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FG, Vulcan Energy Corp. $4.5bn refinery deal raises doubts

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The Federal Government’s Memorandum of Understanding (MoU) with a U.S.-Nigerian joint venture to build six modular refineries with a combined capacity of 180,000 barrels a day is raising doubts among analysts who question the nature of the deal.

The joint venture group (comprising Vulcan Energy Corp. and Petroleum Refining and Strategic Reserve Ltd.,) signed a $4.5 billion deal to build the refineries in collaboration with state- owned Nigerian National Petroleum Corporation (NNPC), Trade and Investment Minister Olusegun Aganga, said in a statement released two weeks ago.

Two of the refineries are expected to be completed within a year.

The lack of clarity on the deal and the relative opaqueness about the companies involved is, however, giving analysts cause for pause.

“The contract awarded to an unknown ‘Vulcan group’ worth $4.5 billion is raising a few eyebrows,” Bismark Rewane, chief executive officer of Lagos-based Financial Derivatives Co. said in a July 4 presentation at the Lagos Business School.

“Cronyism has replaced corporates in both the upstream and downstream sectors. There is a strong link between cronyism and political patronage.”

The Department of Petroleum Resources (DPR) has in the past 10 years given out licences to 18 companies to build private refineries in Nigeria. None of the companies have so far managed to build a functional refinery in the country.

“The whole deal is just too opaque and too often these MoUs are signed with no concrete steps to actualise them,” Kayode Akindele, partner at 46 Parallels, a Lagos based investment firm, said.

“Unfortunately, what we seem to have is a piecemeal policy where MoUs are signed at will with a variety of parties whose ability and willingness to execute is often called into doubt.”

The statement from the trade and investment minister left out important details about the transaction, such as the expected financing source for the project, the capacity of the companies involved to undertake such a project, the environmental impact on local communities, and the effect of the non passage of the Petroleum Industry Bill (PIB) on the project.

The delay in the new petroleum law has kept out at least $40 billion in investments, Rolake Akinkugbe, London-based energy analyst at Ecobank Research, said in a note on May 15.

If all the listed hurdles are somehow overcome, there still remains the sticky issue of how the refineries are expected to break even in a non deregulated downstream petroleum industry environment.

Shell Petroleum Development Company’s (SPDC) executive director, Malcolm Brinded, recently said building a refinery in Nigeria does not make good business sense.

“In today’s world, not looking at the past but where we are today, there is surplus of refinery capacity which essentially means many refineries in the world run at a loss, which also means one can get refined products back again and pay very little for it to be refined,” he said.

The likely impact of the global refinery over capacity means that major investors or financiers may find it difficult to fund new Greenfield refineries, because they would be competing against older refineries that can survive on low margins.

Nigeria’s existing refineries have a total capacity of 445,000 barrels per day, but are running at less than three-quarters of that capacity, mostly due to graft and mismanagement.


Article Credit: Businessday Newspaper

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Updated 7 Years ago

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