We’ve been selling products below costwith subsidies – Phil Chukwu

Mr. Phil Chukwu, the group executive
director in charge of refining and
petrochemicals at the Nigerian National
Petroleum Corporation, NNPC, is a
focused and driven man. Before his
current posting at the corporation, he
had occupied other portfolios including
that of group general manager, NAPIMS,
group executive director, exploration
and production, among others.
In this interview with Hector
Igbikiowubo and Clara Nwachukwu of
Sweetcrude, he speaks passionately
about how the refineries fell into
disrepair, plans to rehabilitate them and
restore production to 90 per cent
installed capacity. He talks about the
need to position the refineries to
operate in a deregulated environment,
among other issues.
Excerpts:
Can you give us an update on the state
of the four refineries – the two in Port
Harcourt, and the ones in Warri and
Kaduna?
Let me first of all say that we see the
refineries as three refineries because
Port Harcourt has two refineries in one –
so we talk about the 210,000 barrel
refineries in Port Harcourt.
In Kaduna, we have a refinery and a
petrochemical plant attached to it.
Actually, in Kaduna there are two plants
– the fuels plant which uses Escravos
Crude, and there is the Lubes plant,
which uses imported heavier crude.
Also, there is the LAB, which uses some
of the products from these refineries to
produce linear alkaline benzene, which is
a raw material for detergents. From this
also, we produce base oil from the Lubes
plant for lubes, wax for candles etc. So in
Kaduna, you may be talking about three
separate plants – the fuels, the lubes and
the LAB. Then the tin and drum is for
packaging.
In Warri, you have the refinery, and
then the petrochemicals – the PP or clean
plant as it is called and the carbon black
plant as well, so you also have about
three of them.
Phil Chukwu
You can now see how complex these
refineries are and for us to have the full
benefits of these investments, we must
have all of these units work.
Unfortunately, over time, the refineries
have not been operating optimally, they
are not doing well, and we are doing
very poorly.
I believe, if I may say that even though
we can do about 60 percent, that is the
inlets or DCUs- Crude Dispensing Units, if
they can take about 60 percent of the
name plate capacity, even though we
can do that, the other units also have
issues because they are not producing
optimally. Therefore, you find that the
yield slate we have is not being
achieved in the refineries. This is
because of many years of not investing
in these refineries.
Although we have invested, we’ve done
some turn around maintenance, but you
find that these are usually very far in
between. Instead of doing them in three
year cycles, we wait till sometimes 10
years and more. So, many things have
happened and what we are trying to do
today is to look at the problems from
different angles. We look at the plant
itself, the different ones I have
mentioned, we also look at the supply
chain because crude comes from the
fields and tank farms into the refineries.
They go through pipelines and all that
and when the petroleum products are
produced, they also go through
pipelines into depots, tank farms or
hauled by road to where they are
needed. These are all areas we must look
at.
Then the third bit of the problem is the
people. How have we been operating
these refineries, do we have the
necessary skills to achieve the objectives
of these refineries. So we look at the
plants, we look at the supply chain and
then we look at the people. So, in our
rehabilitation efforts, we are going to
address these three key elements.
And how far have you gone with
tackling any of these problems?
The programmes have started, we call it
refineries rehabilitation programme. For
instance, the Port Harcourt initially
started with a turn-around programme,
and they’ve gone as far as placing
orders for long lead items, and we have
also visited some of the contractors
because what we are doing is that those
who built the refineries will be the ones
to do the jobs for us. We have
understanding with Technimont that
was proposed by JGC.
JGC is unable to come for several
reasons – there is a Japanese
Government’s advisory that Japanese
companies should not come to the Niger
Delta. So that is an issue, and we’ve
visited them in Japan trying to make
them understand, and the Ministry of
External affairs is assisting us in this
respect. So we are trying to convince
them so that the Japanese Government
can change their advisory from a high
alert level, to maybe a moderate one so
that these people can come. But the
situation today is that they are unable to
come. But they said they will work with
Technimont, who has been partnering
with them all around the world. So
Technimont will be there to work, with
JGC in the background.
For Kaduna, Kaduna was built by
Chyoda, and Chyoda is going to come
and they have agreed to come, even
though they are Japanese as well, but
they are not going to the Niger Delta,
which is where they have an advisory.
Chyoda have agreed to come, we were
in Japan and we met with them and we
are working at how we can come to an
agreement for them to come.
For Warri, we have Saipem, which is the
successor of Snamprogetti, who built the
refinery. Snamprogetti has been
acquired by Saipem, so it’s a unit of
Saipem; they are ready because they are
on ground in Nigeria so we don’t have a
problem with them.
So all three
contractors
have been
identified, we
are also
engaging
NETCO, working
with Technip,
an
internationally
renowned
company with
a lot of experience in refinery work and
they will act as consultants to NNPC.
NETCO and Technip have formed a
consortium, but NETCO is leading and
they will now act as consultants to us.
We have started going round the
refineries to gather data, do the
inspection and auditing, gather all the
data, scope the work, schedule it and do
the cost estimates, prepare all the
documentations for negotiations with
the afore mentioned contractors.
So we’ve gone along this route and we
are currently engaging with NETCO and
their partners to ensure that we wrap
up agreements with them. But before
then, they have already started work
and their proposal is with us and we are
in the process of negotiating with them.
Going back to Port Harcourt and JGC, in
the event the advisory is not vacated,
what happens, or do you have an
alternative arrangement in place?
Let me assure you that Technimont is a
very competent company, they’ve
worked for us in that refinery and they
partner with JGC all across the world, so
they don’t have an issue. Actually, it was
JGC that suggested we work with them
and we believe that they have all the
competences required. They even
worked on the Eleme Petrochemical
Company.
We also know that the Port Harcourt
Refinery over the years has been
bedeviled by electricity supply issues, is
there any plan to tackle that problem
head on?
Yes, we have two initiatives – one is to
refurbish the existing electricity supply
system, which is the steam turbine. The
problem we have there is because of the
water quality producing steam to drive
the turbines. So we are fixing that. But
the main plant, which removes all the
minerals from the water, we have a
contract in the process and once that is
concluded, they will award contract for
the placement of a mini plant, which
produces the water, which goes to the
boiler and from the boiler, you have
steam that drives the turbine. So, this
system is being worked on.
The second system is where you have a
reliable power generation system just
like you have in Warri, to have a gas
fired generator. In that case what we
are doing is, we are talking to two
companies and as soon as we conclude,
in fact, the papers are going to be
considered in GEC, if the GEC meeting
holds today, we will look at what has
been proposed, select the best one and
begin to work with them to install a
turbo generator inside the compound in
Port Harcourt. That will be an alternative
to the existing system.
This doesn’t sound too salutary an
alternative considering the issues we
have with gas, so how will it play out?
We don’t have that many issues with
gas because there is already a gas
pipeline that comes into the Port
Harcourt refinery. The volume of gas
required is something like for 30
Megawatts power generation, so it
won’t require that large volume of gas.
Already there is a pipeline taking gas
across that area and all we need is to
key into the refinery.
The interventions or programmes you
have mentioned so far appear to be
moving at snail speed, which is usually
the case with executing policies in
Nigeria?
The snail speed you’re talking about, let
me tell you that in engineering projects
you don’t just jump into it, you must
plan properly else, you’ll have problems
in implementation and that is what you
must avoid. If you want it to happen
today, it’s not going to happen. When
our consultants finish their work, then
you’ll know the proper time schedule.
We are looking at three elements in the
implementation. The first one is to
revamp the refineries the way they are
today in the immediate short term. We
look at the refineries, there are things
that need to be replaced, some cleaning
up and all that and we’ll do that. The
next stage is the upgrade; you’ll agree
with me that in the time we are talking
about 25-30 years that these refineries
have been there, technology has
changed, and if technology has moved
on, you need to also adapt to new
technologies. So we the upgrade
segment, after the initial revamping, you
have the upgrade and if subsequently
you want to expand these refineries,
you can go ahead and refine them.
These are some of the things that we
hope to do.
The first bit is to revamp the refineries,
clean them up, change the parts that are
rusty to make it more efficient, but it
remains the way it is. Then you go to
the upgrade side, this will increase the
efficiency because we are introducing
the latest technology in refining, then
the final stage is if we want to expand
the refineries. But we are not talking
about that now. These are the things we
plan to do and our schedule will address
the first part – revamping, and then
address the second one, and we take
them in stages like that.
In order to address this concern, can we
look at the time line, how soon do you
expect a feedback from your
consultants?
Let’s not look at my consultants because
what we have or the directive we have
from thee management – the minister
and government is that we will do the
Port Harcourt 1 for one year, the other
one we will do for two years. The Port
Harcourt 1 like I told you, we’ve already
ordered for the long lead items. I
personally went to Japan to speak to
some of those who manufacture these
components, so went to their offices
one by one. We spoke with them and
got agreement with them on when they
can bring them in. the actual bit of
during the time when they will actually
do the work on ground will be say
during a two month or three month
period. What you have is from now to
probably August-September will be for
the manufacture of spares and
equipment that we need and once they
arrive, the actual work of installation
and integration will commence
immediately.
We have been given one year and we
are trying to work within one year, but
the revamping bit, if we now need to
move ahead, then that is another
segment of the work. Our objective at
the end of the day is to achieve about
90 percent of the name plate capacity
for Port Harcourt and all other ones.
Today, Warri is the best that we have.
But you see, one of the problems we
have in Port Harcourt is that it is the new
Port Harcourt that we will address
during this phase. The old Port Harcourt
is really in totally bad shape and that
one will be included in a longer term
work and this will come in with the
upgrade because you have to really go
into it and do detail work in order to
upgrade it to a standard where it can
produce on the basis of the name plate
capacity.
For the purposes of clarity, the 90%
you’re looking at is for Port Harcourt 2,
the 150,000 barrels?
Yes, the 150,000 of the new Port
Harcourt. The old one has not been
functioning for a very long time,
therefore a lot more work needs to be
done there. Port Harcourt is doing 66%
as at yesterday. But you have to
understand also that the FCC – Fluid
Catalytic Cracking unit has not been
working because of power issue. So
once the power issue is solved, in fact,
they are trying to bring back the FCC
today.
A little more clarity, if you say the
refinery is doing about 66%, yet the FCC
is not working, how is that?
The explanation is that the CDU that is
the unit that brings in crude and when
refineries report their performance that
is what they report. The other units will
take input from the CDUs and other units
to function; the FCC gets it raw materials
from the VDU and then processes it. So
what the FCC does is to increase the
volume of PMS that you are producing.
But in reporting the 90% I am talking
about, is from the CDU, what the refinery
can take in at any particular time. So
now it is now our responsibility to
ensure that these other units function
optimally so that whatever is passed
into them is also processed.
In real terms, the refineries supposedly
get 450 000, barrels per day, what
volume of this are you able to process?
I’ve given you an average for all the
refineries, if you talk about an average
of 60%, it will be 60% of 450,000. But
this fluctuates because it is not that at
any particular point in time you have
just that same volume, it could be
higher, it depends on how the refineries
are functioning. But the issue with the
refineries in terms of the restrictions of
the crude you pass into it, is not because
the refineries are not functioning all the
time. There are other issues. There are
the issues of bringing in the crude,
sometimes, you are processing and the
crude line is broken. You process what
you have and if you finish processing
that, you have to wait.
In sum, when you are looking at the
average, you are doing lower than what
you expected to do, and that is what the
issue is. A lot of problems associated
with the refineries come with the
availability of crude.
Let us look at another level of the
problem, the limited authority in terms
of approval limits the managements of
the refineries enjoy are rather small, has
this been addressed?
That has been addressed. The federal
Government has changed the level of
financial authority for most of the
ministries, departments and agencies
and we have adopted that. Today, the
approval limit at the refinery is
substantially more than what it used to
be in the past. So I don’t see that as a
problem.
Given your explanations, it appears the
turn-around maintenance will take
longer than anticipated?
What we are doing is rehabilitation not
turn around. Rehabilitation is more of
TAM + because you have to do a lot
more. TAM is a routine thing, but this
time around, we are not talking about
the routine because when we should
have done Port Harcourt, we are talking
about several years back. Now we are
trying to do it and in addition to that, we
are talking about all the others like
power system, the de-bottlenecking of
the FCC.
When the Port Harcourt refinery was
built, it was originally designed at
100,000 p/d, then I think there was a
plan to build another refinery in Calabar,
but that one failed, so government
decided they should increase the Port
Harcourt to 150,000 barrels. But in
increasing it to 150, 000, the FCC unit
was not increased. Recall also that the
old Port Harcourt refinery was just a
topping refinery but it didn’t have FCC, it
had to also use the existing one. So you
have to de-bottleneck it this time
around. You have to increase its
capacity or you add another unit that
will handle it to increase the volume that
it has to take. So the work on ground is
beyond turn around maintenance.
Given these scenarios, from a layman’s
point of view is it not just better to build
new modular refineries?
No, I don’t agree. Having a modular
refinery will be very small and I don’t
see a company like NNPC going to have
smaller refineries. But if we refurbish
this one, we will do that at a cost that
what you will spend here cannot even
build one refinery. Do you know how
much it will cost you today to build a
refinery of this capacity? You’re talking
about a combined 445,000 bpd refinery;
it’s going to be a huge cost if you decide
to build new ones. Why don’t you spend
a fraction of the money you would have
used to build this one up, do the
technology upgrade. We have experts
who have looked at them and can do it.
We are also looking at the market, the
market in Nigeria today is different from
the market in Nigeria when some of
these refineries were built. Therefore,
the question is, when experts look at it,
am not saying that is what will be done,
but we can reconfigure the refineries to
produce more of the products desired in
this market than products that probably
we can’t handle.
Let’s take Kaduna for example, when it
was designed, it was designed to
produce asphalt, but how do we
evacuate it, have we been able to
successfully evacuate it. Yes, asphalt is
needed in the country but since we
have not been producing, have we not
been using asphalt in the country?
These are some of the things we have to
look at, we have to look at the market,
what does the market want? And we
must be able to address the issue. These
are some of the issues we are carrying
out studies on and we hope at the right
time we should be able to say we can do
this to the refineries or leave them the
way they are. But some of the will need
twitching here and there, and I gave the
example of the Port Harcourt Refinery.
I also want note the situation in Warri,
where there is a PC- Petrochemical plant,
it has not worked for over 12 years and
we hope that during this exercise we
will be able to bring it back to life
because it is also going to be a money
earner for us.
This brings us to a grave concern out
there, which is part of what has brought
the refineries to where they are today
with regard to the frequent policy shifts
in government and management. Won’t
you say the NNPC will be better off
partnering with the private sector for
greater efficiency and less interference
from government?
Let me first of all say that the policies
regarding refineries in Nigeria have
been very consistent in the sense that
there is hardly any government in
Nigeria that does not desire optimum
utilization of the capacity of the
refineries, it has always been the same.
They want the refineries to run well,
they want them produce at optimum
levels.
Once this is done you may say that in
implementation, there is scarcity of
funds because there are competing
needs in this country so if the funds are
not there and the money is not invested
at that time, we have this kind of
problems occurring. So talking about
policies, the policies have been very
consistent.
Secondly, am here today, am pursuing a
policy of rehabilitating the refineries to
make sure that the refineries are
working at least 90% of their capacities,
it is not just me but something being
driven by the management of the NNPC
and the government – the minister up to
the president. They desire it and want
this to happen. Why? From a selfish
point of view, if we don’t do it, then we
will b out of business tomorrow. If there
is deregulation tomorrow and we are
not able to do it we will be out of
business, if we continue to produce at a
higher cost, as an efficient organization,
we should be able to sell below my
costs; if I do that there will be no market
for me. In the long run, I won’t even be
able to refurbish my refineries, so these
are some of the things that happened
because the business structure was
really such that we’ve been selling below
costs with subsidies and all that, it
distorts the market and we are unable to
run a refinery in a business manner. And
that is what deregulation will probably
introduce and if we don’t do well, we’ll
just phase out. So it is very important
that we fix these refineries, from the
NNPC’s point of view and bring it to the
level where we are very competitive.
Then when you are talking about joint
ventures, I believe it is beyond me, it is
government’s decision on what they
want to do because they own the assets.
If they decide tomorrow that they want
to do it then they will.
Would you then say the NNPC and the
refineries are prepared for
deregulation?
That is what this programme is all about,
it is geared towards making the
refineries efficient and if the refineries
are efficient they will be able to compete
effectively in a deregulated
environment. For us to be competitive
and bring our refining costs to a level
comparable to refineries across the
world, then we should be able fix tem,
once this is done, the products prices
will be competitive as well.
You raised a critical point about costs of
your output; it’s contentious out there,
because there are arguments that since
the crude oil is here, the refineries here,
the cost of producing a litre of petrol is
relatively cheaper?
Let me explain that the way it is today,
PPMC buys the crude from government
at the international market price. It is
PPMC that sends this crude to the
refineries, the refineries process it for
the PPMC, which takes its products and
sends it to the market. For the refineries,
what they earn is the processing fees
from PPMC. That is the structure on
ground today.
But we are looking at a structure where
the refineries can buy their own crude,
process and sell. This is happening in
other places. I went to France to see
how they are organized. They have
what they call refining and marketing.
They process their crude and sell the
products. We are not running that today
and we are looking at it. This is what
was proposed in the PIB, where the
refineries will buy their own crude,
process it and sell to off-takers and that
is an option we are looking at.
So you find that PPMC also has a lot of
issues, lines are vandalized, they lose a
lot of the crude before it gets to the
refineries and same thing when the
products are produced before it gets to
the end users. They carry the burden of
these losses. If they eliminate these
vandalism and all, the costs will be lower.
I don’t know if this is still part of the PIB,
it was proposed that the refineries will
have a structure where they will become
refining and marketing companies and
take over most of the functions of the
PPMC and a new company will be
established to manage the pipelines
such that when you use the pipeline,
you pay a fee for it and it will be open
for all users.
So why were all these not done before
full deregulation?
The question has been asked that can
we survive deregulation. And the
answer is that the way we are today, no.
For us to survive we must look at how
can we make the refineries efficient. If
you look at manufacturing in Nigeria, it
is done at a very high cost, no matter
which sector you are looking at –m with
having to provide their own power and
other facilities and the refineries are not
an exception.
Earlier on we were talking about how to
give power the Port Harcourt refinery,
you can’t rely on PHCN for power you
have to build your own power plant and
when you do this and buy gas and
other inputs your costs will be higher
than the ordinary power supplied by
PHCN.
So for us to survive, we must move
away from our current production levels
of 60% and the fact that some of the
units downstream are not functioning
very effectively, so we must fix them. In
fixing them, it is not a one-day thing, it
is something that must be planned
properly – gathering data, doing
feasibility studies, scoping, doing the
design and all and at the end of the day
you are guaranteed the time when you
finish and you are also guaranteed your
costs.
But if you don’t do it very well, you are
bound to mid-way start to go here and
there, trying to solve problems that
should have been solved before you
started. This is what we are doing today,
engaging those who must work with us
and ensure that this thing works, those
who have done it before. By the initial
studies carried out, by March next year,
we must begin to see changes for Port
Harcourt. For the other refineries for the
ones the items that we need to order,
we have placed the orders so that by
the time the ground work begins we
have prepared everybody. We need also
to address the skills of the workers, such
that in upgrading the plants we are also
upgrading the skills of the people.
To this end we are planning to establish
a refining school where people both old
and new will be trained and gradually
over the years they will be going back
for retraining. It’s going to be hands on,
to sharpen their skills, and improve
health safety and environment
knowledge so that they won’t burn
down the refineries accidentally. Those
already there today, we need to give
them top up training, because when
people have been in a place for too long
there are certain behaviors they acquire
which are not right. You need to correct
that and you can only do that through
training and retraining. These are what
we are doing.
I also mentioned the supply chain as the
third element, if we don’t get the crude,
say you pass in 445.000 bpd to the
refineries and you lose 20% of this then
you are not efficient. So there are
integrity and security issues. Integrity in
the sense that are these facilities solid
and in good shape or because of old age
have lost their strength and therefore
can be burst anywhere and lose the
products passed through them.
The other is security, are we able to
secure the pipelines and whose
responsibilities are they? These ought to
be addressed and once this is done you
can be sure that when you pass in crude
and get 99.9% into the refineries, your
costs will be much, much lower. Same
thing if you’re sure that you don’t lose
your products, so the costs we are
talking about today will be reduced. All
these are parts of the costs that we
incur in product losses along the
pipelines.
What about local content input in all of
these?
While talking about the refineries I
mentioned all the contractors for the
various refineries, I believe Nigerian
content is also important. What we are
doing is that because these companies
built the refineries we decided that we
invite them back for the big project.
They know what it takes, they have the
designs. In fact, when I went to Japan I
met people who had fabricated some of
the components for Port Harcourt and
immediately they remembered and
brought out drawing for Port Harcourt
and gave to me. So that is the advantage
of taking these people.
So for the Nigerian content, we are
producing a list of local contractors who
are competent and who have been
working in these refineries and we are
going to ask them to sub-contract to
these international companies where
they have competence. This is one thing
we are consciously doing to promote
local content.