Deadline threatens self-sufficiency in Nigeria

Nigeria has been something of a playground for the International Oil Companies (IOCs) since the oil boom began here in the 1960s. The resources they brought, the scales of production to which they were accustomed to and the reach of their extraction and distribution networks meant that returns were immediate and appetites grew and grew. Tastes are changing though, and over the years a greater emphasis has been placed on championing Nigerian companies, faith in whom has been rewarded with swelling yields. Home-grown companies are well on their way to seeing a fairer share of the action, but with a deadline for licence renewals now racing up, could the fun be over before its begun?

The latest drama falls on the 32 indigenous companies that have been granted licences to establish, and approval to construct, private refineries. Between them, these companies have a combined production capacity of nearly 1.4 million barrels per stream per day. Currently each is operating within the limits of the law, but a deadline for renewing the permits which allow the companies to do so is now months away and several stand to lose out.

According to statistics obtained by The Guardian newspaper here in Nigeria, permits granted by the oil and gas industry regulator, Department of Petroleum Resources (DPR), within the category ‘medium-to-long-term', ie. those that permit activity over 18 months to three years and above, are nearing expiration. If the licences expire without facilities coming on stream, the country's quest to attain self-sufficiency in refining petroleum could be seriously upended. Because these private refineries are the key to fulfilling the Federal Government's hopes to improve our refining capacity.  

The trouble is, some of them just aren't firing on all cylinders yet but it's hardly the fault of the licencees. Of the 32 licences issued between December 2007 and June 2016, just 5 have progressed to the ‘approval to construct' stage. The other 27 are at the ‘licences to establish' level while 23 others are yet to commence work at all. The regulator has at least admitted that the licensees were mostly challenged by funding, largely a result of the precarious foreign exchange situation in the country.

Given the unfavourable conditions in which these local developers are operating, it is hardly fair to hold them to the same targets that might be expected within a stable economic environment. Because indigenous companies have already shown admirable resolve in the face of economic uncertainty. Just look at the production levels achieved by companies like Aiteo Group, who have tripled production levels from those achieved under Shell's previous management. So do we need a vote of confidence in our refinery sector, or is that a kindness too far?

The greatest vote of confidence that the government could provide would be a guarantee of some feedstock to these ambitious private refineries. However, this has already been ruled out in very clear terms by the government. So, with their ability to source crude being curtailed by dodgy market conditions, refineries will have to go to market for supply which means, in effect, purchasing from IOCs at international market prices. Consider a different approach though: one very effective way by which the government could provide private refineries with crude feedstock would be to sell some percentage of a JV's holding with the IOCs.

Reports state that the government still holds between 55 and 60 per cent interests in the JVs, meaning it could quite comfortably free up around 15 or 20 per cent to the private refineries. Doing so would signal to local content producers that this administration is serious about supporting indigenous expertise.

If the PIB passes later this month as many of us hope it will, an opportunity will emerge for the oil and gas sector to mature and reach its potential. But that maturation will be over before it has begun if indigenous companies both upstream and downstream are not encouraged by government more widely. We are a country that has a great deal of opportunity to production and refining. Many will say we cannot make good on these opportunities, which is why the government must work with Nigerian firms to prove them wrong.

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