Adding fuel to the fire – A combination of ageing oil refineries and powerful middlemen led to a crippling fuel crisis last month. By Martins Azuwike, Lagos
IN THE RUN up to his inauguration at the end of last month, President Buhari would have been left in no doubt as to the enormity of the task ahead of him as the country was almost brought to a standstill by fuel shortages.
Long queues formed outside petrol stations, banks closed early, many domestic flights were cancelled and three of the country’s mobile phone companies, MTN, Airtel and Etisalat, warned their services might be affected as they were finding it difficult to supply diesel to base stations.
Although Buhari’s All Progressives Congress accused Goodluck Jonathan’s outgoing People’s Democratic Party of sabotaging the handover, fuel shortages are nothing new. Despite being Africa’s biggest hydrocarbons producer, pumping out more than two million barrels of oil a day, Nigeria’s four ageing oil refineries are unable to meet domestic needs, forcing successive governments to import fuel to make up the shortfall. A fuel subsidy introduced 25 years ago – paying fuel importers the difference between the market rate and the lower price at the pump for consumers – has only served to turn a drama into a crisis. Licences to lift, import and market oil were issued to a few privileged individuals and companies, encouraging the formation of cartels. Today, most, if not all of them, are holders of oil blocs and some also own refineries outside the country, placing them in a unique position to dictate terms.
The halving in the price of crude since mid-last year has led to a devaluation of the local currency, the naira, and resulted in a squeeze on credit to the fuel importers and marketeers.
Earlier this year, fuel importers claimed they were owed $1bn in arrears and stopped distribution until it was paid. To make matters worse, gas tanker drivers went on strike and oil and gas workers also walked out.
Just a few days before Buhari’s swearing-in on May 29, a deal was struck to end the crippling crisis and the Independent Petroleum Marketers Association told its members to re-open its depots in the commercial capital, Lagos. A committee is to be set up to look into the $1bn figure and then pay any outstanding money.
However, the elephant in the room is the subsidy system itself, which is costly and wide open to racketeering. In 2012, the House of Representatives Committee released a report into the subsidy revealing high level fraud that cost the country $6.8bn. In addition, the government paid $8bn the previous year financing it. The subsidy proved so lucrative that the number of fuel importers soared from six in 2006 to 140, the report stated.
Farouk Lawan, chair of the committee, said powerful interests had been angered by its investigation. “We were threatened several times in so many ways,” he told the BBC at the time. “We were told that we were not going to live long [enough] to even finish the exercise. They were death threats, very clearly death threats. Fortunately, we are still around.”
Although President Jonathan was under pressure to get to grips with the scandal and prosecute the wrongdoers, Nigerians feel little has changed.
The underlying problem is that the country’s four refineries operate below par, while importation, distribution, marketing and pricing remain murky. The Nigerian National Petroleum Corporation (NNPC), the Petroleum Products Pricing and Regulatory Agency and other bodies involved in the downstream sector of the industry continue to reel out questionable figures in relation to the pricing regime governing locally refined products and the imported mix. The suspicion is fuel importers, marketeers, government officials and financial institutions collude to create an artificial scarcity for their own benefit.
Nigeria remains the only country among oil-producing nations that cannot refine enough of its crude to meet domestic consumption and whose allocation and distribution continue to distort the economy and impoverish its citizens.
It is pointed out that in theory the 445,000 barrels per day (bpd) installed capacity of the country’s four refineries located in Port Harcourt, Warri and Kaduna is sufficient to address the needs of the domestic market and still leave enough for exports. Port Harcourt Refinery 1 (PHRC I), the smallest and oldest of the refineries and with 60,000 bpd refining capacity, was built by a Shell-BP consortium in 1965. Since then, it has neither been overhauled nor upgraded.
The Port Harcourt Refinery 2 (PHRC II), the youngest and biggest, was conceived as an export refinery with a capacity of 150,000 bpd. Completed in 1989 by General Babangida’s military administration, it remains the nation’s most functional refinery to date. But it has been beset by poor management and maintenance, resulting in chronic underproduction.
Designed to produce 125,000 bpd, the Warri Refinery (WRPC) is another sore point. Built in 1978 during Buhari’s time as petroleum minister in Obasanjo’s military government, an additional petrochemical processing capability was added in 1986 for downstream petroleum products such as polypropylene. The WRPC is also designed to generate 125 MW of electricity, enough to run the refinery and supply surplus energy, estimated at 70 per cent, to the national grid. But it, too, has suffered recurrent shut-downs due to lack of maintenance and pipeline sabotage. At best, the facility is only capable of reaching 30 per cent of its installed capacity.
Buhari also had a hand in the 110,000 bpd Kaduna Refinery (KRPC) while he was head of the NNPC in 1976, again under Obasanjo. Likewise, it has never performed at full throttle and has been accused of being one of the most ill-conceived projects ever built by the federal government. Located more than 600km away from its feedstock supply in Escravos, Delta State, and designed to process both Nigerian
Bonny Light and imported Arab Light, it was also meant to feed base oil manufacturing plants.
Apart from the first 10 years of its history when it got off to a relatively good start, it has been burdened by frequent sabotage of its supply pipelines, oil theft and, in 1997 and 2002, two major fires. Since 2003, when the pipeline from Escravos was blown up following political unrest, it has barely operated at 10 per cent capacity, and then only if crude feedstock is supplied.
Chronic fuel shortages have led to frequent power rationing, forcing businesses and services to rely on private diesel generators. This in turn pushes up costs.
In May, the entire economy faced imminent shut down, said Remi Bello, president of the Lagos Chamber of Commerce and Industry. Although the situation needed to be fixed urgently, there was “no evidence of active engagement with stakeholders in the petroleum industry to bring an end to the crisis”.
In a statement to NewsAfrica, the chamber added: “The country and the economy should not be allowed to continue to drift as if there is no one in charge. The current situation is taking a huge toll on the citizens and the economy
“Unbearable discomfort is suffered by citizens as a consequence of the twin challenges of lack of electricity and fuel supply in households, there is an avoidable social tension in the country, many businesses have either shut down or drastically cut down on operating hours, the cost of transportation has skyrocketed, investors in the petroleum downstream sector are in a quandary as to the policy direction of government.”
It urged the Buhari administration to immediately deregulate downstream sector and to end the subsidy regime. It added: “This will pave the way for the restoration of normalcy in the sector and attract private capital, boost investments and create jobs.”
Buhari has not yet indicated whether he’ll keep paying the subsidy to those he accuses of holding the country to ransom, but his much-vaunted campaign promise to tackle corruption and his hands-on experience of the oil industry offer some hope to beleaguered Nigerians. Only time will tell whether this hope is misplaced or not. Additional reporting Rita Hernandes