Accountability, probity and transparency in Nigeria’s petroleum sector (5)
That said, there is the potential to make NNPC’s operations profitable in real economic terms. The World Bank team identified a performance gap for the refineries of around $370 million between NNPC’s current economic profitability and its potential economic profitability (both measured at international marked prices for crude oil and refined products). However, if locational factors are not taken into account in evaluating refinery performance, the performance gap would be $279 million.
The largest component of the overall performance gap is refinery inefficiency, including excess refining capacity ($28 million), excessive crude oil usage in refining ($31 million), and poor product slates ($179 million). The latter includes the losses due to excessive production of fuel oil which can only be exported at a loss because there is little domestic market for the product.
The largest contributor to the overall performance gap, the poor refining slate, is largely attributable to the inability to maintain fluid catalytic cracker (FCC) units in operation. The latter’s deficiency results in the production of excess quantities of fuel oil which must be exported at a loss because of insufficient domestic demand for the product. The balance of the gap is the excess refinery overhead cost (mainly at head office) of $41 million and excess PPMC overhead of $35 million.
The general and administrative costs at NNPC’s refineries and pipelines are very high. In 1999, these costs were running at a level of $179 million per year, a 50 percent increase over 1998. With optimal refinery production of 103 million barrels per year, such costs should not exceed the international standard of $1.00 per barrel of oil refined or $103 million per year. Thus, there are excess overheads of around $76 million per year.
Optimisation of refinery operations would also contribute to closing the performance gap. This would require that all crude is processed by FCC units and that these units would be fully utilised at Warri and Port Harcourt. This would suggest crude throughput of 3.5 million tons per year at Warri and about 7.3 million tons per year at Port Harcourt following a modest increase in its capacity by 20,000 barrels per day.
Crude oil throughput at Kaduna would be limited to 3.0 million tons per year, which is less than its FCC capacity but is all that can be justified by the market it can economically serve. Operating on this basis, the refineries and pipelines could generate a pre-tax profit of around $330 million.
Closing the performance gap at the level of the refineries would require, in addition to major improvements in operational management, substantial investments in plant and equipment of around $400 million.
In addition to the refinery performance gap and high overheads, there would seem to be large avoidable losses at Eleme Petro-chemical Company Limited (EPCL). Closing or selling EPCL, which was found to be a chronic loss maker, could result in significant savings. EPCL’s primary raw material is natural gas which would otherwise be flared.
Therefore, as the opportunity cost of this gas can be taken as zero, closing EPCL would not result in any reduction in cash cost of gas consumed. However, as EPCL’s export sales revenues are used exclusively for servicing its debts, up to $40 million in sales revenue may not have been available to cover production costs. Therefore, the company depends on NNPC and its suppliers to cover most of its operating costs.
In 1997 and 1998, NNPC provided EPCL with N5.7 billion and N4.5 billion, respectively. Creditors provided another N2.2 billion in 1997 and N1.5 billion in 1998. Together, they provided an average of $70 million per year. This suggests that closing EPCL could save NNPC around $30 million in cash and liabilities to suppliers. Assuming that once the plant has ceased operations, it could be maintained at a cost of $10 million per year, the net annual savings would be $20 million.
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