Refineries in Nigeria are expected to function at substantially better level in 2017 due to plans by the NNPC to embark on a comprehensive rehabilitation of the three refineries which is expected to ensure that the three refineries are able to achieve an ambitious 60 per cent capacity utilization. This is according to Eco Bank 2017 Nigeria oil outlook report.

According to the report, “The last time any of the refineries achieved a rate that high was also by the Port Harcourt Refinery in 2006. The Port Harcourt refinery is expected to begin production of Aviation fuel within the first half of 2017. This is expected to reduce the current scarcity of the product in the country, which is affecting reliability of flight schedules. An alternate pipeline from Niger Republic to supply crude oil to the Kaduna refinery is also being considered. This is however still conceptual and unlikely to kick off in 2017. In our opinion, a potential deal with the Niger Delta militants could reduce the level of disruption in supply of crude oil for processing at the refineries. This is the most important step followed by the massive rehabilitation of the refineries”.

However, with the exception of the Niger Delta Petroleum Resource private refinery, which processes just about 1,000 bpd of crude oil to produce mostly diesel for its owner’s operations, most private refineries are not yet in operation. “A few modular refinery plants are being developed; over 22 have been licensed while 3 have progressed to a higher level, having received the Authority to Construct (ATC) license from the Department of Petroleum Resources (DPR). Depending on the flow of funding to the project sponsors, especially foreign currency, the projects are likely to be completed from late 2018/early 2019. The Dangote refinery having completed equipment fabrication is expected to move into the refinery construction phase, with early 2019 as a likely target for completion. In our opinion, except the refinery is delivered in phases, it is unlikely to achieve completion in 2018”.

Based on these developments, the private refinery segment is unlikely to contribute significantly to the volume of refined products available in 2017. However, it is expected that the efforts by the NNPC at the PH and Warri refineries to raise average capacity utilization at the government owned refineries to over 20 per cent; this is expected to reduce the demand for imported products to below the estimated 11.1 billion litres imported in 2016, the report states.

“Fuel consumption is said to likely increase as economic growth returns. Nigeria’s consumption of key fuels such as gasoline, kerosene and diesel is estimated to have declined 3 per cent to 22 billion litres in 2016 from levels in 2015. The decline was driven largely by the 5 per cent decline in gasoline consumption. Following the sharp increase in gasoline prices in May 2016 due to an adjustment for the higher exchange rates and crude oil prices, gasoline pump prices rose 67 per cent from N87/litre to N145/litre. Furthermore, the consumption subsidy available on the product was completely removed, while some debts owed to petroleum marketers were paid to ensure that government had no outstanding fiscal obligations towards petroleum marketers. Some debts however remain outstanding.  Fuel consumption is expected to increase in 2017 instead, driven largely by expected improvement in the macroeconomic environment and stronger efforts to improve supply of petroleum products from the NNPC Refineries and imports. Considering the favourable margins on PMS, we expect the major retailers to ramp up efforts to push volumes and secure more market share. Although the economy is unlike to fully recover from recession in 2017, it is likely to witness some level of growth that will ensure a positive growth in fuel consumption. Fuel consumption (gasoline, diesel and kerosene) is expected to rise to 22.5 billion litres in 2017 from an estimated 22 billion litres in 2016”.

Further deregulation, imminent

Further deregulation of the downstream is expected in 2017. This is not be unexpected, as it has been on the table of discussions at various fora. This, according to the report is due to the continued rise in the cost of sourcing petroleum products, i.e rising crude oil prices and exchange rates. While the increase in crude oil prices is expected to boost the country’s oil revenues, the cost of petroleum products may also have to increase. Currently landing costs have risen significantly but the NNPC is the main importer for gasoline and has thus imbibed some of the increase in product costs to ensure prices remain unchanged. However, it could be forced to raise prices or fully deregulate to avoid increasing its operating deficits.

More consolidation, less divestment

More downstream assets are likely to be divested. As smaller retailers are unable to source adequate volumes to drive sales and profitability, they are likely to sell more downstream assets. Lack of funding for acquisitions from the banks is expected to however constrain these sales, with only sales to larger major marketers or international buyers likely to go through. Following the sale of Mobil downstream operations to NIPCO last year, part of Forte Oil to oil trader Mercuria and completion of the divestment of Oando Marketing Limited to energy trader Vitol, Total Nigeria is left as the only IOC owned downstream operation in Nigeria. They are unlikely to follow the Mobil example, as they are market leaders in most products and retain downstream operations in most African countries. However, we expect these new owners to begin efforts to consolidate operations, across their group and across operations in Nigeria, as they look to grow market share.