LOCAL CONTENT DEVELOPMENT A CASE STUDY OF ILLEGAL REFINERIES IN NIGERIA

LOCAL CONTENT DEVELOPMENT A CASE STUDY OF ILLEGAL REFINERIES IN NIGERIA

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Abstract

The paper examined technological capability as a critical factor in Nigeria's local content development, using indigenous and illegal refineries in the Niger Delta region as point of reference. It x-rayed the creativity, ingenuity and innovations in the establishment of indigenous refineries in the region. The paper posits that for Nigeria to move from consumption to a productive economy, indigenous technological capabilities in the oil and gas sector must be fully encouraged and harnessed. The present approach of the Federal Government in destroying the indigenous refineries should be reviewed; rather the ingenuity of the operators should be exploited and refined through articulate and robust research and development (R & D). Also, there is the need to review extant laws on refining of Petroleum products. This way the down and upstream sectors of the oil industry will be revolutionized with attendant boost on indigenous technological development and increase in indigenous production of petroleum products, particularly the Premium Motor Spirit (PMS).

INTRODUCTION

BACKGROUND TO STUDY

The now-waning global commodities boom sparked important new discussions on the role of natural resources in promoting economic development. As Nem Singh and Bourgouin (2013) write, the boom has led many to recast debates about natural resources and development. Oil, diamonds, copper and various other commodities had dominated many of African economies for a long time. In the case of petroleum, a select few African countries had been earning massive revenues from petroleum resources since the 1970s. Nigeria in particular has received hundreds of billions of dollars in the form of rents, royalties and taxes.

However commodity extraction and commodity revenues have made little positive impact in the lives of most people in the country. For this reason, there has been growing recognition in the past decade that commodity extraction alone cannot fuel economic development, but that broader policies are needed in order to foster diversification, linkages and spillover effects to the local economy. In order to achieve these objectives, a growing number of countries are implementing local content policies (LCPs).

Local content promotion has integrated itself into the international oil industry in ways that a decade ago would have seemed quite unlikely due to the hegemony of neoliberal economics. Today, the concept has currency well beyond Africa. It is on the agenda for countries from Brazil, Mexico and Chile to Oman, Kazakhstan and Indonesia. Major oil industry conferences such as the Global Local Content Summit1 and the Global Local Content Council’s ‘NOCs and Governments Summit’ 2 compete to attract delegates from government agencies and multinational corporations willing to pay thousands of dollars per person in registration fees so they can learn about the latest trends. Local content polices require foreign or domestic investors to source a certain percentage of intermediate goods or inputs from local producers. Often, the legislation or regulations implemented foresee a gradual increase of the percentage of inputs that needs to be sourced locally (Kuntze/Moerenhout 2013). The most important objective of local content requirements is to develop and support local manufacturing and service provision through backward, forward and sideways linkages along the value chain3. LCPs work by encouraging and/or requiring exploration and production firms to use local companies for the procurement of goods and services and multinational oil service companies to domicile economic activities in the countries of extraction.

Physical and human capital development are also central to LCPs as they stress that it is not trade but the accumulation of physical and human capital that is fundamental for economic growth.

Oil and gas is a typical example of an enclave sector in Africa. Employment opportunities were limited and many jobs required foreign workers with particular skills and experience. The main impacts for people who lived in oil-bearing communities were negative in the form of expropriation of land, pollution and loss of livelihoods. The tendency toward corruption, conflict and low levels of growth produced the now-familiar notion of ‘resource curse’ (Auty 1993; Karl 1997; Ross 2001, 2012). In the past decade new attempts have been made to adopt local content policies in order to counter the resource curse and increase the utilisation of national human and material resources in the petroleum sector and domicile oil and gas-related economic activity in-country that was previously located abroad.

Statement of Problem

All exploration and production companies are required to submit Nigerian content plans for all bidding on tenders in the industry and comply with a series of regulations designed to domicile manufacturing and services relating to the oil and gas industry in-country. It is an irony that Nigeria, since the discovery of oil in 1958 has not been able to develop the capacity to refine crude locally with at least 50 percent local content. Many decades after the establishment of four gigantic refineries, the mode and techniques of operations are still turn-key technology to indigenous staff and operators.

The resultant effects are frequent shut-down, low production capacity, shortage or scarcity of product and dependent largely on imported refined petroleum products to meet domestic consumption a situation that has given room for what is perhaps the largest sleaze in our history - “the fuel subsidy scam”. According to Nwachukwu (2016), fuel subsidy costs Nigeria 1.5 Trillion Naira annually, more than the combined budgets for education, health, agriculture, rural development, transport, land and housing. This has caused successive governments to continuously mount desire to build functional refineries in the country. The matter is made worse by the age of the refineries, the newest of which is about 35 years old. This is further lent credence by the fact that crude reduces drastically with age. In its best form, one gets about 51% of Premium Motor Spirit (PMS) per barrel of crude. But given the ages of our refineries, they can hardly refine more than 40%. Thus, given Nigeria's consumption rate of about 45 Million litres of PMS per day, these aged refineries that currently produce only 12 Million litres per day can hardly meet local requirements (Ibe-Kachukwu, 2016).

At some point, licenses were issued to private businesses, at another time the government has given assurances of the construction of Greenfield refineries and in another stance even signed a Memorandum of Understanding (MOU) with an American firm for the construction of six modular refineries under a joint venture at a cost of N4.5bn, all of which are yet to materialize. This cost is outside the billions of dollars already spent trying to turn around the existing refineries (Nze, 2016). It is instructive to state that Section 3(1) of the Petroleum Act states that; no refinery shall be constructed or operated in Nigeria without a licence granted by the Minister. Other Sub Sections outline the procedures and the licence fees payable.

Also, the Petroleum Refining Regulations Act of 1974 specifies inter alia in part 1 Section 1(1) that;

Application for a licence to construct or operate a refinery shall be made to the Minister in form A in the Schedule to these Regulations.

These regulations specify elaborately the procedures and processes involved in establishing a refinery. Thus, the operations of the indigenous refineries in the Niger Delta region offend the provisions of these and other ancillary laws.

OBJECTIVE OF THE STUDY

This seeks to determine the extent of local content development in Nigeria’s oil and gas sector. Specifically the research objectives are:

1.    To highlight the Benefits of Legalizing Indigenous Refineries

2.    To determine The Role of Government in Sustaining Technological Capability of local indigenous refineries.

3.     To examine the Current Government Approach Towards Indigenous Refineries

Research Question

The research questions to guide this study are:

1.    What are the Benefits of Legalizing Indigenous Refineries

2.    What is the  Role of Government in Sustaining Technological Capability of local indigenous refineries.

3.     What are the Current Government Approach Towards Indigenous Refineries

Significance of study

This research will review the progress made and next steps needed to further advance local content in light of important policy questions that need to be answered about the how the operations of Indigenous Refineries.

Scope of the study

The study will focus on the Nigerian Oil and Gas Industry taking into consideration the operations of illegal Indigenous Refineries in the country.


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