How necessary is rehabilitating the Port Harcourt refinery? -The $1.5 billion question


How necessary is rehabilitating the Port Harcourt refinery? -The $1.5 billion question

In light of the paucity of funds the government faces, the spending of $1.5 billion on a refinery should be at the back burner.

Earlier this month, the Nigerian Government reportedly approved $1.5bn in funding to repair the Port Harcourt refinery, which had closed down two years ago. Of course, the news was met with some negative reactions from Nigerians. Their sentiment might come from a point of mistrust that the project might be a conduit pipe for corruption. Or perhaps poor management would eventually kill the project, taking Milton Friedman’s “If you put the federal government in charge of the Sahara Desert, in 5 years there’d be a shortage of sand” quote into perspective.

However, skepticism and sentiments aside, the economics in funding a refinery repair for $1.5 billion can be debated.


Background surrounding the Refineries in Nigeria

Nigeria, the Giant of Africa and the largest oil producer in Africa, currently has five refineries in the country; of which four are owned by the Nigerian Government through the Nigerian National Petroleum Corporation (NNPC), while the fifth is owned and operated by Niger Delta Petroleum Resources (NDPR).

The four refineries owned by the Nigerian government have a combined capacity of 445,000 barrels per day: one in Kaduna and three in the Niger Delta region at Warri and Port Harcourt. The Port Harcourt refinery which is the bone of contention has the capacity to refine an estimated 210,000 barrels per day.

The 2019 audited results reflected that Nigeria’s refineries made losses of $439.47 million.   In April 2020, they were all shut pending rehabilitation.

How necessary is funding the repair project of the Refinery?

Nigeria’s affair with refineries is synonymous with a passenger waiting for ages at the bus-stop and all five buses appear at once. This happens to be the case as the Nigerian government has decided to fund a refinery amidst the arrival of the Dangote refinery which should commence later in the year/early 2022 and the BUA refinery which should be operational in 2024. Both refineries have a refining capacity of 650,000 and 200,000 which begs the question why the country is funding a refinery that according to the NNPC Chief, Mele Kyari, would be run by private companies once rehabilitated.


The honest truth as the tautology goes is, Nigeria has toiled with the inadequately maintained refineries for years. Mele Kyari is not the first NNPC chief to attempt a revamp, privatise or expand our refineries. Although, you would argue that a country with such oil-producing powers should at least possess one functional refinery that can work to optimal capacity. Over the years, the country has been exposed to saboteurs who have allegedly brought in dirty petrol from Europe and so having a refinery would be in our best interests. However, the timing and prioritization is a concern. The 3-phase-44-month repair project will be funded from sources including the Nigerian National Petroleum (NNPC), Internally Generated Revenue (IGR), budgetary provisions, and Afreximbank.

The Minister of Petroleum, Timipre Sylva has also said that the country would implement rehabilitation work on the Kaduna and Warri refineries on or before May 2023. `This will also be funded from government coffers.

Which begs the question, Why? The country will have a problem of Overcapacity. We have the Dangote’s refinery, (650bpd) the BUA refinery (200bpd) and other commercial refineries (+/- 200bpd) in addition to the proposed rehabilitated state refineries (440bpd) coming on board. Nigeria could possibly have the capacity of refining approximately 1.5 million bpd. With the consumption level and demand for refined products in Nigeria falling within the range of 450,000 and 500,000bpd according to the Petroleum Products Pricing Regulatory Agency (PPPRA), the country that once imported refined petroleum products will have the irony of overcapacity. Much ado for a business that is hardly profitable. Globally, refining margins are very poor. Global Consulting firm, Mckinsey describes how the profitability of a refinery comes from “the difference in value between the crude oil that it processes and the petroleum products that it produces. Most of a refiner’s margin comes from the higher-value “light products” (i.e., gasolinediesel, and jet fuel) that it makes.”

Most of these “light products” will face their days of reckoning when Climate Change policies start to kick in.

To further buttress why refinery businesses should be avoided by the NNPC. Saudi Aramco just released its 2020 results and despite the upbeat revenues and profits made, the company for a second consecutive year lost money on its downstream division (refining and chemicals). There were over 600 operating refineries around the world as of the beginning of 2017.  Last year after the oil price crash, Alan Gelder, head of downstream oil at Wood Mackenzie, lamented about his company’s global composite gross refining margin which averaged between $0.20/barrel in May and June last year. The $0.20 per barrel is a deviation from their 2020 average forecast of $1.40/barrel. He further added that a few refineries are in serious threat of closure in Europe alone over the next three years.


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