How Fuel Subsidy and Other Factors Delayed Modular Refineries in Nigeria

Patrick OdeySeptember 11, 2023

2 minutes read

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Nigeria has been struggling to reduce its reliance on imported petroleum products for decades. One of the solutions proposed by the government was to encourage the development of modular refineries, which are small-scale crude oil processing facilities that can be built and operated with less cost and complexity than conventional refineries.

However, the progress of modular refineries in Nigeria has been hampered by various factors, such as the prolonged subsidy on Premium Motor Spirit (PMS), also known as petrol, the lack of adequate infrastructure and regulatory support, and the security challenges in the Niger Delta region, where most of the crude oil is produced.

According to the Department of Petroleum Resources (DPR), the agency responsible for issuing licenses for modular refineries, only 25 investors had received licenses to establish modular refineries as of May 2018. However, none of them had reached the final stage of obtaining a license to operate.

The DPR explained that there were three stages involved in acquiring a license for a modular refinery: license to establish, approval to construct, and license to operate. It also stated that the investors had to secure funding, land, crude oil supply, and environmental clearance before they could commence construction.

One of the major challenges faced by the investors was the uncertainty over the pricing and availability of crude oil, which was influenced by the subsidy regime on PMS. The subsidy, which was meant to keep petrol affordable for consumers, made it difficult for local refineries to compete with imported products.

The subsidy also discouraged investment in refining capacity, as it created a gap between the cost of production and the selling price of PMS. The government spent trillions of naira on subsidizing PMS imports every year, while neglecting to upgrade and maintain the existing refineries.

The situation changed in March 2020, when the government announced the removal of fuel subsidy and the deregulation of the downstream oil sector. This was prompted by the sharp decline in global oil prices due to the COVID-19 pandemic and the OPEC+ production cuts.

The deregulation allowed market forces to determine the price of PMS, which increased from N145 per litre to over N160 per litre in September 2020. The government claimed that this would create a level playing field for local refiners and attract more investment in the sector.

The Chairman of Council of Registered Engineers of Nigeria (CORAN), Mrs. Olufunke Kotun, confirmed that some of the modular refinery licensees had resumed their projects after the deregulation. She said that there were currently four modular refineries in production and several others in different stages of development.

She added that modular refineries were very viable and essential for Nigeria’s energy security, as they could provide high-quality refined products to local markets in multiple locations across the Niger Delta. She also said that modular refineries would complement the Dangote Refinery, which is expected to produce 650,000 barrels per day when completed.

The National Public Relations Officer of Independent Petroleum Marketers Association of Nigeria (IPMAN), Mr. Chinedu Ukadike, also expressed his support for modular refineries. He urged the government to provide more support for modular refinery operators, such as access to crude oil supply, infrastructure development, and security protection.

He said that Nigeria could not afford to continue importing petroleum products when it had abundant crude oil resources. He also said that modular refineries would create jobs, reduce environmental pollution, and promote peace in the Niger Delta region.