Obidike: Well-run Modular refineries could upstage government, privately-owned refineries

Should modular refineries be operated with such efficiency, dexterity, and tenacity as illegal refineries, under a more liberal business environment, they could become formidable opponents, which with time could shunt privately-owned and government-run refineries, so says Executive Secretary of Lubricants Producers Association of Nigeria (LUPAN), Obidike Emeka, who spoke to ROSELINE OKERE. He also spoke on steps government must take to provide a conducive atmosphere for the initiative to blossom.

To what extent do you think plans by the Federal Government to encourage establishment of modular refineries will stem the proliferation of illegal refineries in the Niger Delta?
Modular refineries can conveniently replace illegal ones the moment factors like enabling business environment, access to funds and loans on rational terms, reduced regulatory hoops, amongst others are in place. All these factors would facilitate the production of sufficient, cheap, quality petroleum products. So, yes, I can see modular refineries edging out their illegal counterparts from the market.

However, we must first of all ascertain the reasons for their proliferation, the most prominent of which is personal gain, scarcity, high market demand and of course, high cost of petroleum products. These are enough motivation for the jobless, and in some cases, illiterate, but enterprising desperadoes to venture into this illegal business. We should not also forget the consumers’ proclivity for pocket friendly prices. Then there is the ease in accessing the raw material – crude- for refining. Unless these hitches are dealt with, illegal refineries will continue to thrive.

The Federal Government’s move to boost local production of petroleum products by licensing the operation of modular refineries is a welcome development, more so in light of the fact that the government owned refineries are producing far below capacity, such that local demand can be met only by heavy reliance on importation to augment our stock. Given the current state of our economy, the drop in our currency’s value and the falling oil prices in international market, it has become pertinent for the nation to explore other avenues of generating revenue and substantially reducing the volume of its import, and one of the effective ways of realising this objective is to ensure that Nigeria increases its refining capacity such that we are less dependent on importation of refined products, which makes up the bulk of our imports.

This, in turn, will put less pressure on our foreign reserves and ultimately boost the value of the naira and check capital flight, amongst other ancillary advantages such as job creation, affordability and availability of petroleum products. Of course the efficacy of this initiative would depend on how many operators are licensed, as licensing few companies might generate a crisis that would propel us right back to where we left – importing to meet local demands.

Operators of illegal refineries need to be carried along for the process to achieve its aim, but their ability to meet financial obligations are in doubt.
I believe the question of these illegal operators having the finances to set up standard refineries has been answered by the fact that they are running illegal operations, which in most cases tend to be cheaper, sans regulatory bottlenecks and asphyxiating criteria. Setting up a standard refinery is capital intensive, and would have these locals running to banks for loans and subjecting themselves to various regulatory manoeuvres and obligations that would require documentation and certification. These they might be unable and/or unwilling to produce, and the cost of which when incorporated into their production expenditure is bound to make them loose their edge in the market, which is the affordability of their products, albeit substandard. Also, the fact that most of these locals are uneducated will tip the scales in favour of a situation where their educational or any other relevant qualification does not come under scrutiny.
Considering the volatility of the region and the market, do you think foreign investors would be interested in operating these modular refineries?

Nigeria is an investor’s paradise, more particularly in the oil and gas sector, due to the accessibility of the major raw material-crude. Given a stable and enabling business climate, as well as, accommodating regulations, I see foreign investors exploring the possibilities of this sector by way of Direct Foreign Investment. They may either establish a subsidiary or associate company, acquire a controlling interest in an existing local company, by means of a merger, or joint venture with an indigenous company. Certain conditions have to be put on ground to catalyse the interest of foreign investors, even as most international oil companies have had firsthand experience of what it is like to run a business in Nigeria.

It is important to point out that entrepreneurs still labour under stifling conditions including poor infrastructure, non-availability of basic amenities, such as power and good road network; there is a glaring lack of incentives by way of intervention funds and favourable policies to alleviate the financial burden on operators. There is also exploitative and fluctuating exchange rates and oppressive interest rates on bank loans, as well as proliferation of regulatory agencies, all armed with their asphyxiating levies and protocols, threat of penalties, daunting protocols, amongst other bureaucratic clogs, to mention but a few. Incorporate the cost of these incidentals and supplementary expenses to the final production costs, and we get products that consumers find unappealing and unsympathetic to their economic situation. I believe the above stated sentiments are what persuade the locals to continue peddling their illegal wares.

Whenever they come on stream, do we see them posing a threat to government-owned refineries?
Illegal refineries, despite the siege and resistance they have been facing, not to talk of the deficient and deprived conditions under which they operate, are almost becoming a force to be reckoned with; should modular refineries be operated with such efficiency, dexterity, industry, and tenacity, under a more liberal business environment, they will in time also become formidable opponents in the sector. However, if local demands can be met by the modular and other privately owned refineries, government run refineries could be fully privatised, else they will be phased out in time.

The Federal Government recently threatened to cancel private refineries licenses it issued that are unused. Is this the right thing to do?
A fact-finding forum made up of government agents, regulators stakeholders and operators- should be set up, to investigate the reasons why these licences are yet to be utilised. From the findings, it should proffer solutions that would ease these licensees into operations with little or no teething pains, and ensure reasonable growth and returns on investment. Imagine accessing loans at an interest rate of 25-28 per cent, not mentioning the fact that the country’s economy has for some time slipped into recession, then take into consideration other deterring factors, such as inconsistent policies and lack of infrastructure. I believe that should conditions be favourable, the licensees would have put the said licenses to use.  Manufacturing is the bedrock of any economy, and should be encouraged on every strata. The government should be principally committed to promoting same by channelling and coordinating it’s every action, time and resources towards its successful realisation.

What specific steps should government take for the country to become self-sufficient in petroleum refining by 2019?
Government should be principally committed to promoting production in the oil and gas sector. Consequently, it should channel its resources and actions towards eliminating the abovementioned obstacles, and make the prospect of modular refining more appealing and profitable to investors. This it can do by setting up investment friendly legal, economic and regulatory framework and policies, while minimising bottlenecks and stipulating moderate, practical licensing procedures.

Are there enough government policies and incentives to attract and retain investors in the downstream sector?
Institutions like the Bank of Industry (BOI) were established to assist businesses all of which are afflicted with the same complications- asphyxiating criteria and crippling interest rates on loans, whose repayment plan most times put their beneficiary out of business. So far, none has effectually carried out their objectives and responsibilities. Whatever incentives and policies the government proposes to extend to encourage prospectors into investing in this venture should ensure punctual and constant availability of crude to the refineries, guarantees to backstop investors obligations, fiscal incentives such as access to loans with lenient interest rates and repayment plans, attractive pioneer status, and the occasional exemption from certain duties and taxes, and protection of their investment by addressing issues bordering on vandalism and oil theft.

Also to be included are feasible tenures of licenses and uncomplicated, straight-forward process of renewal of the Licenses. I doubt that the incentives and policies on ground cater sufficiently with these issues.

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