The Africa Finance Corporation (AFC) recently signed a $35 million debt facility agreement with Waltersmith Refining and Petrochemical Company Limited for a proposed 5,000 barrel per day refinery project to be situated in Imo state. The agreement is expected to produce 5,000bpd by first quarter of 2020 and would contribute 271 million litres of refined products annually. It would cater to states in the eastern region. In this interview, the Chairman/Chief Executive Officer of Waltersmith Refining and Petrochemical Company, Mr. Abdulrazaq Isa speaks about the benefits of the investment to the economy. Nume Ekeghe provides the excerpts:
What does this investment mean to your company?
For us, firstly it means a diversification process because we think we needed to add value to crude oil production because we have been producing oil in the last 10 years and we thought it was time to go on to the next stage of adding value to that process, especially because Nigeria is import-dependent in terms of refined products. So, it didn’t make sense for us to continue what we were doing the way we were doing it. So, we thought this was a natural process to proceed to. Secondly, it is a mitigation infrastructure for our upstream business because we suffer a lot of vandalisation of our pipelines, which then disrupts our export activities. And by putting this infrastructure in place right in the oil filed, we eliminate that risk completely. And that risk has deep financial implications for us in terms of transportation cost to Bonny, crude theft and then disruptions in the operations of our company. So, this is really a big value addition to our operations as a company.
How long would it take to finish the refinery and produce?
Eighteen months. It is a turnkey project and we have started counting because the work has already started and we are expecting to have the refinery commissioned sometimes in January or February 2020.
How do you decipher the opinion that modular refineries are not cost effective?
I have heard that argument and I don’t think anyone has operated in this environment, a modular refinery that is located close to the wellhead. The biggest issue with refining business generally is that the margins are very thin, and it is a volume business. In our own case, our refinery is located on the oil field where the oil is produced. So, we have zero transportation cost and transportation cost is a huge element of the refining margin because you have to transport crude from wherever it is and then you have to transport the products from the refinery to the final destination. We have located our refinery right at the wellhead, so we are using the existing oil production infrastructure to support the refinery itself and we are very close to our market. So, we don’t have transportation cost which is very significant to refining margins and we are taking our products right into the market which is about 30 kilometres from where we are. We are a local refinery not a national refinery, so our aspiration is to meet domestic demands in our area of operation. So, by eliminating that cost, our economy significantly changes.
What products would you refine at the initial stage?
In the first phase, our project is in two modules and what we have signed (with AFC) is for the first module and that module is going to do 5,000 barrels per day (bpd). That is going to produce diesel, kerosene which we would modify to aviation fuel, liquefied petroleum gas (LPG), Naphtha and heavy fuel oil. What is going to happen is that some of the feed stock and the residuals from this first phase we would then form feedstock into the proposed expansion. Because we want to go from 5,000 now, to add another 25,000 bpd and that we would be able to do premium motor spirit and in addition, automotive gas oil and aviation fuel which is a significant demand domestically. So, by looking at all of that, we know we are supporting the import substitution initiative of the government. For a country that produces oil and exports oil to import products, if you do what we are doing, you would begin to take a bite at some of the oil that is being imported into the country.
Most importantly, this project would have an impact on the environment because what happens today is that when we are producing and exporting oil, people are hacking the lines and damaging the environment. All that is now eliminated with this infrastructure in place and we would also begin to have an economic impact in our immediate area of operations. On a daily basis, this plant is going to have about 22 trucks coming in to take products every day. So, imagine the impact in operations.
What is total cost of both the immediate and expansion project?
The immediate one is about $50 million in all. For the expansion it is going to be about $150 million to $200 million. We are still doing the development work. So, when we are going to do the design, we can determine the actual cost. But what we are looking at $150-200 million
What stage are you in for this project?
We have started construction. If you go to our oil field, we have our contractors on site and they have already started working.
In terms of expanding the project, you mentioned earlier that your plan is to increase your production from 5,000 bpd to 25,000 bpd in four years, will you pay off this loan before you take the next loan for the expansion?
They are in two modules. The expansion is going to be another project by itself with a different revenue stream. This revenue stream is here essentially for diesel, kerosene and HFO. The next module is going to be petrol and gasoline diesel and aviation fuel. So that is going to be treated as a different project by itself and so we would raise the finances specifically for that project while this one is running. So, they are going to be running side by side. Some of the products from this would also serve as feedstock into the expansion project
When would you pay off this $35 million loan?
This $35 million loan is a seven-year loan.
You spoke in the past of a power project, are you going to be the consumer of the 300 megawatts?
Our growth strategy is premised on what I call 20/40 scheme. Twenty refers to the radius of 20 kilometres around where we operate. That radius, we are aware there is over 300 million barrels of oil and about 5 Trillion cubic feet (tcf) of gas within 20 kilometres radios of where we are operating. Now, all that oil is looking to go from Imo state to Bonny for export. Fifteen per cent of that oil is stolen and the transportation cost from where we are to Bonny is $5.20 per barrel and you would suffer at least 90 days of production disruptions annually. When you do the numbers, your cost would go up significantly and then you would probably add about $8 per barrel in terms of cost just to take crude from where we are in Imo state to Bonny based on all of these three factors I have mentioned. If we build this infrastructure, we would trap that oil and eliminate all these costs. It is big, we are developing a 300 megawatts power project and it is being developed for the national grid. We plan to sell that to the grid despite all the challenges. We believe that over the long-term Nigeria has to find a solution to this power issue because if you look at the demand for the power and the capacity of power in Nigeria today, the power capacity available is not more than 20,000 megawatts while the demand given our population should be somewhere close to 40,000 megawatts. And then if you take all of the aggregate power projects today it is not more than 30,000 megawatts, so it is still a big shortfall. So, when you take a long-term view of this country, you have to keep developing power projects because our population is growing. And as our population grows, the demand also grows and if we provide more power, it would generate more demand as well. So, there is no stopping we just need to keep investing in power.