Nigeria does showcase sparks of brilliance though, most times, it rarely remembers to replicate the best things. In one entity, National Petroleum Investment Management Services (NAPIMS), Nigeria demonstrated that it is indeed a nation of great people. Nigeria designed a great structure that made it possible for it to unlock value despite apparent lack of technical and financial capacities.

The National Petroleum Investment Management Services (NAPIMS) in the Exploration & Production (E&P) Directorate is the upstream arm of NNPC that oversees the Federation investment in the Joint Venture Companies (JVCs,) Production Sharing Companies (PSCs) and Services Contract Companies (SCs).

NAPIMS is, therefore, set up to earn margin arising from investments in the JVCs, PSCs, SCs, with the multinationals and also protect the nations strategic interests in the JCVs [sic].In addition, NAPIMS engages in frontier exploration services in basins where the multinationals hesitate to venture, like the Chad Basin.

Simply, NAPIMS is the investment arm of the Nigerian people since oil & gas dominates our foreign exchange. As elegantly noted in its mission statement – “to be a world-class oil investment management outfit” – NAPIMS ensures that Nigeria gets value in strategic partnerships with Shell, ConocoPhillips, Eni, Mobil and other major (upstream) oil companies. Through NAPIMS, Nigeria runs many joint ventures with these energy companies, working to maximize Nigerian returns.

Why I like NAPIMS Model

The NAPIMS model is very unique and there is no other structure like that in Nigeria. In short, Nigeria got NAPIMS right, but failed to replicate a really great working system in other areas. I like the structure of NAPIMS because of the following key reasons:

• It makes sure Nigeria is de-risked in oil & gas business. Through the JV, NAPIMS makes money only after the energy companies  have taken the risks and succeeded. In other words, if they go there and lose money, NAPIMS will not lose. But when they make money, they have to share with the Nigerian people.
• Through NAPIMS, Nigeria does not need to have technical capabilities before it can unlock values in its upstream energy business.The global energy giants are responsible for developing and utilizing their technical know-how to unlock the crude oil value in the nation.
• With the NAPIMS Model, Nigeria does not need to have the cash before oil mining can happen. The global partners will be responsible for the financial investments.

Sure, I do agree that if Nigeria should develop the necessary technical and financial capacities, the nation would be creating more value from its oil and gas reserves. But expecting Nigeria to do that will miss the point. We did not run electricity well, we failed in telecommunications, and we continue to struggle in clean water supply. So there is nothing that can support the thesis that if there were no Shell, Mobil etc that Nigeria would be an oil producing country. That we have allowed the energy entities to make money seems to be the only pragmatic model, because in other simpler things, we could not deliver. So, NAPIMS formation was a clever way to overcome Nigeria’s stasis in execution.

FIIRO DG updates Nigeria’s former President Obasanjo on the parastatal’s works (source: Fiiro)

Yes, with NAPIMS, we avoided the problems of inefficient Water Boards, NEPA (or its incarnates), and NITEL and delivered a top-class upstream energy business that has funded Nigerian budget for decades. That is the beauty of NAPIMS; very ingenious.

NAPIMS Model for Government Research Institutes

Nigeria funds many research institutes including Electronic Development Institute Awka (ELDI), Federal Institute of Industrial Research, Oshodi (FIIRO) and Raw Materials Research and Development Council (RMRDC).. While we may not have invented computers, some of these government agencies are actually inventing. However, they do not innovate because they have nothing (of value) commercialized. (Innovation = Invention + Commercialization). Without the element of sales/commercialization, they are merely filing up government shelves with ideas. That is the nation’s weak link: inventing without any plan to innovate.

I have a suggestion, Nigerian government should work to liberate these agencies by deploying the same model it has used effectively in NAPIMS. This is what I suggest:

• Establish a new unit, not a new agency or commission, within Nigeria Export Processing Zones Authority(NEPZA) to coordinate how inventions from these government agencies can be commercialized through joint ventures with private companies. The unit will represent the Nigerian people as it negotiates with the investors. Call this unit National Research Outcome Investment Management Services (NROIMS).
• NROIMS will coordinate with all government labs and research institutes to collect new research outcomes which are ready for commercialization. It will then package them, closing deals with private sector where possible. It will hold small equity, only activated on profit-sharing since it will not invest any money in new ventures. We suggest NROIMS will take 10% profit for ten years. Government has to make the JV terms very palatable for the partners while requiring that they must commercialize under defined terms or they will lose their rights to the inventions.

NAPIMS model will unlock value in the country by providing a vehicle for private companies to explore research outcomes which can be commercialized. NROIMS will work to market and promote the inventors locally and internationally to ensure Nigeria does not end its research policy at discovery, without any element of commercialization.

Case Study: Unlocking FIIRO

FIIRO is a federal government parastatal with the mission “to conduct and promote market-driven research and development (R&D) for the industrialization and socio-economic development of the country”. Over the years, it has created many technologies with most of them not commercialized. Though it has a technology transfer office, a nationwide consolidated system will help bring efficiency in cases where complementary technologies can be integrated from other national institutes.For example, ELDI Awka could have developed an embedded electronics technology which could be used with FIIRO Fruit Washer, to improve its efficiency.

FIIRO Fruit Washer

Rounding Up

Nigeria should not just focus on discovery, neglecting commercialization as it works to redesign its economy through diversification. Our science and technology policy rarely gets up to the level of taking ideas to markets. Our nation has to correct that issue for us to make progress. Yes, we are good in sending satellites in the space before we even plan what to do with the downlink signals. We budget money for research with no apparent strategy on what to do with the outcomes. If we can borrow a model that actually worked, the NAPIMS model, we can redesign our science and technology research for market impact. Now is the time for Nigeria to think seriously about commercializing the little efforts we are making. The Nigerian people are looking for the products in our markets.

Many people are pushing for modular refineries in Nigeria. It is indeed a very exciting business, on the face of it: Nigeria needs fuel to run our generators and drive our cars. And with our refineries not producing the capacity the nation needs, we have been importing for years. Indeed, government will like to substitute the imports with locally refined products especially in this age of foreign exchange scarcity. It makes economic sense because Nigeria has the crude oil and we have no business importing refined products.

That is the optimistic exuberance why most people are getting into this. According to the Vanguard, Nigerian National Petroleum Corporation (NNPC) expects about 20 investors to pump in $20 billion in the business.

THE Nigerian National Petroleum Corporation, NNPC, has commenced move to attract 20 companies to make substantial investment worth $20 billion in order to meet the Federal Government’s target of increasing refining capacity in the country.

Investigations showed that the apex oil corporation has, in the past few weeks, been engaging with the investors in order to inform, educate as well as assist them to prepare various packages required in the process of applying for licence. On completion of the engagement, the promoters of the modular refineries would be equipped with vital knowledge to submit their applications to the Department of Petroleum Resources, DPR, that is vested with the responsibility to issue such licenses.

It is indeed an exciting sector. This article provides a good rosy picture for Dangote Refinery, which is certainly the one that matters at the moment, as it is already building, to begin operations in 2019.

THE 650,000 barrels per day Dangote Refinery has been projected to hit 50 per cent capacity utilisation by 2020. The capacity utilisation of the Lagos-based plant, scheduled to come on stream in 2019, would rise to 90 per cent by 2030.

PriceWaterCoopers, in its latest report, Modular refineries: Merits and challenges, made available to Vanguard, stated that the feat would make West Africa to become a great refining hub in Africa.

The report, which puts existing refineries at 20 percent utilization, stated that Nigeria and West Africa have a deficit of 113,000 barrels per day, bpd. “Nigeria’s refineries continue to operate at abysmally low utilisation rates. 8.5 percent combined utilisation as at 2016 and 37 percent as at 2017. Refineries have been forced to halt operations multiple times as crude supply lines have been routinely targeted by militant groups.

That is a very interesting projection. And that makes sense because Nigeria presently imports most fuels. So, with local demand, Dangote Refinery will not have any problem in getting to near-capacity utilization; our national refineries are largely non-functioning.

Then read this from Quartz newsletter:

This week the UK became the fifth country—after the Netherlands, Norway, India, and France—to commit to selling only electric cars in the near future. It will do so starting in 2040, while Norway and India are more ambitious, aiming for 2025 and 2030 respectively.

As battery prices fall, it’s clear that electric cars are the future. How soon we get there will depend on how serious we are about reaching emissions goals set under the Paris accord….

If any country seems to be on track in this regard, it’s China. In 2016, the country registered 350,000 electric vehicles (the US was a distant second with 160,000). It has tax exemptions in place worth $6,000 to $10,000 per car. It boasts 150,000 charging stations, with 100,000 more coming in 2017 (the US has just 16,000). And it has plenty of spare capacity to power all these vehicles, with its thermal power plants running only half the time.

Comments

From these two bits of news, one can deduce as follows:

• The future of refineries cannot be assured because batteries and electronics will get cheaper, as always. The implication is that fossil-powered cars will be the alternative cars in most parts of the rich world by 2040. If that happens, the fossil-powered cars may not even be produced. Understand that the market for Nigeria, unless we can get more people into upper middle class, may not be too huge for GM, Toyota, Ford etc to be making cars they cannot sell in U.S., Japan, Western Europe, and other rich countries. (I make this statement believing that making electric cars will be cheaper than fossil-powered cars within 15 years, for comparative cars.)
• So, if the rich world pivots to electric, the end of fossil-cars can happen. That will affect the refinery businesses in Africa. It is important to note that this will not happen overnight; we have about two decades on this, in Africa.
• Most refineries in leading economies will struggle because of many factors: electric vehicles, car-sharing (lesser on the road), vehicle energy usage efficiency, solar etc. So, the implication is that any projection in long-term, based on today’s refined-product demand will be careless; one has to consider the technology trajectory and how it will affect demand. This is where I see challenges for small refineries in Nigeria because demand will drop and price must crash for a product that is largely undifferentiated.
• Sure, refineries are not just there to produce petrol for cars. However, in Nigeria, that is the main demand driver. The generators are there but I expect solar to have a good take on that within a decade. In other words, solar will become a good source of energy for most homes or government will figure out the electricity problem.

Investing in Modular Refineries

Refining is a commoditized business where scale matters more than anything. If Dangote Refinery takes off, as expected, it will be the industry leader. If that happens, it will have a huge advantage on building the necessary distribution facilities first. Should you need to come, say five years, after Dangote Refinery begins operations, you need to carefully analyse how soon you can recoup your investment before an expected fundamental industry-level redesign begins to affect demand. The five year projection is based on my model that NNPC may finalize all permits by next year and it will take each company 3-4 years to build.

Besides, if electric cars become far cheaper than fossil-powered cars, petrol demand will struggle. And since electric car penetration is always correlated with solar electricity home usage, we can also see more homes and offices getting electricity from solar at the same time they are driving electric cars. This means that if that happens in Nigeria, we may not even need generators.

So from the electric cars and generators, we will see multi-pronged challenges for refiners, depressing earnings for a commoditized product. We may end up having only the expected industry leader, Dangote Refinery, winning and every other participant largely struggling.

Rounding Up

Refinery business is not trading, it takes years to recoup the investments and as you work on the break-even analysis, consider the technology impact and the fact that we already have a category leader. In the short-term, modular refinery makes business sense in Nigeria. But after the next two decades, it may be worthless.That understanding should help to ascertain if the business is worth the risk.