much does it cost us every year to be paying for interest on money we do not need, how come you are prepared to outbid the real sector from the credit market?
Let me not take more time
but I have injected into your consciences that once you offer dollar certificate in place of created naira by CBN, what you would have is a ripple effect in such a way that the issue of refinery expansion would be meaningless because it will become a field , people don’t have to legislate it.
Boyo: If our refineries are working optimally, we cannot produce and sell below the market price because once you do that and that is what we are doing at the moment. What we are doing at the moment is that we are selling petrol at half the price it should be consequently, there is great attraction of people coming all over the borders of our countries to steal our oil.
If you have a situation where a liter is equal to one dollar and one dollar is equal to N80 then you suddenly find that the price is too expensive. It means that for them to come and smuggle, they have to pay one dollar per liter, they will not come, you will kill the smuggling business immediately! It is the exchange rate!
Moderator: Let me turn to PENGASSAN which has opposed the ideas of selling the refineries. Sir, will the selling of the refineries solve the problem of our refining capacity and all the intrigues that goes with it?
Olowoshile: You will permit me to be very discretional and analytical and how I can bench mark my own experience with some international exposures.
If we go back to the basis, we will ask why has these challenges come about? First, we Nigerians believe that we are blessed with so much resources but government collects them without giving anything back to the citizen.
The other aspect has to do with the perspective of a typical business man, a private capitalist, an investor. He believes that if he has to invest his money, it must be profitable and he must be able to have a return of investment for his money, so profitability is key. In terms of government, do we really have the enabling environment, from the policy down to the institution and the infrastructure because it is the basic thing you will find all over the world. You need to get your policy framework right, you need to get the environment right and you need to get the appropriate infrastructure that supports business growth.
On the side of government there is a lot of misplacement of priorities in governance, it is like we are day-dreaming and people begin to ask us what are we dreaming? Are we been sincere to ourselves?
Then we have the problem of corruption, then a lot of official compromises, the abuse of rule of law and those processes of how things should be done, it is very important that we look at that.
We also have the problem of resource control and I learnt this from some Dutch men when they came to Nigeria. They said some countries that are so rich in resources tend to be prodigal. We believe that God has so blessed us and as such we can never be poor, so whatever we do with our resources, it will continue to flow. That is the major problem we have and the orientation of ‘God has so blessed us’ needs to be returned.
We also have the problem of how to manage the local market. Somehow there is this effort on the side of government to encourage people to build refineries in Nigeria but the key questions we need to ask is how do we manage appropriate margin? How do we guarantee the off-take? How do we also guarantee policies that would ensure the environment is sustained so they will continue to maintain the same structure and there would not be undue government interference and all that?