T

he benefits of Modular Refineries in present times has Furthermore, the cost of repairs of the four refineries for
stimulated discussions on establishing modular
refineries in the Niger Delta region of Nigeria (the
Region) in order to boost the Country's crude oil refining
capacity and meet its local consumption demands. At a
Stakeholders' Workshop in 2015, the former Director of the
Department of Petroleum Resources (“DPR”), Mr George
Osahon stressed the importance of investment in modular
refineries to curb the operation of illegal refineries in the
Region. This importance has been reinforced by the
present administration, which has repeatedly emphasised
its interest in reducing importation of refined products.
The Nigerian National Petroleum Corporation (NNPC) in
April 2017 stated that Nigeria's four refineries currently
operate at about 37.67 percent less of their combined
capacity thereby producing far less than their installed
capacity per day. Consequently, existing refineries are
unable to meet the Country's refined products' demand at
the current rate of performance thus forcing the country to
rely on imports.
optimal production remains discouraging. Nearly $2 billion
has been spent on 'Turn Around Maintenance' (TAM) of the
existing refineries between 2000 and 2016, without
adequate returns. In contrast to the conventional refineries,
modular refineries with about 30,000 bpd capacity may be
built within an 18 month period at a cost of about $100 -
$250million. In addition, investors in modular refineries may
relatively be assured of off-takers for their output in the local
and regional market.
THE LEGAL FRAMEWORK
Applicable laws in the Nigerian oil and gas sector as it
relates to the building and operation of refineries are the
Petroleum Act 1969, the Hydrocarbon and Oil Refineries
Act, the Petroleum Refineries Regulation 1974, and the
Department of Petroleum Resources (DPR) Guidelines for
the Establishment of Hydrocarbon Processing Plants
(Petroleum Refinery and Petrochemicals).
THE PETROLEUM ACT 1969
Section 3(1) of the Petroleum Act stipulates that no refinery
shall be constructed or operated in Nigeria without a licence
granted by the Minister of Petroleum Resources (the
Minister). Section 3(3) of the Act further affirms the power of
the Minister or other regulatory body to impose an
application fee for the licence to be granted for the
construction or operation of a refinery.
In addition, Section 3(4) provides that the provisions
regarding refineries (Section 3) are only in addition to the
provisions of the Hydrocarbon Oil Refineries Act thereby
acknowledging that the provisions of the Act are not all
encompassing as far as the construction and operation of
refineries are concerned.
Section 9 of the Act empowers the Minister to make
regulations concerning refineries and refining operations.
Furthermore, where two or more refineries are in operation,
the Minister is also empowered to specify the proportion or
quantity of crude oil to be supplied to each refinery, the
share of each refinery in the total market and the price of
refinery products.
THE HYDROCARBON OIL REFINERIES ACT
Section 1 of the Hydrocarbon Oil Refineries Act (HORA)
provides that no person shall refine any hydrocarbon oils
save in a refinery and under a licence issued under the
HORA. The licence is referred to as "a Refiner's Licence”
and it is the lack of same that accounts for the large number
of illegal refineries being run by oil vandals in the Niger Delta.
Application for the Refiner's Licence is to be made to the
Nigerian Customs Service Board (the Board) in respect of
the premises to be used for the refinery, according to
Section 2 of the HORA. The Board is to examine the
premises and equipment of the prospective Licensee and
upon satisfaction issue the Refiner's Licence after the
payment of a N500 (Five Hundred Naira) application fee.
Where the Board is unsatisfied with the conditions at the
proposed premises for the refinery, it may refuse to grant the
application and communicate its decision in writing to the
applicant.
THE DEPARTMENT OF PETROLEUM RESOURCES
(DPR) GUIDELINES FOR THE ESTABLISHMENT OF
HYDROCARBON PROCESSING PLANT 2007 (“THE
DPR GUIDELINES”)
The DPR Guidelines were issued in 2007 pursuant to
Regulations (2) and (3) of the Petroleum Refining
Regulations, 1974.
Section 1.3 of the DPR Guidelines describes the approval
process for the issuance of licences to construct and
operate refineries in Nigeria. The process is designed to
ensure that investors adequately understand the sector as
well as the technical, economic, sociological and
environmental implications of the project. In addition,
maintenance provisions of the DPR Guidelines required in
protecting the health of the operating staff and safety of
refinery must also be observed.
There are three (3) stages provided by the DPR Guidelines
for the construction and operation of refineries. These are:
a) License to Establish (“LTE”);
b) Approval to Construct (“ATC”); and
c) License to Operate (“LTO”).
Only persons who have successfully met the regulatory
requirements and have discharged all obligations at the LTE
stage can advance to the ATC phase and must similarly fulfil
all conditions at that stage before applying for an LTO.
LICENSE TO ESTABLISH (“LTE”)
According to Section 2.1 of the DPR Guidelines, the
purpose of the LTE approval stage is to confirm general
feasibility of the proposed project, market plan, products
specifications, site selection, proposed crude oil (or
feedstock) supply plan and product evacuation plan,
preliminary safety and environmental impact statement, and
organisational plans.
The DPR will carry out site inspections as well as review
necessary documents in order to grant the LTE to the
refinery investor. Where the DPR is unconvinced about the
ability of an investor to implement the project satisfactorily,
show reasonable plans for sourcing crude oil to be
processed at the refinery or exhibit the capacity to comply
with environmental safety demands for instance, the
application shall not be recommended to the Minster for a
grant of the LTE.
In addition, Section 2.1.1 of the DPR Guidelines provides for
the application and statutory payments to be made by
applicants for a refinery licence which includes a statutory
application fee of $50,000 (Fifty Thousand Dollars) for the
LTE stage and a DPR service charge of N500,000 (Five
Hundred Thousand Naira).
It is noteworthy that a note in the DPR Guidelines stipulates
that the requirement for the payment of a refundable deposit
of One million dollars only (US $1,000,000) for every 10,000
bpsd refinery capacity for LTE, Plant Relocations and ATC
Revalidation had ceased to be effective since 2009. As at
May 2015 however, the DPR at a 'Workshop on the
Guidelines for Establishing Modular Refineries in Nigeria'
appeared to have made reference to the $1million
refundable fee. In addition, the DPR was quoted to have
stated that it reduced the licensing fee for modular refineries
from $1million to $500,000. It is advisable that the DPR
should clarify the seeming inconsistency between the
provisions of the Guidelines and statements credited to its
officials.
At the LTE phase, the DPR will also review the Preliminary
Investment and Support package to be submitted by the
refinery investor. The package is to contain a Preliminary
marketing plan indicating the target market for the output of
the refinery, the location of the proposed refinery site and
proof of its acquisition, infrastructural support strategy, a
preliminary organisation plan including staff training plans
and a financial plan. Applicants are also to state plans for
community development and local content input. In
addition, other documents to be presented to the DPR for
review include the Basic Design presentation showing
process configurations and product specifications; a Basic
Design and Concept selection Package showing the
refinery design philosophy as well as project
implementation schedule; and statements on Safety,
Health and Environment.
Where the investor has satisfactorily complied with the
above requirements, the DPR will recommend the investor's
application to the Minister in order to be granted the LTE
following which the applicant may proceed with the Detailed
Engineering. The LTE granted by the Minister or his
designate is valid for a period of two years.
APPROVAL TO CONSTRUCT (“ATC”)
At this stage, a refinery investor intending to construct a
refinery is required to submit a detailed engineering of the
plant/refinery to the DPR for review and approval which must
comply with the technical standards set out in Section 2.4 of
the DPR guidelines. In addition, the Applicant is also
obligated to make a comprehensive presentation regarding
the project design to the DPR.
The Minister may thereafter grant the Applicant the
construction license upon recommendation from the DPR
following which the Applicant can proceed with the
Procurement and Construction phase of the project.
By virtue of Section 3.3 of the DPR Guidelines, the ATC
granted by the Minister remains valid for a period of twenty
four (24) months. Where less than 50 (Fifty) percent of the
mechanical construction has been achieved at the refinery,
the investor must apply for a revalidation of the ATC to
continue with the project.
The ATC revalidation requirements contained in the DPR
Guidelines includes a fresh payment of a non-refundable
application fee of $50,000 (Fifty Thousand US dollars)
payable to the Federal Government and a service charge of
N500,000 (Five Hundred Thousand Naira) payable to the
DPR.
Modular refineries are generally expected to be built within
18 months, consequently, the stipulated time frame
contained in the DPR Guidelines may not unduly handicap
applicants where social and environmental conditions
permit smooth operations. However, the Niger Delta area is
known to experience recurring cycles of sporadic violence
which may disrupt construction plans. It would occasion
great financial strain on any modular refinery investor to be
required to pay additional ATC fees where such disruptions
hinder the building of the refineries within the initial validity
period.
LICENCE TO OPERATE (“LTO”)
When the refinery has been built, the investor must
subsequently apply to the Minister for a licence to operate
the plant and pay the necessary fees. At this stage, the DPR
carries out a physical inspection of the plant to ascertain
conformity with the approved design and subsequently
prepares a report to be presented to the Minister. The
Minister thereafter grants the approval to commission and
operate the refinery upon receiving a satisfactory inspection
report from the DPR.
Once a LTE is granted, the DPR subsequently plays the role
of regulator and is saddled with the responsibility of
ensuring that the operation of the refinery is in compliance
with existing laws and regulations. The refiner is also
obligated to submit an annual program of activity in the form
of a presentation to the DPR at the beginning of each
calendar year.
CONCLUSION
Beyond the regulatory provisions highlighted above, the
DPR at the 2015 Workshop on its sensitization programme
on the Establishment of Modular Refineries in Nigeria stated
a few other conditions to be complied with. The DPR
prescribed a capacity range of a module of between 1,800
and 30,000 bpd with skid tanks mounted installation for
easy mobility. While the plant location is left to the discretion
of investors, the DPR insists that the feedstock choice must
be typical Niger Delta light sweet crude oil of about 0.2
percent sulphur content. However, a new regulation
specifically for modular refineries promised by the DPR is
yet to be made available to the public.
In addition, plans by the present administration to promote
investment in modular refineries in the Niger Delta region
may be able to stem the recurring tide of unrest in the area
as well as address the challenge of illegal refineries which
also constitute environmental hazards in the region. It is
recommended that efforts be intensified to pass all aspects
of the Petroleum Industry Bill which has been before the
National Assembly for many years. The Bill generally
provides for the liberalisation of the downstream sector and
the issuance of licences to private refinery investors.
Related to the above is the excessive cost of the licence for
the category of persons the government seeks to attract to
invest in Modular Refineries. With application fees as high as
$50,000 which amounts to about N15.7million and the DPR
service charge of N500,000 and other associated costs,
building a modular refinery may remain an unattractive idea
to small scale investors and repentant illegal refinery
operators.
It is understandable that marginal field operators and
international oil companies may be able to acquire the
licences but the aim of local participation may be defeated
and could further result in increased vandalism. Where the
latter occurs, modular refinery operators may be unable to
access feedstock and deliver on production targets thereby
losing revenue and making such refineries unattractive for
financial institutions.
The Federal Government is therefore advised to formulate
clear policies to govern the sourcing of crude oil for the
modular refineries and sale of the refined products when the
refineries begin production. Other incentives such as
collaboration with state governments for the purpose of land
acquisition, transportation concessions, security and tax
breaks should also be included in updated regulations to
be issued.