On crude oil theft, illegal refining and modular concept

BY CHIJIOKE NWAOZUZU

The recent accident associated with an illegal refinery site in Egbema/Ohaji area, Imo State in the Niger Delta region has reopened the debate on how to resolve this thorny issue. High youth unemployment, and a desire to get rich quick, no matter how, could be responsible for these activities.

Illegal oil refineries in Nigeria thrive on stolen crude oil, and vandalism of oil pipelines and other oil installations. Without a doubt, these illegal oil operations are reprehensible and should not be condoned for a number of reasons.

First, it is improper for citizens of this country to destroy oil installations in their bid to steal crude oil as feedstock for illegal refineries. Second, it is lawless to set up any kind of refinery without going through the licensing process with the relevant government agency. Third, it is most inappropriate for persons, Nigerians or foreigners, to steal crude oil belonging to the Nigerian State with impunity. Finally, and perhaps the most worrisome is what the illegal oil refiners do with the residue (black oil) from crude oil distillation process. There are serious environmental issues involved regardless of whether they dump the ‘black stuff’ into the river or simply incinerate it. Currently, ‘black soot’ effects are some of the secondary environmental consequences, and could be felt in and around the region.

Nigeria’s revenues are down and the sources to generate income to shore up the dwindling base are closing in. With crude oil as the country’s main foreign exchange earner, current upsets in the production chain are hurting the country’s finances more. But the oil industry is also suffering as cases of oil theft rise and illegal artesanal refining in the Niger Delta region of Nigeria wreaks havoc on the country.

These crude oil streams for illegal refining are usually obtained through hot tapping and cold tapping techniques, blasting of pipelines with heavy ammunition (e.g. AK 47) or dynamite blasting. These pipelines need to be protected urgently.

However, there may be a few positive lessons to be learnt from these illegal oil operations. First lesson: there is a significant imbalance between our projected refining capacity and existing capacity, such that it has become very tempting to boil crude oil in drums knowing that there is a guaranteed market for the petroleum products (which they usually sell as diesel or AGO). Second lesson: small-scale (modular) refineries could be profitably sited close to oil flow stations and terminals.

Benefits of the modular refining format

The capital outlay for any 100,000 barrel per day (bpd) refinery is about $1.5 billion, while a 24,000 bpd modular refinery is roughly $250 million. Therefore, it is easier to access funds for the modular refining modules. The manufacturing time for plant, equipment and machinery for a plant of 100,000 bpd capacity is within the range of 3-4 years. Start-up for modular refineries of 24,000 bpd is within 18-20 months. The modular system allows the plant to be expanded to 100,000 bpd capacity in structured increments. The increments can be funded with the cash flows from phase 1 and additional phases, and so the refinery will not incur additional debt for its expansion. The expansion of the modular plant capacity can be done without shutting down production from existing equipment and plants. This is not the case with big capacity refineries.

Revenue streams and pay-back periods are faster with the modular refining format, than with the larger capacity refineries. The major short-coming with modular refineries is that the plants are semi-automated and less labour-intensive, i.e. not many jobs can be created directly. For instance, 20 to 30 personnel can operate a 24,000 bpd modular refinery. Most of the spin-off jobs created are of a secondary nature, and based around the location of the site.

In summary, modular refineries are simple, efficient and fast to start up. Such refineries usually operate at optimal capacity at all times. The relatively small investment cost allows for private investors to enter the refining space much easier. It also enables the government to build the bigger capacity refineries using the modular format, but in incremental stages. However, government-built modular refineries should have full conversion facilities (i.e. catalytic reformers and naphtha hydrotreaters) to enable the refineries to produce PMS.

A national oil refining model worth considering

There is currently an over-reliance on government-owned refineries. Nigeria can also adopt a refining model that relies on modular refineries (built and operated by private investors) that will produce all refined products with the exception of petrol (PMS). The implication is that the modular refinery operators will not have to invest in catalytic converters and naphtha hydrotreaters that are required to convert naphtha to petrol. These equipment are capital intensive and complex. Therefore, the exclusion of such facilities in a modular refinery plant will further reduce the cost of set-up. This will enable the modular refiners to focus on producing diesel, marine diesel, dual purpose kerosene (DPK), aviation turbine kerosene (ATK), and low-pour fuel oil (LPFO).

On the other hand, NNPC refineries can focus on PMS production and become essentially transformed into PMS complexes instead of full conversion refineries. In this case, NNPC refineries will buy all the naphtha feedstock from the modular refinery operators and convert these to PMS. Other products that NNPC refineries can produce will include fuel oil, asphalt, and petrochemicals.

The major downside to this proposed model of refining is the transport cost of moving naphtha from each modular refinery to the NNPC PMS complexes. To mitigate the transport costs, modular refineries could be strategically located near the source of crude oil feedstock and the NNPC PMS complexes.

Role of the government

The Federal Government of Nigeria can ensure success in the following ways:

Guarantee crude oil feedstock to each modular refinery operator for at least 10 years.

Guarantee a domestic crude oil price for local refining that is indexed to the benchmarked price of crude oil for the yearly budgets.

Invest in PMS process equipment at the ailing national refineries to enable the refineries process naphtha into petrol.

Guarantee to purchase all naphtha feedstock from each modular refinery, and refine as much PMS at NNPC refineries as possible.

The business of crude oil distillation should be privatised as soon as possible, because the importation of refined petroleum products for local consumption is too paradoxical, to say the least.

Chijioke Nwaozuzu, a professor of energy economics, is director, Emerald Energy Institute, University of Port Harcourt. He can be reached via email at cnwaozuzu@gmail.com. and text on: +234 70 6874 3617 (SMS Only)