Introduction
The recent incident in an illegal oil refinery site in Egbema/Ohaji area of Imo State, where over a hundred people reportedly lost their lives, has reopened the debate on how to resolve the thorny issue of illegal oil refining. High youth unemployment, the growing culture of oil bunkering and a desire to get rich quick, could be responsible for these nefarious activities.
However, these events, despite their ugliness, point to some unexplored economic opportunities for Imo people, the government, and private investors. To start with, the persistence of illegal oil operations clearly shows that there is a significant imbalance between projected official refining capacity and existing demand, such that it has become even more tempting to boil crude oil in drums, knowing that there is a guaranteed market for the petroleum products, especially diesel (Automotive Gas Oil).
Notwithstanding this gap in the market, there is a current over-reliance on government-owned refineries to fill the gap. The Nigerian government can adopt a refining model that relies on modular refineries (built and operated by private investors or state governments) that will produce all refined products. This will allow more suppliers (i.e., producers) to come into the market and raise the bar of market efficiency.
Why modular refineries and why now?
Modular refineries make excellent economic sense, and rightly so for many reasons. First of all, the capital outlay for any 100,000 barrel per day (bpd) refinery is about $1.5 billion, while a 24,000 bpd modular refinery is roughly $250m. Therefore, it is easier to access funds for modular refineries. If the government shows enough interest, banks will fund such proposals for the establishment of modular refineries backed-up by feasibility studies, sound environmental impact assessment and attractive rate of return on investment.
Secondly, the manufacturing time for plant, equipment and machinery for a plant of 100,000 bpd capacity is within the range of 3-4 years. Start-up for modular refineries of 24,000 bpd is within 18-20 months. Thirdly, the modular system allows the plant to be expanded to 100,000 bpd capacity in structured increments. The increments can be funded with the cash flows from phase 1 and additional phases, and so the refinery will not incur additional debt for its expansion. The expansion of the modular plant capacity can be done without shutting down production from existing equipment and plants. This is not the case with big capacity refineries. In other words, revenue streams and pay-back periods are faster with the modular refining format than with the larger capacity refineries.
However, a major short-coming with modular refineries is that the plants are semi-automated and less labor-intensive, i.e. not many jobs can be created directly. For instance, 20 to 30 personnel can operate a 24,000 bpd modular refinery. Most of the spin-off jobs created are of a secondary nature, and based around the location of the site. But beyond the direct jobs of oil refining itself, the value chain along the lines of facility maintenance, storage, safe-keeping, transportation and haulage, downstream retailing and associated services will be enormous.
The other challenge is that currently, exploration and refining of oil fall on the exclusive list of the federal government, which means that for a state, like Imo State, to benefit in the stated manner, a lot of legal and diplomatic agreements and concession with the federal government must be reached. The Special Assistant to the President on Niger Delta Affairs, Senator Ita Enang, recently on a TV show announced that the Federal Government was planning to legalize modular refineries. Once the legalization or any form of legal agreement can be reached, it is important that the government of Imo State creates an enabling environment to attract oil investors to the state.
In summary, modular refineries are simple, efficient and fast to start up. Such refineries usually operate at optimal capacity at all times. The relatively small investment cost allows for private investors to enter the refining space much easily, if operated as a private-public-partnership. It also enables governments to build the bigger capacity refineries using the modular format, but in incremental stages. However, government-built modular refineries should have full conversion facilities (i.e. catalytic reformers and naphtha hydrotreaters) to enable the refineries produce Premium Motor Spirit, if not in all modular sites then in specified places. But that’s not everything about modular refineries.
Pressing questions and further thoughts
If it takes about 3 years to start and operate a modular refinery, and the world is switching to electric cars from 2030, due to clean energy transition pressures, it only leaves us about 5 years to play with. How realistic and pragmatic is this modular refinery opportunity for Imo State beyond the very short term? Is it possible to assume a scenario where modular refineries produce transportation fuel in the short term, and other things afterwards? These are, in themselves, pertinent and pressing questions.
It is instructive to note that in the energy mix, petrol, diesel and kerosene will still be there for much longer. Despite the overwhelming interest of the Global North to move away from fossil fuel powered transportation systems and vehicles, it will take a while before petrol and diesel engines are completely eliminated in Africa. Even where the desire to do so exists, the lag in technology and innovation will constitute a major bottleneck, especially where the energy infrastructure does not easily lend itself to significant leapfrogging. How we deal with this lag will either make or mar us!
Nonetheless, green energy transition efforts will still go on, and probably replace the carbon products when a significant percentage of the petrol/diesel engines cannot be maintained any longer. Then auto-manufacturers will also stop making spare parts at the time they phase out petrol/diesel engines. What is important, therefore, is to be ready to make a smooth transition to ‘green’ at the point where it is inevitable. Before then, it is equally important for Imo State to make the necessary transition investments in both people (i.e. capability) and innovation by leveraging existing technology. That’s foresight!
In all, Imo State can benefit from encouraging investments in small-scale (modular) refineries in ways that allow and enable private investors to profitably satisfy immediate market demands, create jobs, and contribute meaningfully to both energy sufficiency and resilience. However, this should be done with a close eye on the future and the global pressures to transit to green and renewable energy sources.