Incentives for greenfield refineries (2)
00Continued from yesterday
HOWEVER, before we explore some of the incentives that may cause the refining business to ‘fly’ in Nigeria, let us consider the politics of refineries’ location. Most refining projects are likely to ‘come to grief’, unless the federal arm of government negotiates with the governors of states where refineries could possibly be profitably located. Most governors, with the possible exception of those who are not interested in propagating their local political influence beyond their tenure, would be unwilling to support such projects unless they are an integral part of it. They do not want a ‘cash cow’ in their states breathing down politically on their necks! A 16,000-barrel a day refinery can generate above $150m in a year, if it operates efficiently!! With such cashflows, the refiners can control the politics of that very state, almost perpetually.
Incentives to be considered would include the following:
Guarantee of 100% crude oil feedstock for all refiners for at least ten (10) years; discounted price of crude oil for domestic consumption; a minimum of 60 days credit for each cargo of crude oil, at least for the first five (5) years of operations; supply of crude feedstock should commence as soon as the Department of Petroleum Resources (DPR) can certify mechanical completion of each new plant; guarantee of 100% refined products off-take by government (NNPC); government guarantee of foreign loans for domestic companies wishing to set up refineries.
Plants should be granted tax exemption for at least three (3) years from date of commencement of operations; plants should be exempted from import and export duties and value-added tax (VAT) for at least five (5) years; plants should enjoy accelerated capital allowance of about 95%, and the percentage of assessable profit for the purpose of capital allowance recovery should be 70% at most.
In addition, the following incentives could also be considered:
All Greenfield refineries should be exempted from all state and local government duties, taxes and levies for at least five (5) years from initial production; all refined products from the greenfield refineries should be exempted from export duties, levies, and taxes for at least five (5) years from inception of production; the mandatory payment of a refundable deposit to DPR of $1 million for every 100,000 b/d refinery capacity should be scrapped; the cost of acquiring and leasing land for each refinery plant should be agreed with the appropriate state/local government authorities. This should either be considered as part of equity investment by the land owners or amortized in installments over 20 years; greenfield refinery investors should qualify as preferred bidders for oil and gas block allocations; export-based refinery plants may be required, under domestic obligations to this country, to supply a portion of its products to the Nigerian market. In this case, any additional costs of meeting such an obligation should be borne by the government.
From the foregoing, it is ‘crystal clear’ that Nigeria needs to ‘alter its game plan’ in the crude oil distillation business and/or introduce alternative fuels for vehicles. The introduction of alternative fuels (Compressed Natural Gas Vehicles) is necessary even when we have enough refining capacity. This calls for a clearer and more robust regulatory framework for the refining/downstream petroleum business in this country. Incentives are vital to encourage urgent action towards developing acceptable refining capacity to serve our teeming population and neighbouring countries that depend on ‘big brother’ for their supply of fuels.
•Prof Nwaozuzu is a Downstream Petroleum Economics & Policy Expert and Deputy-Director at Emerald Energy Institute for Energy & Petroleum Economics, Policy, & Strategic Studies, University of Port Harcourt