Friday, June 02, 2017 6.40PM / Proshare Research

Recently, the Nigerian Senate put a halt to the planned “concession” of the Port Harcourt Refinery over a lack of “transparency”. This was after some build up had taken place such as talks between capital market operators on the local bourse over what they termed direct assurances from sources within a listed entity.  

This talk was not without foundation as Dr. Ibe Kachikwu, Hon. Minister of State for Petroleum Resources had earlier briefed journalists and stakeholders at a press conference on May 5, 2017 while at the Offshore Technology Conference (OTC) in Houston, Texas that “Nigeria’s refineries would soon have new investors, and that these investors would be announced on or around September 2017, as part of the Government’s full commitment towards attaining self-sufficiency in petroleum products”.  

To really appreciate why the cancellation was a shock to the “information mill”, recall that on May 9, 2017; Dr. Ibe Kachikwu had announced that the Nigerian Agip Oil Company, a subsidiary of the Italian oil giant, ENI – “had committed to repairing the Port Harcourt refinery, as part of a $15 billion investment that included the building of a 150 thousand barrel per day refinery and a power plant.” 

Further, on May 11, 2017; Mr. Wale Tinubu, CEO, Oando Plc., told members of the Nigerian Stock Exchange (NSE) that the group had received approval (in principle) of the government to “Repair, Operate and Maintain” the Port Harcourt Refinery in conjunction with Agip.  

Thus the announcement of a decision following a motion from Senator Sabo Mohammed (APC, Jigawa South) asking the Senate to investigate how the deal was sealed generated a new set of interest and chatter; with obvious consequences. 

The Concerns –The Motion 

The motion sought to lay a complaint that essentially argued that due process as it relates to the ‘Public Procurement Act’ was not followed. Senator Sabo Mohammed urged the Senate to investigate and find out the criteria used to select AGIP/ENI and OANDO PLC as the preferred entities to repair, operate and maintain the Port Harcourt refinery as well as the cost and the time-frame for the deal. 

The Senate, in adopting the motion; essentially agreed that while they do not, in the main, disagree with the intent behind the approach towards the Port Harcourt Refinery, they remain unsatisfied that due process was not followed through in arriving at the entity of choice. 

Invariably, they concluded that the award of job was allegedly characterized by a lack of clarity, due process and transparency. 

Recall, that the Nigerian government recently entered into agreement with AGIP, a subsidiary of ENI, an Italian oil concern to construct a $15 billion refinery in the Niger-Delta; a deal which also included an investment from AGIP. This agreement, according to the Minister of State for Petroleum, Ibe Kachikwu was part of plans to increase local production and end an era of fuel importation. 

OANDO Issues a Response 

On May 15 2017, Oando Plc issued a press release in the national newspaper(s) where it sought to provide context and a clarification about its refinery ambitions. 

The statement signed by Oando’s Chief Strategy and Corporate Services Officer, Ainoije Irune, confirmed that the company was a party to the agreement reached between Agip and the Federal Government of Nigeria to repair, operate and maintain (ROM) the Port Harcourt Refinery (PHR) - an arrangement planned to ensure the refinery grow from its current 30 percent to 100 percent of its 210,000 barrels per day capacity. 

It is instructive that no time frame was indicated or has since been publicly communicated. 

In the statement, Oando explained that “In line with the concerted efforts of the Ministry of Petroleum Resources and the Nigeria National Petroleum Corporation (NNPC) to aggressively drive private sector led refineries rehabilitation and expansion programs, Oando as local partners to NAOC/ENI will support the rehabilitation of PHRC’s on activities of terminalling, logistics, structuring and funding,”  

Although Mr. Irune said final agreement(s) would be reached by the end of July 2017, the aforementioned May 9, 2017 announcement by Dr. Ibe Kachikwu would suggest that the “government” had already concluded on the concessioning of the refinery to Agip and its partner, Oando. This would not be the first time Oando had sought to manage the PHR as it should be given considering its synergy with its operations. 

To therefore appreciate the issues involved here about due process, it will be necessary to delve into some background, if only to provide context about our history with resolving challenges with our refinery’s and what best practice looks like in order to ensure future attempts to resolve the problem engenders confidence and trust from all stakeholders. 

The PHRC & Privatisation:  How We Got Here  

The PHRC (Port Harcourt Refining Company) is a subsidiary company of the NNPC (Nigerian National Petroleum Corporation) incorporated to carry out crude oil refining activities that is the processing of hydrocarbons into petroleum products for either export or local consumption.  

The PHRC had its first refinery commissioned in 1965 with a capacity of 60, 000bpsd (sixty thousand) barrels per stream day. A new refinery was commissioned in 1989 with an installed capacity of 150,000bpsd thus bringing the combined crude processing capacity of the Port Harcourt Refinery to 210,000 bpsd.  

The refinery was designed to be self-sufficient in power and utilities generated from the Power Plant & Utilities. The PHRC at its optimum can produce the following products - Liquefied Petroleum Gas (LPG), Premium Motor Spirit (PMS), Kerosene (aviation and domestic), Automotive Gas Oil (AGO - diesel), Low Pour Fuel Oil (LPFO) and High Pour Fuel Oil (HPFO). 

The PHRC has hardly operated at full capacity and this is due to the irregular nature of the turn-around maintenance (TAM), where TAM is required every 18 (eighteen) months. Refineries in Nigeria are known to spend as much as two decades without the required levels of maintenance. Instead the rehabilitation of Nigerian refineries which barely enable them to operate at minimum capacity (35%) has been the preferred course of action – a constant source of milking the system that has been sustained over the years without oversight from the Senate.  

The decision of the Nigerian Federal Government to deregulate the downstream sector of the Nigerian petroleum industry through the privatisation of the PHRC is not a recent development – the first attempt began way back in 2003.  

That year, the PHRC was one of the two crude oil refineries slated for sale, the other being the KPRC (Kaduna Refining & Petrochemical Company). Pursuant to the Privatisation Act of 1999, refineries belonged to the class of enterprises slated for privatisation.  

Nigeria’s Initial Attempt at Privatization   

The privatisation process of PHRC and KRPC commenced in 2003 and was concluded in May 2007, a world class transaction advisory team guided the process and the offers were advertised in local and the international press.  

The BPE proceeded on the basis of/and application of international best practices, due process and transparency. A Consortium of Advisers led by Credit Suisse First Boston (now Credit Suisse Securities) was engaged by the Federal Government to render transaction advisory services and to assist government with the marketing of refineries to investors. The Consortium commenced work with a sales study of the refineries conducted between October and December 2003.  

The purpose of the 60-day sales study of the refineries undertaken was to assess the marketability of the refineries and identify the potential bottlenecks that might create challenges for the transaction. Privatisation of the PHRC and KRPC at given datelines was part of the Structural Benchmark under the Policy Support Instruments (PSI) of the IMF/World Bank programme for monitoring the performance of the implementation of the economic reform programme of the Federal Government in repositioning the Nigerian economy. By the PSI, the privatisation of both refineries was to conclude by mid June 2006. 

Privatisation Strategy / Timeline 

The Privatisation Act provided for Core/Strategic Investor Strategy at selecting a Core Investor.  

In accordance with the Privatisation Act and Policy, the following factors were key considerations in the evaluation of prospective Core Investors, amongst others:

• Technical expertise in refining as a prerequisite;
• Credible Investment Plan aimed at critical rehabilitation and expansion of refining capacity;
•  A Social Plan for dealing with over-staffing; 
•  Evidence of  financial  resources; and 
• Demonstration of managerial ability. 

In terms of sequencing, the Port Harcourt Refining Company (PHRC), was identified as the most attractive to foreign investors and therefore was offered first. 

The PHRC transaction process, effectively commenced in March 2004, was halted in May 2004 and then re-commenced by January 2005. This pause was due to remuneration discrepancies.

Process Issues 

Guided by CSFB, the transaction road map complied with best practices and included the following measures;

• A Preliminary Information Memorandum (PIM) was distributed to the List of Expressions of Interest (EOIs) approved by the Steering Committee, which included the Oil Majors;
• The PIM  was distributed to prospective bidders for  new oil blocs in the 2005 Licensing Rounds, in line with FGN's desire to encourage integration of the upstream and downstream;
• A web-based Data Room was opened with access granted to prospective bidders after the execution of Confidentiality & Non­ Disclosure Agreements;
• Plant site visits were conducted by bidders signing from the week of 13th June 2005;
•  A one-week bidders forum was hosted by CSFB at their London office from 27 June 2005 to 1 July 2005 to provide an opportunity for a one­ on-one interaction with all the prospective bidders in order to ascertain their credibility and identify critical issues/ concerns  that  might  likely affect investment decisions in PHRC, with a view to mitigating them;
• The technical transaction team unbundled and corporatised PHRC as a separate business entity from NNPC; hence a new PHRC was created
• Detailed assessment of the environmental impact of the refinery operations and the provision of  a detailed report indicating the extent of environmental liabilities and the required remediation plan; were undertaken
• Continuous interaction with the relevant stakeholders (host communities and labour unions) to identify and address their concerns was sustained
• Circulation of the final Information Memorandum (IM) and relevant bid documents that were issued to prospective bidders was done in November 2005; 

Bids by the following four Companies, were received at the deadline of December 02, 2005:

1. Essar Infrastructure of India  
2. Oando plc 
3. Refinee Petroplus
4. Transcorp Plc (Bluestar Oil Service Limited Consortium) 

On evaluation, it was discovered that all the four bidders did not meet the minimum qualification benchmark apparently due to a misunderstanding of the provisions of the Requests for Proposals circularized by CSFB. Areas of weakness in their bids were pointed out at a bidder’s conference and the bidders were asked to submit revised bids by 24 April 2005. 

The four (4) bidders submitted revised bids by the deadline. 

However it was found out that a technical partner was a member in more than one consortium following multiple memberships in bidding consortia by a Technical Partner, which would have led to the disqualification of most of the Bidders. 

In 2006, The Bureau of Public Enterprises received a letter from the Minister of State for Petroleum Resources conveying the Federal Government's directive to suspend the conclusion of the privatization of PHRC to enable government investigate a complaint by one of the bidders.  

The Economic Management Team (EMT) intervened to rescue the transaction and subsequently the transaction was re-opened with new set of advertisements for expressions of interest placed in December 2006. The deadline for submission of EOls was set for January 19, 2007.  

By the deadline, six bids were received from the following prospective investors as follows:

1.       Mittal Investments ltd

2.      Indorama International Finance Ltd

3.      Global Oil  & Energy

4.      LinkGlobal International Ltd

5.      Taleveras Group

6.      Oil Works Ltd (DFP project Finance Ltd 

Following evaluation of the new EOls, approval was granted for prequalification of Eight (8) consortiums - comprising both existing and new bidders.  

The eight (8) firms that were recommended to proceed to the next stage of the transaction were:

1.       Essar Infrastructure of India 

2.        Oando Plc 

3.      Refinee Petroplus

4.      Bluestar Oil Services Limited Consortium

5.      Mittal Investments ltd

6.      Indorama International  Finance Ltd

7.      Global Oil & Energy

8.     LinkGlobal International Ltd 

Site visits to the PHRC plant were arranged for all the bidders, scheduled from 12 March 2007 to 6 April 2007 and BNP Paribas was engaged to conduct a fresh valuation of the refineries.   

Financial Bid Opening 

The public opening of financial bids was conducted on 17 May 2007, by the Technical Committee of NCP at the Transcorp Hilton Hotel chaired by the Chairman of Technical Committee of NCP. 

At the financial bid opening, Bluestar Oil Services Limited Consortium emerged the preferred bidder with a bid of $561 million. 

The other bidders were disqualified for breaching bidding rule e.g. Refinee Petrolplus did not present the bank draft for 50% of their bid, while the bank draft provided by Oando Plc did not sum up to the 50% of their bid price as required in the bidding rules.  

The NCP subsequently approved Bluestar Oil Services as the core investor in PHRC; Blue Star Oil Services Limited completed payment for the full amount of their bid price of $561m on Friday 25 May 2007; and Share certificates for PHRC was handed over to Bluestar Oil Services Limited on 28 May 2007. 

Thoughts and Perspectives  

Events after this would indicate that the process for bids is both time consuming and fraught with a myriad of political considerations. These considerations would have weighed heavily on the minds of the current minister in reaching his decisions. 

Yet, it is important to interrogate the fall-out and hopefully unlearn the missing points. 

Matters Arising and Teachable Moments 

The intricacies involved in privatising a public enterprise are numerous and filled with landmines which for all intent and purposes makes the need for an adoption of best practices a minimum requirement, especially given the nature of the sector/industry. 

As seen in the painstaking approach adopted in an attempted sale nay privitisation managed by a competent BPE; showed that it took no less than four (4) years for the PHRC to be finally privatized. 

Ironically, that effort was short-lived as almost immediately Blue Star Oil Services Limited opted out of the investment, and was fully refunded by the Nigerian Government.  

In the recent example with Oando, it would appear that the approach taken to adopt a ROM model was well informed. This was not another round of privatization but a middle-of-the-road approach to achieve same intent without the concerns of the past. 

This in itself presents a unique problem on its own; for it must by now be clear that no action can and must be taken that does eschews the core principles around a process that confirms validity and credibility to the process; given the weight of such an investment on both economic, financial and political equations in the sovereign. 

To employ the “concession” approach as espoused by “Oando Plc” is to recognize that it cannot be a bid of one. 

The touted altruistic motive and desire to see the petroleum product industry in Nigeria to be self-sufficient is neither new nor exclusive to Oando in an industry filled with several capable and equally interested players. 

This indeed, if anything fuels and empowers the unassailable argument in support of a competitive bid; one backed by and under the purview of the Infrastructure Concession Regulatory Commission.  

The law that governs public-private concessions in Nigeria remains the Infrastructure Concession Commission (Establishment) Act 2005 and not perhaps the Public Procurement Act referred to by the distinguished senator. 

The ICRA provides in S.1 that “the Federal Government of Nigeria or any of its Ministries may enter into any concession or development contract in accordance with the provision of the Act.”  

In relation to concessions, once any project has been qualified for financing, operation or maintenance, the Federal Government, Agency or ministry involved shall make public invitations to tender bids from private investors. They shall go about this by publishing such invitations in at least three Newspapers having wide circulation.  

The only exception to this caveat is found in S.5 of the act where it provides that “if there is only one bidder, then there is no need to have a public invitation to tender bids”.

Preliminary Conclusion 

If the NNPC or/and the honorable minister did not invite the public to tender then there is no way they could have publicly granted the concession to Oando and Agip; unless of course they relied on S.5 of the ICRA 2005  for which they would have to show proof that Oando/AGIP was the only bidder. 

If the NNPC intended to grant a “concession” according to the law put in place for due process, then there would have been a public invitation to bid, at a minimum. 

Regardless of what the agreement reached with Oando Plc is labeled as Part-Privatisation or Concession; the outcome has not passed the smell test. 

There could well be a case of expediency which under the circumstance will be considered apt. Yet, that same argument provides the base case for an argument about cronyism and absence of best practice that should engender trust, investment certainty and proof of learning from our recent history. 

Outside of these two arguments may however lie a not so loud possibility, that the reality of a corruption-free oil sector requires that players in the downstream must actually invest in our refineries as an economically viable response from a corporate; and especially one who has sought to operate within the rules of engagement. This is incontrovertible. 

While it is understood that the country’s current economic situation requires strategic policy direction and hence a reaction from the operating firms; it is no less important that the process taken to realise this objective is not in itself outside of due process; as it would appear took place here. 

This can and must be quickly resolved by the Oil ministry, saving the sovereign valuable time and effort in an investigation with an obvious conclusion. 

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