If you listen to the government often enough, there are so many wonderful things that are going to happen to Nigeria’s economy once the petrol subsidy is removed. After the ‘short and sharp’ pain we will suffer as a people, prosperity will be gloriously ushered on a magic flying carpet and Nigerians will be cursing themselves for delaying their enjoyment all these years by keeping the subsidy.
One of the oft repeated things we hear from the govt is that once subsidy is removed and the sector is ‘deregulated’, investors (who are apparently waiting for their marching orders) will come in and build refineries and all sorts of beautiful things. Now the govt doesnt exactly tell us what it is that is currently preventing investors from setting up refineries now except to say that somehow the current arrangement makes it unattractive for investments. Fine, we accept even if we dont understand.
But we ought to test this argument further; will the removal of subsidies really spur investments in refineries in Nigeria? Will subsidy removal cause us to shift from importing refined petrol to refining locally?
Nigeria, as always, does not exist in isolation in the world and so its important to look at the state of the business of crude oil refining globally today. The simple truth is that oil refining is no longer a very useful investment worldwide. This is speaking strictly for a private investor point of view. Refineries are still being built but in most cases they are being built with heavy government involvement mainly in China and other oil rich countries.
A very good example is the Jubail Refinery due to become operational in December 2013 (after several delays) in Saudi Arabia. When completed, the refinery will handle around 400,000bpd, will cost an eye watering $14bn to complete and will output 54% diesel and jet fuel with the rest being petrol and other products. Who’s paying? Well Saudi Aramco owns 62.5% of the project with TOTAL owning another 37.5%. Some of the Saudi Aramco funding was raised from the Saudi Stock Exchange in 2010. You can read more on the refinery here. The Saudis are also wholly funding the $7bn refinery being constructed in Jizan (also 400,000bpd) as well as another, again, 400,000bpd refinery in Yanbu where it will own 62.5% with China’s Sinopec owning the remaining 37.5%of a project worth $12bn.
Now the point isnt to compare Nigeria to Saudi Arabia which is a very wealthy country, but to point out that you will struggle to find serious refineries being built anywhere today without heavy govt backing. Isnt it also interesting that major refineries are being built in Saudi Arabia where petrol is heavily subsidised? So why is the Nigerian argument that subsidies are preventing private investors from coming in?
There are several other examples to be found; there’s the $5bn 240,000bpd refinery in Fujian, China. 50% owned by Sinopec with Saudi Aramco and ExxonMobil owning 25% each. Or the $9bn 300,000bpd refinery in Guangdong, China jointly owned by Sinopec and Kuwait Petroleum.
Now let’s move to what happens to the refining business when there is no govt involvement i.e. what the Nigerian govt is presumably telling us would happen in Nigeria. For the past 2 years, TOTAL has been trying to sell the Lindsey Refinery, the 3rd largest in the UK with about 326,000bpd capacity. Nobody wants it. In 2010 the same TOTAL also shut down the Dunkirk Refinery in the UK claiming that weak margins no longer made it profitable for it. In 1975, the UK had 19 refineries. Today there are only 8 of them which somehow manage to meet 90% of the UK’s daily demand of 130m litres. In March this year, Shell managed to sell the Stanlow refinery (270,000bpd) to Essar of India for $1.3bn. When announcing the deal, Shell was happy to report that it had ‘reduced its exposure to the global refining business by 1.6m bpd since 2002’. Again, this year alone, Sinopec of China has bought 50% of two refineries in UK (Grangemouth) and France (Lavere).
What is happening in the refining business worldwide is that because of the breakneck speed with which the Chinese are building them to meet local demand (they are targeting 12m bpd by 2015) with the Arabs trying to move away from just pumping crude out of the ground, the world is approaching ‘over capacity’ in refining. One musnt forget that even though refining capacity is increasing, the amount of crude oil sold daily is more or less capped and is hardly going to increase dramatically anytime soon to maintain the prices that oil exporters want to sell for.
What is clear from all this is that while investors are looking to get rid of their refining business in the Western world due to a combination of very weak margins and flat demand (useful read), the emerging economies are witnessing increased demand. However wherever you look, this increased demand is being heavily backed by goverments in those countries. The Brazilians for example plan to build 5 refineries in the country by 2017 all of them to be built by Petrobras with or without joint ventures (By the way the Brazilians also import 60% of their petrol needs to meet local demand).
In the first 9 months of this year, the 2 main Chinese state owned oil companies – Sinopec and Petrochina – have so far reported losses of $10bn on their refining businesses. Is this a hint as to why goods from China remain cheap and affordable given that the govt there keeps petrol prices there artifically low? The story isnt much different in Brazil where Petrobras which controls 100% of the refining capacity in the country lost $1.4bn in its refining business this year partly due to the govt’s plan of keeping petrol prices stable even though crude prices were rising. You can check in India and the story is the same, all the oil refining companies are making heavy losses partly due to subsidies and/or price controls. However we import items from these countries and even go there for cheap medical facilities compared to the west…hmmm. In the UAE they are complaining of losses in the refining business as well yet the UAE govt is spending money to expand refining capacity.
The question to ask therefore is which fool will put his money into a business like refining except a govt which has its eyes on the bigger picture e.g boosting exports and spurring local production? What is so special about Nigeria that would make investors commit billions of dollars to building refineries in the country where the demand is bound to drop drastically if and when subsidy is removed? Is there any wonder that all the private companies who were given licences to build refineries in the country havent been able to do so? The idea that government can somehow leave the refining sector to the private sector to fund sounds like a very unfunny joke. There is no way round this mess we have gotten ourselves into as a nation, the govt must pull its finger out and begin to repair some (at least) of the damage in the oil sector.
The argument over fuel subsidies has now turned to an opportunity for people like the Central Bank Governor to bully us with his sophistry and scare mongering about how Nigeria would go the way of Greece if we dont remove fuel subsidies. But the truth of the matter is that a budget where 74% is spent on recurrent expenditure will send us the way of Iceland never mind Greece.
From the above, there is hardly anything strange about Nigeria spending money to subsidise fuel or even importing petrol for that matter. In 2008, Morgan Stanley estimated that at least half of the world’s population enjoyed energy subsidies in one form or the other. The real challenge is that we are simply not moving people out of poverty quickly enough.
Furthermore, our 4 refineries at 445,000bpd can meet the bulk if not all of our demand. Again, it’s not as if the refineries are so old that they can no longer work, Brazil’s ‘newest’ functioning refinery was built in 1980 and the UK’s largest refinery in Fawley has been operating since 1951.
The point of this article is that investors will not show up when fuel subsidies are removed. This is a myth if not an outright lie. Whatever is saved from subsidy removal, more will need to be spent if we want to build local refineries. In fact we dont need investors to build refineries at all. What we have is fine and whatever shortfalls we have can be simply imported. There is no crime in importing some petrol to meet your needs.
What is happening here is that the government has looked at the corruption it has enabled and has decided to raise the white flag in surrender. This is a strange way to do things given that these same corrupt people cant be expected to become born again overnight once subsidies are removed. They will simply look for the new regime, whatever it is, and game that one too. Impunity emboldens corruption, always.
The Nigerian government is hell bent on carrying out an experiment that looks good on a spreadsheet but will very probably yield absolutely no improvement. You hear the Finance Minister say things like ‘in the villages and many states no one buys petrol for N65, they are already paying more than that‘. You have to ask, if people in the villages are already paying say N120 per litre, what will happen to these prices when subsidy is removed? Surely it cannot be expected that those prices will remain the same while prices in places like Lagos and Abuja rocket? What could possibly be worth this kind of experiment? Will the government have the stomach to watch if petrol prices start to climb if say a war breaks out out somewhere? This year the Brazilian govt asked Petrobras to reduce petrol prices by 10% to keep inflation in check and avoid upsetting its citizens due to high oil prices.
We know that the government is dead broke and cant tackle the corruption it has created. We understand. However, if they want a blood donation exercise, they must roll up their sleeves and donate the first pint or two. There really is no easy way round the problem.
What this debate needs now is calm heads on the opposing side who can counter the government’s relentless propaganda with evidence and facts.
And no, the investors are not coming.