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The Nigerian fuel queues 12 May 2016

I was in Lagos in March and was heading to a meeting on Awolowo Road in Ikoyi. I got stuck in traffic that hardly moved for more than 45 minutes. Traffic jams in Lagos are not new to me but this one seemed exceptionally slow, even by Lagos standards. On investigation, it turned out that the jam was caused by people queuing up to buy fuel at a petrol station on that road. Much later, I came upon the following tweet by @ObiiIsaac with a photo of cars queuing up that made me smile:
    
“You know you are in Nigeria when there's this much traffic at a gas station.”
    
As I apologised to the people I was meeting for being late, I made a mental note to look into this issue and try to understand the reasons behind those long queues.

It's one of the conundrums of Nigeria that even though it is Africa's largest producer of oil, it currently exports about 90% of its crude. It then imports petroleum products into the country at international prices using hard currency to pay for the products. In light of the decline in oil prices and consequently much lower revenue to the government, there are foreign currency issues which have disrupted fuel importation by oil marketers. The country has been gripped by dollar shortages, and the currency controls by the Central Bank of Nigeria (CBN) are taking a toll on the economy. Nigeria's dependence on foreign imports of all manner of goods and services only makes matters worse.

Although fuel shortages have been with Nigeria for decades, the phenomenon still baffles people. They ask “why is the country dependent on fuel importation, and why the incessant shortage?”

Domino effect

The current spate of fuel shortage can be traced back to the government's fixing of the official exchange rate of the naira at 199 naira to the dollar, compared to the value of the naira on the parallel market (which has been floating around a band of 320 to 340 naira to the dollar in the past few months).

To maintain the artificial value of the naira in the official forex market, the CBN needed to deploy its hard currency reserves. But the reserves are quite low now, at under $28 billion. The resulting unavailability of dollars at the official exchange rate has limited access to foreign exchange by fuel importers. Moreover, government's control of the pump price of petrol makes it economically unviable for importers to source foreign currency from the more expensive parallel market, even if there is no forex scarcity in that market.

The reason Nigeria needs to import fuel is that it is not able to refine most of the crude produced in the country. The reason the country is not able to keep pace with fuel imports is that the foreign exchange revenue from oil exports – which is 90% of the value of total exports – cannot cover import needs at the current prices of crude oil. But the issues are much broader.
 
Domestic refining

Nigeria has four major refineries. They are state-owned and managed by the national oil company, Nigerian National Petroleum Corporation (NNPC) and Niger Delta Petroleum Resources (NDPR). Two of the refineries are in Port Harcourt and one each in Kaduna and Warri. These refineries have a combined installed capacity of 445,000 barrels per stream day (BPSD), and are supplied by a network of pipelines and connected to depots located in some parts of the country. However, the problem is that these refineries have been operating at less than 20% of their combined capacity.

It is believed that even if all four refineries were running at combined full capacity, they would only supply a quarter of Nigeria's needs. Various attempts have been made to resolve this problem but so far the results have not been positive.

Oil theft

The problem with refining petrol in Nigeria is deeper than the sorry states of the refineries. The infrastructure that supplies crude to the refineries is also part of the problem. One of the key reasons Nigerian refineries have not been able to operate at their maximum installed capacities is deliberate damage to oil installations and theft of oil.  

Earlier this year, two of the four NNPC refineries – in Port Harcourt and Kaduna – had to be shut down after militants attacked oil pipelines and caused supply problems. This is not an isolated incident. It follows the pattern of years of attacks on oil platforms and pipelines.

Thieves often tap into either the pipeline or the wellhead. More detail on this issue can be found in an in-depth piece of research carried out by Judith Burdin Asuni (http://www.usip.org/sites/default/files/blood_oil_nigerdelta.pdf).  However, the following note excerpted from the report succinctly describes the depth of the problem and some probable solutions.

The trade in stolen oil, or “blood oil,” poses an immense challenge to the Nigerian state and a threat to the economy, while fueling a long-running insurgency in the Niger Delta. The  enabling  environment  for  illegal  oil  bunkering  includes  high  levels  of  unemployed youth, armed ethnic militias, ineffective and corrupt law enforcement officials, protective government officials and politicians, corrupt oil company staff, established international markets for stolen oil, and the overall context of endemic corruption. Therefore, efforts to control blood oil must be accompanied by actions against corruption, illegal arms importation and money laundering.
    
A Chatham House report in 2013 placed oil theft in Nigeria into three categories:
•    Small-scale pilfering and illegal local refining. It is mostly indigenous groups and opportunistic local residents who undertake this activity. They tap into oil pipelines and carry out a basic refining process.
•    Large-scale illegal bunkering in the field. This involves the use of more sophisticated equipment like long-range tapping pipes, motorboats and oil tankers to steal oil.
•    Theft at export terminals. This involves crude oil being stolen from official storage tanks and also
using the country's export terminals to export hydrocarbons to various foreign locations.
    
In 2013, the Economist ran an article called “A Murky Business” which says that oil theft may cost Nigeria as much as $8 billion a year, adding that an average of 100,000 barrels a day (b/d) were stolen in the first quarter of the year. Politicians, security forces, militants, oil-industry staff, oil traders and members of local communities all profit from “bunkering” of oil, so few have an interest in stopping it. When so many are feeding from the trough, it is doubtful if anyone in Nigeria has the political will to stop it, Economist concluded ominously.

Illegal refining

Illegal refiners tap oil from oil companies at the point of transporting the crude from one point to another. This dangerous process is often carried out at night with the complicity of the oil companies' control-room staff that turn a blind eye to a drop in the pressure of its pipelines. The crude oil thieves usually separate out the products with the highest economic value (after using the same basic distillation technological process used in legitimate refining) and simply dump the remainder into the environment – which has severe environmental and ecological impact.
    
The bulk of petroleum product produced at illegal refineries in the Niger Delta is diesel – 41 per cent; and waste, 55 per cent. Petrol, kerosene, and bitumen are produced in very small quantities. Many refiners also give their host communities small quantities of kerosene for lighting and cooking at no charge.

Other than complicity, corruption and ineffectual policing, the reason illegal refining still happens is down to pure economics. The thieves make money because the raw material is free (stolen crude). The cost of production is low, and the demand for the products at the price it is sold is high. There has been talk of the legalisation of these refineries. However, this ignores the economics of the free stolen crude that drives these activities.

Whilst President Muhammadu Buhari's stance and actions on corruption and reform of the oil industry is well known, the jury is still out on how successful this programme is or will be. Especially in the fight against damage to oil installations and theft of oil.
    
Light at the end of the pipeline

NNPC has recently launched a tender process to find partners to overhaul its ailing refineries. It has also been reported that NNPC is talking to Chevron, Total and ENI to rehabilitate the refineries. It's not entirely clear how this ties in with the tender process.

In addition, nine companies (including Vitol and Seplat) have submitted bids to construct new oil refineries in Nigeria. The successful companies will build near existing state-owned plants and add at least 250,000 bpsd of refining capacity to the current 445,000 bpsd.

Also, the Vice President, Professor Yemi Osinbajo, endorsed the building of modular refineries to help solve the fuel scarcity problems. And not to forget what Aliko Dangote is calling the world's largest refinery that he says will put an end to the recurring fuel crises in Nigeria.

Whilst all of this is good news, the positive impact is not going to be felt by the ordinary Nigerian any time soon.

A UK lesson in managing problematic refinery

The irony is that whilst there is a lack of refining capacity in Nigeria, Europe has had too much. Indeed the glut of refineries was the reason that the large independent refining group, Petroplus, went into administration in 2012.

At Dentons, we worked hard with the administrators to keep the complex and the large Coryton refinery operational whilst a buyer was found (and in the process alleviated the South East UK's fuel demands during the London Olympic games). Whilst Coryton was configured to produce gasoline shortly before Europeans started driving more diesel cars, it, like all refineries, was burdened with huge working capital requirements (around $1 billion); and needed to fund crude purchases until its refined products were sold.

We worked with the administrators and found novel ways to slash the working capital costs (including by changing credit terms on supply and off-take contracts) so that the refinery was kept open for many months before the market let it close.

More recently, when refining margins are benefitting from low crude prices, some refineries are “fixing their roofs whilst the sun is shining” by putting in place "just in time" off-balance sheet financing and inventory management techniques. In short, this is making the industry more competitive. But while more sophisticated trading and financing strategies may not be the first priority for the Nigerian industry, plagued by theft and pollution, building a system of resilience in an increasingly sophisticated global products market should not be ignored.

Conclusion

One thing is clear: Nigeria needs to move away from its reliance on importing refined petroleum products. This is not only necessary to address petrol shortages but it will also help its balance of payments and hard currency issues.

The real tragedy of the fuel shortage is the impact on ordinary Nigerians. Food prices are heading north, transportation costs have nearly doubled and motorists spend up to five hours at gas stations waiting for fuel trucks to arrive. As I finish writing this, I read in the press that works at the refineries have resulted in increases in their operating capacity of up to 60%. Whilst this is welcome news, the reality is that the combined issues of bunkering, inadequate refining capacity and currency controls need to have a permanent solution to solve this cocktail of uniquely Nigerian problems!