Umaru Musa Yar’Adua’s energy sector policy is largely responsible for the challenges we face with alternative energy (PMS, Diesel) costs. This is not a popular stance in Nigeria, but it’s surely a major marker of his legacy.
Many Nigerians believed he performed excellently before his hospital confinement and sad eventual death. His palpable humanity and pro-poor policies like reduction of fuel prices, that his predecessor had increased before leaving office endeared him to Nigerians.
Fuel prices were reduced from 75 Naira to 65 Naira on June 2007. Well, if we assume that this decision does not have a great and systemic effect. But he reversed the sale of our refineries already perfected by Obasanjo. And this continues producing dire and excruciating poverty as a consequence.
How Dangote Purchased The Refineries in 2007.
On May 17th, 2007, President Olusegun Obasanjo sold controlling stake in Port-Harcourt refineries to Bluestar Consortium which comprises of: Transcorp, Zenon, China Sinopec and Dangote. He acquired the Port-Harcourt refinery for $561million.
Kaduna Refinery Sale
In a separate transaction in May 28th, 2007, Dangote also acquired a controlling stake (51%) in Kaduna Refinery after China National Petroleum Corp bid $102million which was considered too low by the committee in charge of the auction.
Port-Harcourt refinery had a capacity of 210,000 barrels per day, while Kaduna had a capacity of 110,000. This is a combined 320,000 barrels per day asset. But the stake was reversed in July 2007.
Why Obasanjo Sold the Refineries.
Obasanjo sold the refineries because their operation yielded no result or sub-optimal results. Nigeria was importing PMS and other crude oil derivatives, despite the installed capacity of 450,000 bpd of Port-Harcourt, Kaduna and Warri Refineries, all state-owned refineries.
Nigeria’s domestic consumption has been put at 66million liters daily, whereas, these government owners refineries can deliver 70 million liters. However, we have to import a great part, if not all of the PMS and other sister products that we consume.
Why was the sale reversed?
There were innuendos of cronyism, lack of due process, corporatism and insinuations of state capture by the Yar’Adua government.
The twin policy of reducing fuel prices and reversing the sale of the refineries, and thereby eliminating the chances of running optimally in the future has guaranteed that domestic fuel prices will be subjected to foreign exchange volatility and inability to make the refining assets produce foreign exchange, in the event that more modules are added and they can produce more for foreign markets.
It must not go without mention that foreign investors such as Shell, according to former president Obasanjo had been approached and they flatly refused to purchase the refineries because of their age and local risks they were not ready to bear. Once again, government sabotaged strategic growth and development of the country by reversing the sale and pursuing subsidy policy.
This further narrowed the Overton window for managing our refining sector optimally.
The Concept of Overton Window
Overton window is a term developed by economist, Joseph Overton to describe the range of policies that is available in a specific policy or decision making situation.
In this case, the Overton window applies to the choices that Nigeria has to ensure energy security through domestic supply of essential crude oil products.
Before now, we had the following policy choices
1. The opportunity to sell our ailing refineries to domestic entrepreneurs.
2. Revamp the ailing refineries
3. Build new refineries
4. Build new modular refineries to serve regional markets.
Let’s start by reviewing option 1 and maybe we can determine the options we have today.
1. Opportunity to Sell Ailing Refineries
it is important to highlight that Number 1 is almost impossible since the July 2007 decision by Yar’Adua. A range of reasons can be attributed to this.
Firstly, the refineries have suffered neglect intermittently across the years, often lacking maintenance and adaptation to new technologies. This will reduce efficiency and viability as a result.
Secondly, the refineries do not fit into latest environmental technology and regulatory frameworks, hence retrofitting is critical. This will be prohibitively expensive.
Thirdly, while our three refineries- Warri, Kaduna and Port-Harcourt have a combined capacity of 445,000 bpd. They require different administrative and operational process that makes it difficult to optimize their efficiency, compared to a Dangote Refinery that is a single-train 650,000 bpd operation.
The final element here, is that there is a challenge of human capital, where it has been recorded by sector experts like Former M.D of Kaduna and Port-Harcourt refineries that there is a human capital problem across operational and managerial cadres in our refineries.
The nature of this problem might appear like it will be solved with a contrivance such as hiring new people. This comes with organizational development problems such as institutional memory and steep learning curves for the new staff.
A better way to appreciate the challenge of human capital is to try to unearth why Dangote had to employ over 11,000 employees from foreign countries.
These factors have combined to the result that our refineries are not viable and will pose legacy challenges to investors and other private concerns that desire to operate them for profit and going concern motives.
It must also be noted that over 127 billion Naira was spent on salaries, wages and employee benefits for refinery staff, between 2020 and 2021. Despite the fact that there was little or no output from these refineries.
Hence, Number 1 and Number 2 options are out of the question. This leave us with just number 3 and number 4
Number 3 and Number 4
The options of building new high-capacity and modular refineries to serve regional markets hold the greater promise of viability and energy security. And this is what we see with the Dangote Refinery that has started producing 25 million litres of PMS daily, almost a third of the domestic market requirement.
However, does this naturally translate to lower energy prices for domestic consumers? The jury is still out, but the answer is most likely in the negative because Dangote and other modular re
Yar’Adua’s legacy does not extend to the systemic economic challenges such as inflation, food insecurity and high electricity prices. However, it contributes to the hardship.
If the crude oil refining sector had been restructured and handed to private owners, domestic supply would not be in the current dire straits and the refineries will be running professionally. Aliko Dangote and his consortium would have invested and turned the refineries around.
This writer also predicts in hindsight that the unintended consequences of the privatization would have included a saber subsidy regime, if at all there is any today. Another positive consequence is that the NNPC would have been forced to be more professional, far more than it is today.
No country gets to a destination or a policy quagmire in one day. Poor decisions lay the foundation for more poor decisions till the entire building has to be demolished and rebuilt.
Conclusion
The NNPC recently announced that it has a cash shortfall, hence supply of energy commodities are constrained. This is after it claimed that there are challenges with import freight due to weather issues.
Experts like Mr Tilewa Adebajo, CEO of The TFG Advisory have also reviewed the audit report of the NNPC and identified liquidity challenges in NNPC’s books. Currently, the NNPC’s current liabilities are greater than its assets, which in conventional finance means that the NNPC is illiquid and cannot meet short term obligations. He also stated that all NNPC subsidiaries are loss making, to the tune of 25 trillion Naira”. This needs to change.
He also advised that NNPC refinance its forwards and obligations as well as position itself for more accountability and better corporate governance. This, he holds, will help provide more liquidity for the NNPC, as well as improve its capital structure to invest in more assets that will ensure it captures more value from the international crude oil value chain.
Particularly, Mr Adebajo, believes with confidence will provide NNPC with a lifeline to fund its exploration and production to be more competitive like Saudi Aramco, citing shortage of rigs in production.
It must be stated unequivocally that NNPC is Nigeria’s only hope out of the current economic mess we are in.
Nigeria has the good fortune that fossil fuels will still make up a greater part of the global energy mix by 2050. This is according to forecasts by Exxon Mobil. They highlighted that oil demand will remain at 85 million barrels per day, even if every car sold by 2035 is an electric vehicle.
If we go by this assertion, Nigeria has 25 years to prepare a better future for its citizens and their future generation. Dubai, Saudi and other oil rich countries have done it. What makes us an exception?
Babatope Falade Onikoyi
CEO, Onikoyi Consulting
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