Zia Mian | Petrojam: ‘Down the rabbit hole’!
“Alice: Would you tell me, please, which way I ought to go from here?”
– ‘Alice’s Adventures in Wonderland’ by Lewis Carroll
A reader, while commenting on one of the articles in this series, has reminded me that an Austrian group had provided the financial backing for the ‘management-buy-out’ bid for the Kingston refinery. However, the package had certain strings attached to it that among others, would have required “the GOJ imposing some cess”.
I thank the reader for this insight, which confirms that to keep a small refinery operating, government support and/or pricing manipulation are necessary conditions.
Another reader has pointed out an oversight on my part re the Trinidad and Tobago (T&T) Petrotrin refinery that was shut down last year.
I would like the readers to know that Petrotrin’s 170-thousand-barrel per day (b/d) refinery, which has full conversion capacity, was shut down last October.
Over the past five years, it had accumulated losses of TT$ 8 billion and a massive TT$12 billion in debt. The refinery retrenched 1,700 employees. While T&T is an oil-producing country, the refinery processed imported crude oil. Now, T&T will import refined products to meet domestic demand.
Let me also clarify a point that I made in the last article, where I listed five countries as the oil-import sources for Jamaica. This reference was strictly for crude oil and not for refined products.
The Bahamas neither produces oil nor has a refinery. She hosts a large transshipment terminal for crude oil and refined products.
CONTINUING WITH SECURITY OF SUPPLY
Continuing with the supply security rabbit hole, in a country with a small refinery, the choice between crude oil and refined products is an economic and not a supply-security issue. Both are imported.
In the last article, I gave an example of land-locked Zimbabwe. A more recent example is an island refinery in the Indian Ocean.
Madagascar is similar to Jamaica in topography but much larger in size (587 thousand-square kilometre) and has a population of 26.3 million.
In 1966, she built a hydro-skimming refinery at Toamasina (10 thousand barrels b/d capacity, later expanded to 15 thousand b/d). Following the 1973 oil embargo, the Toamasina refinery became financially unattractive. Believing it to be necessary for the ‘security of supply’, in 1976, the administration nationalised it.
In response to economic restructuring and to deal with prevalent corruption, the Government decided to reprivatise the refinery. In 1999, a consortium, headed by a Dubai group, bought the refinery.
The refinery processed a mix of Iranian Light (85 per cent) and Qatari (15 per cent) crude oils and operated at 80 per cent of its design capacity, which was not considered financially viable. The group operated the site mainly as a terminal. By charging hefty throughput fees and manipulating the ex-refinery/terminal prices, the operators had a ‘cash cow’ on their hands!
The refinery was shut down in 2008. Madagascar is yet to experience a fuel-supply shortage or security-of-supply crisis. The said consortium is no longer in Madagascar.
According to a World Bank’s multicountry study (‘Petroleum Market in Sub-Saharan Africa’, March 2010), for a refinery to survive in today’s market, we must address the following questions:
- Is the refinery large enough to be able to compete with imports if efficiently structured and run?
- If the domestic market is too small, can the refinery size be increased to a sufficient scale by competing on the export market?
- Is the country an oil producer?
- Does the refinery have low-cost access to supply?
The study stated:
“As a basic rule of thumb, a refinery needs to have a processing capacity of at least 100,000 barrels a day (or five million tonnes a year) to be economic in a liberalized market. Because it is disproportionately expensive to install small cracking units, small refineries tend to be hydro skimming refineries …
“A subeconomic-scale refinery is unlikely to be able to compete with product imports from large and efficiently run refineries …
“Similarly, a refinery may have access to relatively low-cost crude oil if, for example, it is a transit country for a crude oil pipeline. But such a cost advantage can be easily offset by higher refining costs if the refinery is small.”
CRITICAL FOR THE ‘SUPPLY SECURITY’ REASONS
After failing to acquire the refinery, the management persuasively lobbied the successive administrations that the refinery was critical for the ‘supply security’ reasons. If the refinery were to shut down, more than 200 employees were at risk of losing their jobs!
There was no regulatory oversight, independent expertise, or institutional capacity at the sector ministry that could guide an objective decision-making process.
The lobbyists, just like in the United States, tend to support pet socio-political projects; provide talking points regarding the economic contribution that a refinery could make; and readily provide employment opportunities to those who would help to promote their covert agenda.
The scandal of the day is not something rare. In reality, it is a modus operandi that helps to maintain the status quo for small and inefficient refineries in many countries!
Fearing energy diversification (for example, introduction of natural gas), a strategy that I had recommended in 2001, the management commissioned engineering and feasibility studies to support a refinery upgrade and expansion.
In 2004, the Government accepted the recommendations and made a policy decision to proceed with:
a) An upgrade of the refinery with conversion facilities to eliminate fuel oil production; and
b) Increase the design capacity to 50,000 b/d.
The project was to be completed in two stages. In Stage I, the capacity would be increased to 50,000 b/d at a cost of about US$200 million.
In Stage II, the refinery would be upgraded to eliminate bunker fuel production. Depending on the choice of technology, this phase would cost between US$250 million and US$300 million.
At the time of this policy decision, the project cost was estimated at about US$500 million!
As the time has passed, the cost for the proposed upgrade and expansion is now projected to be about US$1.3 billion.
We are digging a deep hole and the end is not there yet!
- Zia Mian, a retired senior World Bank official and former director general of the OUR, is an international consultant on energy and information technology. He writes on issues of national, regional, and international interest. Send your comments to firstname.lastname@example.org or email@example.com.