Nigeria may be the largest oil producer in Africa, but its downstream oil and gas industry is in a sorry state. A shortage of workable refining capacity forces the country to import petrol, the cost of which is increased by the lack of suitable port infrastructure. Two key investors in the Lekki Free Zone (LFZ) will bring some much-needed changes for the better.
Nigeria produces about 2 million barrels of oil every day. However, as its four existing refineries are in such poor shape, it has had to export about 90% of that and then import refined petroleum products at international prices. Because retail petrol and household kerosene prices are controlled at artificially low levels, the government must then reimburse importers with the difference between those and the actual landed costs. It spends about $2.5bn a year on these subsidies.
So it was welcome news when, in 2013, Dangote Industries announced it would build a $9bn refinery, petrochemicals and fertiliser complex. The original location was to have been the Olokola Free Trade Zone, 50 kilometres further east of Lekki. In 2014, however, after negotiations with the local community got nowhere, the project was moved to LFZ, where it will occupy the south-east quadrant. Olokola's loss has been Lekki's gain, giving new momentum to the whole LFZ project.
This will be Nigeria's largest ever industrial complex. Although the original capacity specifications have been increased more than once, it remains scheduled for completion in late 2017. With the project cost now put at $11bn, the refinery will process 650,000 barrels a day of crude oil into a range of petroleum products. These will be mainly gasoline, but will also include diesel and jet fuel, all meeting Euro V emission standards, as well as liquefied petroleum gas and fuel oil. The refinery will also produce propylene, which will be used as a feedstock for polypropylene – 1 million metric tonnes a year of it. The fertiliser plant will produce 2.75 metric tonnes a year of urea and ammonia. As well as being sold domestically, some of the output from the complex will be destined for the export market.
Once the deep-water port is operational west Africa will be coming here to buy their products
Aliko Dangote, president of the Dangote Group, says that the project will employ 8000 engineers and create jobs, directly and indirectly, for 85,000 Nigerians. The contract for the refinery and petrochemical plant has been awarded to UOP, part of Honeywell International. UOP will provide process technology, catalysts and equipment for the refining complex which, when completed, will be Africa’s largest. Since UOP is an American company, the US Trade and Development Agency has said it will provide a $1m grant to help train more than 100 staff on refinery fundamentals. India Engineers will provide project management consultancy and engineering, procurement and construction management. The contract for the fertiliser plant was awarded to Saipem, which is controlled by Italy's ENI.
Dangote will install a number of single-point mooring systems (SPMs) offshore to pump crude oil directly ashore and pipe clean products out to waiting tankers. “The complex will help retain $17bn out of the money expended on petroleum products imported into Nigeria and will bring in $7.5bn as export proceeds,“ Mr Dangote told an oil conference in 2014.
Installing its own SPM off the Lekki shoreline is the headline project of another LFZ investor, Pinnacle Oil & Gas, a Lagos-based importer, marketer and distributor of petroleum products. As its CEO Peter Mbah points out, the Lagos ports are too shallow to allow bigger vessels to berth and discharge these products, which must first be transferred to a smaller ship. This invariably results in spillage and is both expensive and slow. A cargo that would have been discharged in 24 hours can take at least two weeks, and the delay results in unnecessary queues at the jetties and consequent demurrage costs. "The government pays for all these inefficiencies via its subsidy," says Mr Mbah.
After four years of research and negotiation with multiple government departments, Pinnacle finally won approval last year to install an SPM and a conventional buoy mooring system (CBM). Each will be connected via two mainline pipes to a tank farm in LFZ's south-west quadrant. The whole project will cost $250m, according to Mr Mbah.
"Using the SPM, you can discharge 50,000 metric tonnes in one day," he says. "That's a faster turnaround than you can achieve in one month with a shuttle vessel." The SPM can receive larger vessels of up to 150,000 deadweight tonnage, 24 hours a day. Ship-to-ship transfers must usually be done in daylight. By eliminating the need for these, the project will generate operations cost savings of between $500m and $1bn a year, according to Mr Mbah. The average delivery cycle for petroleum products traders could be reduced from about 21 days to only 48 hours, generating more savings and freeing up operational capacity. If and when the government lifts price controls and stops paying subsidies, the benefits will accrue to traders themselves.
The first phase of construction will include the SPM, the CBM and their pipelines, together with 200,000 metric tonnes of tank storage. The tank farm, which will benefit from being inside the secure perimeter of LFZ, will then add an additional 200,000 metric tonnes of capacity each year for the next two years, to a total of 600,000 metric tonnes. Unlike the Lagos ports, which now handle petroleum product imports, the tank farm will include 40 hectares of land for a truck park. This means that the gridlock that surrounds Apapa and Tin Can Island ports, as trucks park wherever they can, will not be reproduced.
Lekki Free Zone Development Company (LFZDC), developer of the south west quadrant, has allocated land to 11 other tank farm operators within its oil and gas area. They will all have to obtain their products from Pinnacle, which will have the section’s only intake facility. Its SPM and CBM will be operated by a special purpose vehicle in which LFZDC will have a stake, the size of which is still being negotiated.
Mr Mbah emphasises that the strategic location of the project will provide a gateway to other markets in the west African region. "I think the zone will be a hub for the entire west African market," he says. "Once the deep-water port is operational, west Africa will be coming here to buy their products."