PRIVATIZATION OF REFINERIES IN NIGERIA: Challenges And Opportunities Dr. Julius Jibril Bala, Director General, Bureau of Public Enterprises At the 8 th.

PRIVATIZATION OF REFINERIES IN PRIVATIZATION OF REFINERIES IN NIGERIA: Challenges And OpportunitiesNIGERIA: Challenges And Opportunities

Dr. Julius Jibril Bala, Dr. Julius Jibril Bala,

Director General, Bureau of Public Enterprises Director General, Bureau of Public Enterprises

At the 8At the 8thth Africa Oil and Gas Trade and Finance Africa Oil and Gas Trade and Finance Conference 26-30, April 2004Conference 26-30, April 2004

Marrakech, Morocco.Marrakech, Morocco.

By

NOT AN OFFICIAL UNCTAD RECORD

Overview Of PresentationOverview Of Presentation

» IntroductionIntroduction

» Sector statusSector status

» Oil and Gas Reform PhilosophyOil and Gas Reform Philosophy

» Reform ObjectivesReform Objectives

» Refineries Privatisation Refineries Privatisation

» Key challenges Key challenges

» Other Opportunities in the Oil & Gas SectorOther Opportunities in the Oil & Gas Sector

» ConclusionConclusion

IntroductionIntroduction

Government recognises the need to create Government recognises the need to create enabling environment to reposition the oil enabling environment to reposition the oil and gas sectorand gas sector

Enabling environment would engender Enabling environment would engender private sector participation & efficiencyprivate sector participation & efficiency

Key sectoral reform issues- major plank of Key sectoral reform issues- major plank of privatisation programme.privatisation programme.

Sector Status –Oil and GasSector Status –Oil and Gas

Nigeria is a major oil and gas provinceNigeria is a major oil and gas province Oil accounts for 40% GDP, 80% of Government Oil accounts for 40% GDP, 80% of Government

revenue and 95% Foreign exchange earnings.revenue and 95% Foreign exchange earnings. Reserves as at December 2003 are Reserves as at December 2003 are

conservatively estimated at 33billion barrels of conservatively estimated at 33billion barrels of oil and 162 trillion cubic feet of gas.oil and 162 trillion cubic feet of gas.

Production capacity currently stands at 2.6 Production capacity currently stands at 2.6 million barrels per day and is expected to reach million barrels per day and is expected to reach 3.3 million barrels per day by end 2004 3.3 million barrels per day by end 2004 (excluding condensates)(excluding condensates)

Domestic petroleum products demand is Domestic petroleum products demand is estimated at over 32million litres per day.estimated at over 32million litres per day.

Sector Status – Cont.Sector Status – Cont.

The downstream oil and gas sector has been at the verge The downstream oil and gas sector has been at the verge of collapse due to the following reasons: -of collapse due to the following reasons: -

» Inadequate margins for various stakeholders Inadequate margins for various stakeholders e.g.Refineries, Distribution (pipelines, depots, e.g.Refineries, Distribution (pipelines, depots, Marine) marketers, dealers and transportersMarine) marketers, dealers and transporters

» Inadequate maintenance of refineries & Inadequate maintenance of refineries & distribution logisticsdistribution logistics

» Inadequate reception facilities for imported Inadequate reception facilities for imported refined productsrefined products

» Controlled pricing regime.Controlled pricing regime.

» Community issues - Pipeline vandalisation etcCommunity issues - Pipeline vandalisation etc

DownstreamDownstream Sector Status Sector Status -1-1

Downstream consists of Downstream consists of

ThreeThree Refineries Refineries

Distribution network made up of Pipelines Distribution network made up of Pipelines and Storage depots, managed by and Storage depots, managed by Petroleum Petroleum Products & Marketing Company (PPMC)Products & Marketing Company (PPMC), one , one of of Nigeria National Petroleum Nigeria National Petroleum Corporation(NCorporation(NNPC’sNPC’s)) subsidiaries subsidiaries

Other downstream assets like Eleme Other downstream assets like Eleme Petrochemicals and Nigerian Gas CompanyPetrochemicals and Nigerian Gas Company

DownstreamDownstream Sector Status Sector Status-2-2

NNPC is de facto monopoly supplier of NNPC is de facto monopoly supplier of petroleum products to the domestic market, up to petroleum products to the domestic market, up to point of sale ex-PPMC depots to the oil point of sale ex-PPMC depots to the oil marketing companies (The oil majors and the marketing companies (The oil majors and the independent marketers).independent marketers).

NNPC owns and operates the NNPC owns and operates the threethree Nigerian Nigerian refineries.refineries.

DownstreamDownstream Sector Status Sector Status -3-3

NNPC owns and operates a nationwide, NNPC owns and operates a nationwide, integrated pipeline system, and depot integrated pipeline system, and depot network for supply of petroleum products network for supply of petroleum products to the different regions of the country.to the different regions of the country.

NNPC has been sole importer of NNPC has been sole importer of Petroleum Products in Nigeria, with Petroleum Products in Nigeria, with exception of brief period in 1998/99.exception of brief period in 1998/99.

Although currently allowed, oil marketing Although currently allowed, oil marketing companies do not have the incentive to companies do not have the incentive to import because of inadequate marginsimport because of inadequate margins

Oil & Gas Reform PhilosophyOil & Gas Reform Philosophy

Formulate policies that foster competitionFormulate policies that foster competition Review/update the legal/regulatory frameworks.Review/update the legal/regulatory frameworks. Create strong & independent regulatory Create strong & independent regulatory

commission for each segment of the sector commission for each segment of the sector (downstream oil and for Gas), with the MPR (downstream oil and for Gas), with the MPR focusing on policy formulation.focusing on policy formulation.

Regulators to publish clear, transparent licensing Regulators to publish clear, transparent licensing and competition rules for each sector.and competition rules for each sector.

Implement phased and transparent privatisation Implement phased and transparent privatisation of assetsof assets

Sector Reform Objectives - OilSector Reform Objectives - Oil Sector reform prioritiesSector reform priorities include include::

» Formulation of a new National Oil and Gas Policy Formulation of a new National Oil and Gas Policy

» Liberalisation of downstream petroleum markets Liberalisation of downstream petroleum markets » Refocus and strengthen sector regulation Refocus and strengthen sector regulation » Establishment of an independent regulatory Establishment of an independent regulatory

authority to oversee activitiesauthority to oversee activities,, Limit FGN Limit FGN involvement in the sector to policy formulation involvement in the sector to policy formulation and fiscal matters. and fiscal matters.

» Restructuring/privatisation/commercialisation of Restructuring/privatisation/commercialisation of NNPC downstream enterprises NNPC downstream enterprises

Sector Reform Objectives - GasSector Reform Objectives - Gas Greater private sector investment in gas production, Greater private sector investment in gas production,

transportation and distribution infrastructuretransportation and distribution infrastructure Increased direct utilisation of gas in domestic industrial Increased direct utilisation of gas in domestic industrial

processes and power generation;processes and power generation; Attainment of 2008 gas flare-out objective, and thereby Attainment of 2008 gas flare-out objective, and thereby

reduced environmental degradation;reduced environmental degradation; Development of a new gas pricing methodology.Development of a new gas pricing methodology. Development of a fair and transparent fiscal regime.Development of a fair and transparent fiscal regime. Creation of an independent National Gas Transportation Creation of an independent National Gas Transportation

Company by unbundling Nigerian Gas Co (NGC).Company by unbundling Nigerian Gas Co (NGC). Creation of a new role Creation of a new role for for Network Operator.Network Operator.

ENTERPRISES SLATED FOR PRIVATISATIONENTERPRISES SLATED FOR PRIVATISATION

NAMENAME CAPACITYCAPACITY WORK FORCEWORK FORCE PRIVATISATION PRIVATISATION PLANPLAN

KADUNA REFINING KADUNA REFINING & PETROCHEMICAL & PETROCHEMICAL COMPANYCOMPANY

110,000bbl/day110,000bbl/day 2,1852,185 Core investor sale of Core investor sale of 51%51%Initial Public Offer Initial Public Offer

WARRI REFINING & WARRI REFINING & PETROCHEMICAL PETROCHEMICAL COMPANYCOMPANY

125,000bbl/day125,000bbl/day 1,4501,450 Core investor sale of Core investor sale of 51%51%Initial Public OfferInitial Public Offer

PORTHARCOURT PORTHARCOURT REFINERY REFINERY (Complex)(Complex)

21210,000bbl/day0,000bbl/day 15731573 Core investor sale of Core investor sale of 51%51%Initial Public OfferInitial Public Offer

ELEME ELEME PETROCHEMICAL PETROCHEMICAL COMPANYCOMPANY

Processing & Processing & marketing of Natural marketing of Natural Gas products and Gas products and refinery by-productrefinery by-product

1,2611,261 Core investor sale of Core investor sale of 51% shareholding51% shareholdingInitial Public Offer of Initial Public Offer of 49%49%Timeline 2003-2004Timeline 2003-2004

ENTERPRISES SLATED FOR PRIVATISATIONENTERPRISES SLATED FOR PRIVATISATION

NAMENAME NATURE OF NATURE OF BUSINESSBUSINESS

WORK WORK FORCEFORCE

PRIVATISATION PLANPRIVATISATION PLAN

PIPELINE & PIPELINE & PRODUCTS PRODUCTS MARKETING MARKETING COMPANY(PPMC)COMPANY(PPMC)

Transportation, Transportation, supply and supply and marketing of marketing of ProductsProducts

2,8402,840 Unbundling along line of Unbundling along line of activitiesactivitiesTimeline 200Timeline 20044-200-20066

NIGERIA GAS NIGERIA GAS COMPANY LTD.COMPANY LTD.

Production and Production and marketing of marketing of Natural gas and Natural gas and its derivativesits derivatives

601601 Unbundling along line of Unbundling along line of activitiesactivitiesCore investor sale of 51%Core investor sale of 51%

Refineries PrivatisationRefineries Privatisation

Port Harcourt Refining Company (PHRC), (old and new Port Harcourt Refining Company (PHRC), (old and new refineries) identified as the most sellable in the present refineries) identified as the most sellable in the present circumstances & therefore to be offered 1circumstances & therefore to be offered 1stst..

Priority transaction for 2004; CSFB appointed advisersPriority transaction for 2004; CSFB appointed advisers PHRC to be restructured into a stand-alone business PHRC to be restructured into a stand-alone business

outside NNPC.outside NNPC. Interim management Board expected to be appointed, Interim management Board expected to be appointed,

responsible for implementation of privatisation issues.responsible for implementation of privatisation issues. Steering Committee set up to ensure smooth Steering Committee set up to ensure smooth

communication between NNPC, BPE, and CSFB communication between NNPC, BPE, and CSFB (advisers)(advisers)

Privatisation on course and expected to be concluded Privatisation on course and expected to be concluded before the end of 2004.before the end of 2004.

Refineries Privatisation- Cont.Refineries Privatisation- Cont.

Kaduna and Warri refineries to be Kaduna and Warri refineries to be privatised over the medium term before privatised over the medium term before 2006.2006.

Key Privatisation Challenges Key Privatisation Challenges

Environmental issues - Ecological Environmental issues - Ecological degradation & the need for remediation; degradation & the need for remediation; obsolete fuel bearing pipelines.obsolete fuel bearing pipelines.

Host communities issues / Restiveness in Host communities issues / Restiveness in the Niger Delta Labour agitationsthe Niger Delta Labour agitations

Weak existing legal/regulatory framework Weak existing legal/regulatory framework and resultant effects on operations within and resultant effects on operations within the sectorthe sector

Corporate Governance issuesCorporate Governance issues

Other Opportunities in the SectorOther Opportunities in the Sector

In addition to the investment opportunities due to In addition to the investment opportunities due to privatisation of the refineries, a host of other privatisation of the refineries, a host of other investment opportunities exist, they include:investment opportunities exist, they include:

» Petroleum products refining presents a very lucrative Petroleum products refining presents a very lucrative investment opportunity since domestic demand is investment opportunity since domestic demand is estimated at over 32million litters per day. The West estimated at over 32million litters per day. The West African sub-region is yet a bigger market yet to be African sub-region is yet a bigger market yet to be satisfied.satisfied.

» Petrochemical segment is almost a virgin area yet to Petrochemical segment is almost a virgin area yet to be exploited. Current nameplate capacities can hardly be exploited. Current nameplate capacities can hardly satisfy 40% of the domestic demand.satisfy 40% of the domestic demand.

Other Opportunities – Cont.Other Opportunities – Cont.

Glaring opportunities in the provision of bunkering Glaring opportunities in the provision of bunkering services including fuels for the West African Coast as services including fuels for the West African Coast as a bunkering hop.a bunkering hop.

Natural gas production which now enjoys a lower Natural gas production which now enjoys a lower Petroleum Profit tax of 65.75% against the former Petroleum Profit tax of 65.75% against the former 85% as well as pioneer status for projects aimed at 85% as well as pioneer status for projects aimed at stopping gas flaring, present other great investment stopping gas flaring, present other great investment opportunities.opportunities.

Natural gas based chemical industries including Natural gas based chemical industries including natural gas liquids recoverable from gas streams rich natural gas liquids recoverable from gas streams rich in heavier hydrocarbons are waiting to be tapped.in heavier hydrocarbons are waiting to be tapped.

Other Opportunities – ContOther Opportunities – Cont

The market for natural gas fired equipment and The market for natural gas fired equipment and accessories present excellent opportunity to accessories present excellent opportunity to invest in marketing and servicing of gas fired invest in marketing and servicing of gas fired heaters, fryers, ovens, air conditioners, etc for a heaters, fryers, ovens, air conditioners, etc for a variety of industries.variety of industries.

The use of gas for power generation is just about The use of gas for power generation is just about receiving attention of serious investors. The receiving attention of serious investors. The power gap requirement is currently wide enough power gap requirement is currently wide enough to accommodate more than 10,000MW projects to accommodate more than 10,000MW projects up to the year 2006.up to the year 2006.

CONCLUSIONCONCLUSION A reform package is being put together by the A reform package is being put together by the

Government to re-position the oil sector in Nigeria. Government to re-position the oil sector in Nigeria. The reform encompasses changes in the legal & The reform encompasses changes in the legal &

regulatory framework as well as privatisation.regulatory framework as well as privatisation. There is a strong political will on the side of the There is a strong political will on the side of the

government to ensure success for the reform and government to ensure success for the reform and privatisation initiative.privatisation initiative.

The World Bank has been supportive and BPE is The World Bank has been supportive and BPE is poised to work with all stakeholders including poised to work with all stakeholders including investors to ensure the attainment of the vision for the investors to ensure the attainment of the vision for the sector. sector.

THANK YOU AND THANK YOU AND WELCOME TO NIGERIA.WELCOME TO NIGERIA.

END!END!