I am still keenly waiting for the details of government’s plan to absorb the illegal refineries operators into the mainstream. The VP is reported to have said “Our approach to that is that we must engage them (illegal refiners) by establishing modular refineries so that they can participate in legal refineries. We have recognized that young men must be properly engaged.”

I hope this is targeted more at the owners who established these refineries than the workers employed there? This is because what drives this is really illicit profit more than unemployment – and this is not saying unemployment is not a problem.

What I have picked up so far from news reports, is that there are plans for government to either build and partner or gather these folks into cooperatives and empower them to build and operate small capacity (1,000 bpd, etc.) type modular refineries.

Why this interests me is the following:

How do they plan to create incentive in this business?

Recall that the chief driver for this illegal activity is the combination of very low cost inputs and medium to high value outputs from:

  1. Free crude oil, ready market and poor enforcement by authorities.

So they basically get their “plant” crude oil feed for free.

  1. Simple operations.

What they do is a crude form of “Topping” or atmospheric distillation, with the aim of making diesel. They start by heating crude oil up to 350-400oC. This is done in two stages. The bottoms from the first stage is mostly bitumen. The distillate is moved to a next stage vessel and cooled to get diesel. The other by-products like fuel oils, gasses, jet fuel/kerosene and gas oils are not properly extracted and are disposed indiscriminately to the environment. Note that diesel is about 27-32% of crude oil types available in Nigeria. In a proper refinery, the next stages would be conversion and treating. These are quite complex steps involving different chemical processes, materials and equipment. This is where you’ll find scaled up refineries producing gasoline (petrol), LPG, etc.

  1. Proximity to crude.

They are usually sited a small distance from the pipeline where the oil is stolen from. So, no real transport cost.

  1. The absence of controls and standards.

It costs money to abide by product, operational, environmental and basic chemical industry process safety standards

  1. No taxes to government.

I suppose they can still get greenfield tax incentives for 5 years, per the regulations when they now go legal. So, this is a soft one.

  1. “Irregular” employment practices….and that is being modest.

These guys run as a cartel with a local strong man overseeing things. Nobody dey strike o. You don’t like the conditions – you leave. But I hear the money is not bad.

All these help to lower cost of operations a great deal and maximize profit.

*Note that refineries’ profits are determined by size and complexity, crude type and product slate, logistics, operational efficiency and regulatory environment. Generally, their margins run from minus (-ive) to 18% with 11-13% being the average for North America. I have not been able to gather data in Nigeria to determine how we have run in the past, for reasons of not having profit driven refining operations.

Conclusion

Whatever partnership, help, subsidies/loans and waivers the FG intends to give these operators, I don’t see how health, safety, environmental and product quality standards can be lowered. So, that element of operational cost will still be there to “temper” profit margins. Hopefully, government will still find a way to create incentive for this plan to work, regardless. I trust that they have enough people in the policy space of this sector, who understand the problem and can proffer solutions and advice on implementation.

All in all, reaching out in an inclusive manner in trying to solve this problem, in a win-win manner, is a good initiative.

I hope for the best in its implementation.

SAN

 

Additional reading

  1. http://sweetcrudereports.com/2017/02/15/nigeria-govt-to-work-with-illegal-oil-refiners-osinbajo/
  2. http://venturesafrica.com/federal-government-decides-to-work-with-illegal-oil-refiners/
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