PRIVATIZATION OF REFINERIES IN NIGERIA: Challenges And Opportunities

1. NOT AN OFFICIAL UNCTAD RECORD PRIVATIZATION OF REFINERIES IN NIGERIA: Challenges And Opportunities By Dr. Julius Jibril Bala, Director General, Bureau of Public Enterprises At the 8th Africa Oil and Gas Trade and Finance Conference 26-30, April 2004 Marrakech, Morocco.

2. Overview Of Presentation • Introduction • Sector status • Oil and Gas Reform Philosophy • Reform Objectives • Refineries Privatisation • Key challenges • Other Opportunities in the Oil & Gas Sector • Conclusion

3. Introduction • Government recognises the need to create enabling environment to reposition the oil and gas sector • Enabling environment would engender private sector participation & efficiency • Key sectoral reform issues- major plank of privatisation programme.

4. Sector Status –Oil and Gas • Nigeria is a major oil and gas province • Oil accounts for 40% GDP, 80% of Government revenue and 95% Foreign exchange earnings. • Reserves as at December 2003 are conservatively estimated at 33billion barrels of oil and 162 trillion cubic feet of gas. • Production capacity currently stands at 2.6 million barrels per day and is expected to reach 3.3 million barrels per day by end 2004 (excluding condensates) • Domestic petroleum products demand is estimated at over 32million litres per day.

5. Sector Status – Cont. The downstream oil and gas sector has been at the verge of collapse due to the following reasons: - • Inadequate margins for various stakeholders e.g.Refineries, Distribution (pipelines, depots, Marine) marketers, dealers and transporters • Inadequate maintenance of refineries & distribution logistics • Inadequate reception facilities for imported refined products • Controlled pricing regime. • Community issues - Pipeline vandalisation etc

6. Downstream Sector Status -1 • Downstream consists of • Three Refineries • Distribution network made up of Pipelines and Storage depots, managed by Petroleum Products & Marketing Company (PPMC), one of Nigeria National Petroleum Corporation(NNPC’s) subsidiaries • Other downstream assets like Eleme Petrochemicals and Nigerian Gas Company

7. Downstream Sector Status-2 • NNPC is de facto monopoly supplier of petroleum products to the domestic market, up to point of sale ex-PPMC depots to the oil marketing companies (The oil majors and the independent marketers). • NNPC owns and operates the three Nigerian refineries.

8. Downstream Sector Status -3 • NNPC owns and operates a nationwide, integrated pipeline system, and depot network for supply of petroleum products to the different regions of the country. • NNPC has been sole importer of Petroleum Products in Nigeria, with exception of brief period in 1998/99. • Although currently allowed, oil marketing companies do not have the incentive to import because of inadequate margins

9. Oil & Gas Reform Philosophy • Formulate policies that foster competition • Review/update the legal/regulatory frameworks. • Create strong & independent regulatory commission for each segment of the sector (downstream oil and for Gas), with the MPR focusing on policy formulation. • Regulators to publish clear, transparent licensing and competition rules for each sector. • Implement phased and transparent privatisation of assets

10. Sector Reform Objectives - Oil • Sector reform priorities include: • Formulation of a new National Oil and Gas Policy • Liberalisation of downstream petroleum markets • Refocus and strengthen sector regulation • Establishment of an independent regulatory authority to oversee activities, Limit FGN involvement in the sector to policy formulation and fiscal matters. • Restructuring/privatisation/commercialisation of NNPC downstream enterprises

11. Sector Reform Objectives - Gas • Greater private sector investment in gas production, transportation and distribution infrastructure • Increased direct utilisation of gas in domestic industrial processes and power generation; • Attainment of 2008 gas flare-out objective, and thereby reduced environmental degradation; • Development of a new gas pricing methodology. • Development of a fair and transparent fiscal regime. • Creation of an independent National Gas Transportation Company by unbundling Nigerian Gas Co (NGC). • Creation of a new role for Network Operator.

12. ENTERPRISES SLATED FOR PRIVATISATION

13. ENTERPRISES SLATED FOR PRIVATISATION

14. Refineries Privatisation • Port Harcourt Refining Company (PHRC), (old and new refineries) identified as the most sellable in the present circumstances & therefore to be offered 1st. • Priority transaction for 2004; CSFB appointed advisers • PHRC to be restructured into a stand-alone business outside NNPC. • Interim management Board expected to be appointed, responsible for implementation of privatisation issues. • Steering Committee set up to ensure smooth communication between NNPC, BPE, and CSFB (advisers) • Privatisation on course and expected to be concluded before the end of 2004.

15. Refineries Privatisation- Cont. • Kaduna and Warri refineries to be privatised over the medium term before 2006.

16. Key Privatisation Challenges • Environmental issues - Ecological degradation & the need for remediation; obsolete fuel bearing pipelines. • Host communities issues / Restiveness in the Niger Delta Labour agitations • Weak existing legal/regulatory framework and resultant effects on operations within the sector • Corporate Governance issues

17. Other Opportunities in the Sector In addition to the investment opportunities due to privatisation of the refineries, a host of other investment opportunities exist, they include: • Petroleum products refining presents a very lucrative investment opportunity since domestic demand is estimated at over 32million litters per day. The West African sub-region is yet a bigger market yet to be satisfied. • Petrochemical segment is almost a virgin area yet to be exploited. Current nameplate capacities can hardly satisfy 40% of the domestic demand.

18. Other Opportunities – Cont. • Glaring opportunities in the provision of bunkering services including fuels for the West African Coast as a bunkering hop. • Natural gas production which now enjoys a lower Petroleum Profit tax of 65.75% against the former 85% as well as pioneer status for projects aimed at stopping gas flaring, present other great investment opportunities. • Natural gas based chemical industries including natural gas liquids recoverable from gas streams rich in heavier hydrocarbons are waiting to be tapped.

19. Other Opportunities – Cont • The market for natural gas fired equipment and accessories present excellent opportunity to invest in marketing and servicing of gas fired heaters, fryers, ovens, air conditioners, etc for a variety of industries. • The use of gas for power generation is just about receiving attention of serious investors. The power gap requirement is currently wide enough to accommodate more than 10,000MW projects up to the year 2006.

20. CONCLUSION • A reform package is being put together by the Government to re-position the oil sector in Nigeria. • The reform encompasses changes in the legal & regulatory framework as well as privatisation. • There is a strong political will on the side of the government to ensure success for the reform and privatisation initiative. • The World Bank has been supportive and BPE is poised to work with all stakeholders including investors to ensure the attainment of the vision for the sector.

21. THANK YOU AND WELCOME TO NIGERIA. END!