Global Insight Perspective | |
Significance | Bluestar Oil, which purchased the Port Harcourt and Kaduna refineries in the final days of former president Olusegun Obasanjo's rule, has cancelled the agreement following widespread criticism of the deal. |
Implications | It is believed that new Nigerian President Umaru Yar'Adua was considering revoking the deal and that the consortium was acting pre-emptively to avoid embarrassment. |
Outlook | This is the sort of brave leadership that Yar'Adua needs to display to break from the past, however, it puts Nigeria's refining sector back to square one, although international oil companies may yet consider investing in the nation's downstream sector. |
No Refineries for Bluestar
Because of the vast public outcry over the sale of two of Nigeria's refineries to a domestic consortium involving reportedly the wealthiest businessman in the country, Bluestar Oil has decided it will cancel the agreement and the Nigerian National Petroleum Corp. (NNPC) will once again take over the running of the facilities.
Bluestar Oil is comprised of three of the largest domestic companies: Dangote Oil (with 55%); Zenon Oil (25%); and Transcop (5%); with the Rivers State government also holding a 15% stake. In May, in the final days of the administration of president Olusegun Obasanjo, Bluestar purchased the Port Harcourt refinery and the Kaduna Refining and Petrochemical Co. Ltd (KPRC). However, the Bureau of Public Enterprise (BPE), the agency that is responsible for the privatisation of Nigeria's state assets, was accused of having sold off strategic assets in downstream sector.
The Deals
In May, Bluestar first purchased a 51% stake in the Port Harcourt refinery after offering to pay 71.8 billion naira (US$561 million), with US$300 million up front. It then paid the remaining US$261 million seven days after being officially notified of its successful bid. The federal government had been considering for some time the part–privatisation of Nigeria’s largest refinery, a 210,000-barrels-per-day (b/d) facility, but the decision to sell the facility in the final days of Obasanjo's rule to a consortium that included people with close business ties to the former president drew much criticism, particularly from oil unions, which were told to expect significant job losses. Soon after the first refinery sale came the announcement that Bluestar had also purchased a 51% stake in KPRC, which includes the 110,000-b/d Kaduna refinery, which is currently out of order.
Members of Nigeria's two main oil unions—the National Union of Petroleum and Natural Gas Workers (Nupeng) and the Petroleum and Natural Gas Senior Staff Association of Nigeria (Pengassan)—stated that the two refineries were wrongly sold by the BPE. The sale of the two firms was completely lacking in transparency, they claim, and the unions also stated that no due diligence was carried out and that the Port Harcourt refinery was worth close to US$5 billion, roughly nine times the amount it was actually sold for. The sale of the refineries to Bluestar was a contributing factor in a general strike that paralysed the Nigerian economy for four days in June.
Outlook and Implications
Bluestar Oil wrote to the BPE yesterday (19 July) stating that it was pulling out of the deal as a result of the widespread criticism. The consortium is expected to receive a full refund and ownership of the refineries will revert to the NNPC. Bluestar added, however, that it would give the state energy firm 12 months to improve the refining sector and, if this does not happen, would make another bid for the two refineries at a renegotiated price.
There has been a huge outcry over the sale of the downstream facilities, but it appears that Bluestar may have been forced into cancelling the contract. Local newspaper Leadership said that Nigeria's new president Umaru Yar'Adua had decided to reverse the sale of the refineries and that Bluestar were acting pre-emptively, thus minimising any embarrassment for the businessman involved in the deal. In a recent interview with the Financial Times, Yar'Adua said he was considering reversing the sales if they were found to have been carried out without due process. This is the type of action that the new president needs to be taking and, hopefully, signals a new, better era for the country’s struggling energy sector and a possible end to the corrupt deals known to occur between the federal government and the oil sector. It is believed that Yar'Adua will examine a host of other deals that were hastily arranged in the final days of the previous regime and some difficult questions may have to be answered by the BPE director-general, Irene Chigbue.
Last week, the NNPC and the Department of Petroleum Resources (DPR) called for the cancellation of the sale of both the Port Harcourt and Kaduna Refineries, asserting that the NNPC was capable of running them. This is in contrast to Bluestar, which has no actual experience of operating refineries. As ThisDay reports, the group executive director of refineries, Abubakar Lawal Yar'Adua, stated that if given the necessary assistance, the NNPC had the capability to run the refineries efficiently, He argued that the solution to the nation's petroleum shortages would not be found in the sale of the refineries, but in conducting proper turn-around maintenance on them as well as building new ones. DPR director, Tony Chukwueke, for his part, said that the nation had not exploited all the models that could ensure that the refineries worked optimally and that Nigeria could invite foreign technical partners to run the refineries or conduct repairs whenever the need arises. With none of the country's main refineries currently in working order, Nigeria has to import 440,000 b/d of refined products and the current strike by oil unions could close petroleum products depots, leading to further fuel scarcity in the country
Unfortunately, the downside of this announcement is that it puts Nigeria's refining sector back to square one. This has been another false dawn for Nigeria's refineries and the new government will need to show that it is serious about turning around the downstream sector and it is possible that the refineries will now be sold to an international firm. In June last year Total Nigeria Plc said it was examining the viability of building a large US$6-billion refinery in the country to take advantage of the synergies provided by its upstream partner, Elf Petroleum Nigeria Ltd. The oil supermajors have been eager to exploit the country's upstream acreage, but more reluctant to involve themselves in the downstream sector because of the lower profit margins available and a lack of deregulation in the pricing of petroleum products sold locally. The failure to have refineries in working order also means that the country has not been able to export refined products throughout the West African region. The cancellation of the Bluestar contracts could see the Indian entrepreneur and steel magnate Lakshmi Mittal bid again as he had previously tried to purchase a controlling stake in the Port Harcourt Refinery Co. (PHRC).