The Federal Government recently entered into an agreement with the Nigeria Agip Oil Company (NAOC), a subsidiary of ENI, an Italian oil giant, to construct a $15 billion refinery in the Niger Delta region. The deal, which includes investment by Agip in a power plant, would also see the Italian company assisting Nigeria in the repairs of the Port Harcourt Refinery.
Dr. Ibe Kachikwu, Minister of State for Petroleum, said the agreement was part of a broader Federal Government plan to increase capacity for local production and consumption of petroleum products, with a view to ending fuel importation in Nigeria by the end of 2019. The resolve by the Federal Government to increase local refining capacity is laudable and should have been applauded by all Nigerians had corporate governance principles and the country’s extant laws been followed to the letter.
For instance, it is not yet clear if the new arrangement is a concession agreement or an agreement to build a new refinery. This confusion was given fillip following the disclosure on May 11, 2017, by the CEO of Oando Plc, Mr. Wale Tinubu, on the floor of the Nigerian Stock Exchange that the group had received approval of the Federal Government to “repair, operate and maintain” the Port Harcourt Refinery Company (PHRC) together with “our partner,” Agip. During that disclosure, Tinubu said Oando planned to increase the refining capacity of the PHRC from 30 per cent to 100 per cent.
This development would have been wonderful because it would mean an end to importation of refined petroleum products by the year 2020, but many questions are begging for answers. Is it Agip/ENI that is taking over the Port Harcourt Refinery or is it Oando Plc? Did the process pass through Nigeria’s privatisation law? Was due process observed in the acquisition of this national patrimony? I mean, was there any bidding process before the ceding of Port Harcourt Refinery to Agip/Oando? How did the Federal Government select either Agip/ENI and/or Oando? Which other companies were involved in the bid process? How much did the others bid for the refinery?
While I think Nigerians need answers to these questions, I am not in anyway suggesting that there was foul play in the process. Rather, what I am pointing at is that due process should be followed and full disclosure made for such a big ticket transaction. As long as this transaction is concerned, I think it is devoid of total transparency. The timing of the transaction to coincide with the President’s absence from the country also breeds suspicion.
It is a known fact that the Bureau of Public Enterprises (BPE), the Federal Government agency in charge of privatisation of government enterprises, has a specific structure for the privatisation of all enterprises. The BPE document has an approved programme for the privatisation of the nation’s refineries and both the privatisation of the PHRC and the Kaduna Refinery and Petrochemical Company (KRPC) fall under the structural benchmark of the Policy Support Instruments (PSI) on the IMF/World Bank Programme for monitoring the performance of the implementation of the economic reform programme of the Federal Government in repositioning the economy. Thus, if the temperature of the economy is to be measured accurately, one of the instruments that is required is the transparent privatisation of the country’s refinery.
For instance, in privatising the refineries as stipulated by the Privatisation Act of 1999, a core investor should be selected based on the following criteria:
• Technical expertise in refining;
• Credible investment plan aimed at critical rehabilitation and expansion of refining capacity;
• A social plan; and
• Evidence of financial resources and demonstration of managerial ability.
Others include the constitution of a Presidential Steering Committee, comprising representatives of the BPE, NNPC and the Presidential Adviser (now Minster of State for Petroleum Resources) to supervise the process, and the establishment of an Interim Technical Board, comprising representatives of the BPE, NNPC and some experts in refining.
In any transaction, international best practice requires the selection of partners through open and competitive bid process, involving four steps. First, the business that is slated for sale must be prepared for the market. That means letting the interested buyers understand the market, seeking for interested parties and putting potential value on the enterprise to be privatised.
The second step involves the marketing of the business under which various interested parties are contacted and information to potential bidders provided and evaluated.
The third step comes with the selection of buyers, as bidders are pre-qualified, due diligence is conducted and all financial bids evaluated.
The last process is the closing of the transaction, where negotiations are finalised, documentation completed and a final transition to the buyer made.
It is not known if these processes were followed in the sale or privatisation of the Port Harcourt Refinery or if the Federal Government just invited Agip/ENI and Oando to take over the refinery on concessionary terms.
This sort of arrangement took place during the privatisation of the power sector under the previous government, where firms with no knowledge of the power industry were handed the power sector. The result is what we are experiencing today. The country has not and can never recover from the monumental error committed in the privatisation of the power sector. This type of arrangement should not be allowed to repeat itself. It seems what we have here is an exclusive arrangement. Exclusive arrangements in any selling process lead to sub-optimal outcomes for the seller owing to reduced bargaining power. That was what obtained in previous privatisation exercises.
If I remember vividly, an earlier attempt to privatise the Port Harcourt Refinery in 2004 went through an open and competitive bid process, where a consortium of advisers, led by Credit Suisse First Boston (now Credit Suisse Securities) was engaged by the Federal Government to offer transaction advisory services and to assist government with the marketing of the refineries to investors. The consortium commenced work then with a sales study of the refineries, and after that a preliminary information memorandum (PIM) was distributed to a list of companies, which included the oil majors.
The PIM was also distributed to prospective bidders for new oil blocks, in line with the Federal Government’s desire to encourage integration of upstream and downstream sectors of the oil industry and to reap maximum returns on the sale. This was then followed by the provision of information to companies through plant visits, data rooms and organisation of forums, where investors were exposed to the refineries for privatisation. After these exercises, an expression of interest was submitted by the firms that were eventually cleared to proceed to the next stage, which was the submission of financial bids. After the entire painstaking and vigorous exercise, a firm, Bluestar, was selected as preferred bidder.
This new plan now on the table to appoint NAOC/ENI, in partnership with Oando, to rehabilitate the Port Harcourt Refinery is fraught with suspicion and has a negative historical antecedent. The arrangement, where companies that do not understand the internal workings of the refineries are allowed to take over the facility, was what has today put the refineries in a perpetual lockdown, as various turn-around maintenance (TAM) failed woefully to bring them back to operation.
For instance, in 1998, the Federal Government employed the services of Total Plc, which in turn brought in Delattre Bezous Nigeria Limited as local partner to revive the Kaduna refinery. That TAM was never concluded and that marked the beginning of Kaduna Refinery’s epileptic performance, which it has not recovered from till today. The same goes for other refineries, where millions of dollars were paid out for TAM without commensurate returns in optimal performance.
I am not saying that Oando or any other capable local oil company should not acquire the PHRC, which has been operating below installed capacity for many years. What I am advocating for is that due process and transparency template be adhered to. A situation where such a company as the PHRC is hurriedly sold does not augur well for the country’s economy. I am not also sure the country would have gotten the best bargain from the transaction, given that it was opened only to just one or two investors. I should be proved wrong.
I am in total support of Dr. Kachikwu and his laudable desire to see Nigeria become a net exporter of refined petroleum products in 2020. I, however, believe that every process geared towards achieving this noble goal should be open, transparent and in tune with international best practices. I also think it is unhealthy to the economy for investors in modular refineries to form an association as they have done now. The development tends towards transforming the association to another oil cartel that would dictate the prices of refined petroleum products. The Federal Government should not allow it.