Solving Fuel production and distribution problems in Nigeria – Chinedu Onyeizu
Producing two-million barrels of crude oil per day, Nigeria has approximately 38 billion barrels of crude oil and 188 trillion standard cubic feet of natural gas in reserve. Despite its abundance of natural and human resources — and its position as the largest crude oil producer in Africa — the country suffers from a persistent fuel shortage, with most Nigerians lacking adequate electricity. Clearly, the current industry model is not working in Nigeria. In the last 7 years, Nigeria has spent N4.7 trillion on petroleum products importation and subsidy payment.
I came to the MIT Sloan Fellows Program to find a solution. I am convinced that Nigeria has the capacity to become a leader in making liquid energy accessible and affordable to Africans. To enable such radical transformation, we need to make major policy, financial and operational changes.
The first step to finding a solution is identifying the cause of the current problems. Three main issues are prevalent in Nigeria: dysfunctional refineries, dependence on imported products and government regulation, and pipeline vandalism and distribution challenges.
Nigeria’s four refineries have a capacity to produce 445,000 barrels per day, but they operate below 22% of their design capacity due to poor maintenance and corruption. We saw a well-documented occurrence of this in 2011, when over $1 billion was wasted on a refinery turnaround project that never came to fruition.
Dependence on imported products and regulation
For over 40 years, Nigeria has depended on foreign refined products to meet domestic liquid energy demands. With high transportation and custom costs, the country bleeds out billions of dollars as subsidy payments to independent petroleum product dealers. Over 2.5 trillion Naira was spent in 2011 on subsidy payments, a 900% increase from the year before. Coupled with a lack of transparency in the process, trading companies continued to milk the country with claims of imported products backed with fake documentation.
Pipeline vandalism and distribution challenges
Another major challenge is pipeline vandalism and a poor distribution framework. With high unemployment rates, it is common for youths to regularly destroy crude oil pipelines and make ransom demands from the government. Further, the inability of the government to adopt a smart distribution framework makes it easy for dubious traders to collect subsidies as well as hoard and divert the products to markets that offer higher prices.Although the present government is trying to manage these problems, reliance on the current system is not sustainable. Short-run gains from the barter trading of Nigerian crude for refined products seem ephemeral at best. While some optimists believe that the private refinery under construction by Aliko Dangote will solve Nigeria’s fuel scarcity issue, many are concerned that it will only result in a market monopoly (or oligopoly if a few others join him).
At MIT Sloan, I have developed a policy and technology-based three-node model that could permanently address the fuel scarcity problem. It works by unbundling and liberalizing the sector to privatize the process of refining crude oil.
In the current system, there are two sectors: upstream and downstream. The upstream sector involves extracting crude oil from an underground reservoir and bringing it to a terminal, where it transfers to the downstream sector to be refined and eventually sold as petroleum products.
My model recommends replacing the current centralized structure of Nigeria’s downstream sector with decentralized and autonomous subunits. These would include:
- Downstream-Upstream Subunit– Starting from the upstream gathering tanks, this sector would include the modular and conventional refineries to the point that oil is loaded for shipment.
- Downstream-Midstream Subunit – After the crude oil is refined, this subunit would oversee operations that cover the loading of refined petroleum products into vessels for distribution to onshore tank farms.
- Downstream- Downstream Subunit – This unit would manage distribution of petroleum products across the country. It includes the tank farms all the way to consumer vehicles.
My research suggests that creating these autonomous units will enable transparency, creativity, and accountability in the sector. It will eliminate the need for government subsidies and reduce the impact of corruption in the sector. As for vandalism and hoarding, I propose adopting the use of real-time product tracking and monitoring technology.
If this model is adopted by the government, Nigeria could be self-sufficient in fuel production within one year for modular refineries and five years for conventional refineries. With refineries running at full capacity in-country and increased product shipping activities within and outside the country, millions of jobs will be created for Nigerians.
By becoming a global hub of refining, Nigeria could enjoy a significant economic boom — and we could accelerate the process of making reliable energy accessible to all Africans.