Nigeria’s Ongoing Turnaround Maintenance: Refining Economics 101 and why it matters

By Dimeji Bassir

In April 2021, the Nigerian government announced it had let out a $1.5Billion contract to Italian Marie Technimont for the rehabilitation of its 210,000 barrels a day portharcourt refinery which became operational in 1965. The news generated a lot of furore within the citizenry with a prominent Nigerian Banker stating the government was about to embark on a brazen and expensive adventure.

About the same time, the global oil and gas multinational, Shell, announced it had taken the decision to scale back its global refinery footprint by greater than half, having permanently shuttered its 240,000 barrel-a-day convent refinery in Louisiana a few months earlier.

The coincidence, and contrast in strategy between one of the largest global international oil companies and the eleventh largest OPEC country by reserves size couldn’t be more stark.

For Shell, the objective of downsizing its downstream business is to prioritize its most profitable assets while divesting from businesses that no longer align with its strategic objectives. Basically, a move towards strategic optimization.

In the case of Nigeria, a country which at best could be described as a sleeping oil giant that consistently underutilizes a lot of the things it is naturally endowed with. The West African OPEC nation has consistently underperformed its OPEC quota for close to ten years. Despite having an installed production capacity of two million barrels a day, its average daily oil output in September 2023 was 1.35 Million barrels per day, the highest it had been in the entire year.

The context of the outrage surrounding the announcement of the $1.5Billion rehabilitation contract lies within the May 2023 report which showed that the government had spent $25 Billion between 2013 and 2023 on fixing the refineries and yet had spent $10 Billion on petroleum subsidies in the year 2022. Juxtaposed with reporting from an ICIR report which revealed that the Port Harcourt refinery had posted losses five years in a row (2014 – 2018) totalling ₦206Billion. The story of the Nigerian refineries cannot be told without invoking raw emotions among the country’s  citizenry who are desperately yearning for available and affordable petroleum products.

To underscore the absurdity of Nigeria lacking everything it has, the country which has been described as oil rich and energy poor is blessed with an abundance of natural gas—north of 200Trillion cubic feet—which represents about a third of Africa’s total gas reserves. Yet commercializing its gas molecules to meet domestic power demand in a sector begging for critical structural reforms remains a mirage. 45% of the country’s two hundred million people remain without access to the power grid.

The passage of the Petroleum Industry Bill in 2021 birthed the Petroleum Industry Act (PIA) with one of its core mandates being the transformation of NNPC, the government-controlled agency, to a commercially driven limited liability entity. Theoretically, the impact of this transformation is expected to manifest in a restoration of operational oomph which had been lacking in the NNPC going by its track records of under-performance over the years.

Delivering capital projects with speed and efficiency has always been a major challenge, both for private and public corporations. Project performance data studied across governments and organizations globally shows that projects delivered under budget and ahead of schedule are the exception, not the norm. Data presented in Figure 1 below supports this point.

Figure 1:

Projects don’t go wrong but in many instances simply just start wrong. But it’s seductive to think that the only thing that separates us from the project delivery results we desire is one unique secret sauce we are yet to learn. Whereas in reality, there are a number of missteps which conspire and eventually derail capital projects, having been left unfettered for so long along the way.

Figure 2: Some causes of project derailments Source: PWC

While all megaprojects are susceptible to veering off track, some are more vulnerable than others, particularly those under the wrong stewardship. Project controls help, but they must be kept very tight. Due to the mission-critical and costly nature of the ongoing revamp works at the Nigerian refineries in Warri and Port Harcourt, the least desirable scenario is where project owners and managers are consciously or unconsciously stuck in a state of ineptitude and/or profligacy, what the writer refers to as the “Naija factor,“. The affliction of the Naija factor and its close cousins; cronyism, political meddling etc is rife. But those are not the focus of this article and will not be dwelt upon.

NNPC did not do much construction of any sort in the thirty years between 1990 and 2020 and a lot of organizational knowledge has certainly been lost in this period. We can infer therefore that the refinery revamp projects being spearheaded by NNPC are much bigger than the individuals leading them, particularly with little to no operational history to leverage—in planning and executing the projects—along with ingrained cultural inefficiencies to contend with. In the context of the three plants’ dismal operational performance over the years as earlier outlined, it’s no surprise that there’s been more than a few promised completion days albeit all botched.

Refining Economics 101 and why it matters:

Refining operations are complex with extremely tight unit economics. Financial performance is largely driven by two variables- the cost of feedstock i.e. crude oil, and price of refined products e.g. gasoline, jet fuel etc. The difference between a barrel of crude oil and the petroleum products refined from it. This concept, called the crack spread provides an indication of refining margins. Like most commodity play, a refinery operator has no influence on what it pays for feedstock or the price it commands for finished products. Refineries simply fill the market with products until margins, or profits, for refining the products drop. At this point, operators scale back on production to induce supply versus demand balances. This balancing act inevitably separates out those operators who are able to run their facilities efficiently from those who can’t. One of the biggest differentiators between the two groups is reliability which can mean the difference between operational excellence and mediocrity, perhaps even profitability versus bankruptcy.

In short, reliable operations are the strongest correlative indicator to profitable operations as reliability drives utilization which in turn drives profitability.

There are about 700 refineries globally with less than 300 of them accounting for 80% of the world’s approximately 100Million barrels per day refining capacity. Data gleaned from the global refining economics of reliability report shows that North American operators are the paragon of executing optimal reliability programmes. This is primarily driven by the fact that they are 100% private sector owned and operated, do not receive subventions or support from the government, and are driven mostly by a singular incentive which is to consistently deliver value to shareholders.

There are variable and fixed components to refining costs. 80% of the costs in a refinery go to feedstock. Operations & maintenance-related costs are independent of the quantity of crude processed and are fixed regardless of the plant’s overall utilization.

The difference of what is left over after backing out a refiner’s single largest cost from its theoretical revenues is what is available to cover the rest of its costs. Narrow crack spread implies that refiners have fewer resources to invest in sustaining their plants’ operations.

Better reliability enables increased utilization, lowers downtime, and significantly lowers operations and maintenance costs.

The prudent approach to refinery revamp:

Maintenance is the lifeblood of refinery operations, given the extreme degradation that physical assets are subjected to during the course of operations. But it’s important to establish that assets undergo non-age related functional failure. Over 70% of equipment studied in industrial plants experienced the phenomenon called infant mortality whereby there is a high probability of equipment failure shortly after being commissioned to service. While this data is not representative of industry in general, it challenges existing belief of a correlation between asset reliability and operating age, which led to the idea that the more an item is overhauled, the less likely it is to fail. This belief had formed the basis of designing preventive maintenance schedules but is now known to be largely untrue in the world of modern maintenance. Converse to that debunked idea, scheduled overhauls could actually increase overall failure rates by introducing infant mortality into otherwise stable systems. This is why a broadly defined reliability framework that synthesizes all the critical components of modern-day understanding of how machines function and knowledge of maintenance best practices should be adopted by every operator of asset-intensive plants.

Figure 3: Equipment failure shows no correlation to age Source: Reliability Centered Maintenance Book by Nowlan & Heap

In the intricate world of refining, a scheduled revamp aka turnaround, or shutdown, is a large-scale maintenance activity where the entire process unit is taken off stream for comprehensive maintenance related activities. The primary objectives are inspection of equipment, completing replacement of deteriorated parts, installing new facilities, upgrading or revamping the processes or capacities to restore the overall health of the plant and improve safety, health, and environmental conditions. Increased reliability correlates positively with the profitability of refineries.

Think of a revamp as a megaproject consisting of several thousands of integrated tasks that must be completed within extremely tight timelines and stringent specifications in order to restore the plant back to production timeously. Preparation for refinery revamps should ideally take anywhere between six to twenty four months. Avoiding false starts on these complex projects should be the goal of the organization and it means beaming a laser on discovering the unknown unknowns early on at the preparation stage.

A typical 120 thousand-barrel-per-day refinery would have tens of thousands of unique SKUs in equipment count. Any revamp, such as those ongoing in the Nigerian refineries, which had been moribund for years prior to the initiation of revamp works, required that a comprehensive, granular, reliability-based audit (gap analysis) is conducted to determine the as-is condition at each system, equipment, and component level. The deliverable from that molecular exercise should then serve as input into the detailed scoping of the rehabilitation works.

But very often, missing data—e.g. equipment health (obtained from predictive / condition monitoring technologies), equipment operations and maintenance history, etc.—prevents the conduct of a thorough and granular level equipment reliability-based gap analysis as needed. In such an instance, scoping the revamp is done blindly or based on assumptions rather than being data-driven. In addition to a detailed gap analysis as mentioned above, critical to the success of a revamp is the development of a comprehensive plan that identifies precise worklists, establishes realistic schedules, resources needed, and accurate cost estimates. Important to capture with precision the work to be done and in addition, have the work sequenced correctly. Rigour in risk analysis as well as scope challenge sessions that test for various scenarios on paper should be incorporated into the planning process preferably facilitated by experienced independent third-party consultants.

Recognize the value of experience: Leadership is the key to success on any project or major task. Given the immense responsibility, a refinery revamp manager must be a highly experienced, focused, creative minded and dynamic professional who continually strives for excellence. He must exhibit a leadership style that shows decisiveness, a clear methodology and approach to problem solving and bring a breadth of successful delivery of several revamp within the domain. They must have an innovative, entrepreneurial bent with an open-mindedness to accept divergent thinking and explore new technology that can drive revamp efficiency. They must be someone with deep domain practical experience and a proven track record of success. They will be tasked with assembling the right team, establishing a cohesive team culture, and cascading the project philosophy and ethos throughout the execution team.

Plan slowly, execute swiftly: When it comes to megaprojects, haste makes waste at the start. Bent Flyvbjerg avers in his book ‘ How Big Things Get Done ‘ that planning is the safe harbour as costs of its iteration are relatively low. Furthermore, he talks about the window of doom stating that projects that fail tends to drag on and those that succeed zip along and finish. The author advocates the maxim: ‘Think slow, act fast’ throughout the book. Errors are cheap and often fixable during planning. At execution, they are often fatal. This might seem intuitive but the data suggests that the 0.5% of 16,000 projects studied that succeeded were those where slow and meticulous planning preceded speedy execution.

“The irony of megaprojects is that many are late because not enough time is spent planning.”

Project controls underpin flawless execution: The complexity, notoriously tight timelines and high dependency of tens of thousands of maintenance tasks to be coordinated and completed on a refinery revamp project mandates it to be managed and organized with sound project management and advanced project control techniques. The sheer volume of activities and resources involved, along with millions of manhours, high costs, tough deadlines, a multitude of stakeholders all portend extremely high risks. However, the global best practices to replicate are in the open and available for the open-minded to adopt. Data from the aforementioned pinnacle study shows that the most profitable refineries are those in North America primarily due to the sustained high utilization and lower per barrel spend on reliability.

Figure 4: Correlation between refinery Utilization & Profitability Source: Pinnacle Study

It is no coincidence that the use of robust project controls software applications purpose built for turnarounds in process facilities is highly prevalent in North America. Effectively, these tools, which facilitate efficiency in turnarounds, help to build work packages, dynamically pull in engineering, equipment, BOM and cost data, manage logistics, facilitate management of change, document control etc. within one cloud based application. They are customizable to any project’s unique needs, make it easy to track project progress and enables forecasting with accuracy. They enhance project governance and controls, provide excellent visibility and reporting and obviously correlate positively with operational excellence.

It is immensely difficult to proactively recognize the onset of project challenges and understand the right levers to deploy in order to correct course. Without the right tools, processes and systems, incoherent coordination and ad-hoc decision making prevail, ultimately becoming an albatross on the project. This confluence of ills, have been responsible for derailing even the best planned projects leading to significant cost and schedule overruns.

North American refineries have consistently scored high in those metrics that correlate with top reliability performance such as maintenance cost and inventory value as a percentage of the plant value, percentage of assets on BOMs, work split between predictive and preventive maintenance etc.

Operational readiness facilitated by experts from independent third-party outfits underpins the ability to wrap up a revamp project efficiently and transition effectively to commissioning with the least amount of surprises during startup.

Setting the business up for long term success: Broadly speaking, the refining process encompasses the following steps; The separation of crude oil into different fractions – The improvement of quality of some cuts – The transformation of heavy cuts into light cuts – Blending to derive the finished products.

A refinery consists of several distinctly disparate parts; The process units where crude oil is separated to fractions or cuts and additional processing takes place to improve the grade of products – The Utilities i.e. where fuel, power, steam etc. necessary for the refining process are generated – The storage, blending and shipping facilities. A refinery could sit on several tens of hectares with majority of this space comprising of the storage facilities.

The most commercially viable refineries globally are of the fluid catalytic cracking (FCC) type (or equivalent process units), which are capable of transforming heavy distillation fractions into lighter fractions—gasoline, jet fuel etc. While these facilities have the dual advantage of high fuel efficiency and moderate investment cost, they introduce an order of magnitude of complexity into refineries as they became relatively more sophisticated. The introduction of capabilities for deep conversion (residue hydrocracking, coking with coke gasification etc) increased the complexity of the refining system (and of course the equipment spread required to achieve the detail of processing became more advanced).

Capital, whether in the form of investment in a new refinery or the cost of replacing systems / units in an existing one must be recovered as depreciation.

A combined projected spend of over two billion dollars on the ongoing revamps of Port Harcourt, Warri and Kaduna refineries is reflective of the depth of intervention being undertaken and the new administration’s laser focus on completing the protracted turnarounds sooner than later to abate further revenue losses from deferred production, along with costs and schedule completely run amok could not be a more urgent imperative.

The oldest of the four Nigerian refineries was commissioned in 1965 but have barely operated in the last decade. The oldest continuously running refinery in North America was commissioned one hundred and forty two years ago. Refineries that old would ordinarily be fully depreciated. But the four Nigerian plants had been moribund and in some instances cannibalized prior to the commencement of the revamp projects. This means the intervention works to be undertaken are of a very extensive and invasive nature involving system level replacements on a relatively broad scale. This introduces depreciation costs that could triple operating cost per barrel. For example, total refining costs for a 160,000 thousand barrel a day refinery could be as high as $10 per barrel of crude processed (assuming 100% utilization) as opposed to $2 – $3 for a fully depreciated asset.

A plant’s technical limit is an unattainable state where it runs 100% of the time and spends zero dollar on maintenance or repairs. Equally inconceivable is the contrasting scenario exemplified by Nigerian refineries, where tens of billions of dollars have been expended on “ maintenance and repairs “, yet the facilities scarcely operated over the past decade.

Constantly shifting revamp completion deadlines provide the strongest evidence that the ongoing revamp projects are in jeopardy and that the sponsors remain stuck in a state of unconscious incompetence, hence, flailingly grasping at straws.

The influence of existing paradigms prevents humans from embracing novel concepts and has the potential to obscure new opportunities for business leaders. Driving sustained operational excellence requires a paradigm shift, particularly at the leadership level. In order to mirror the operational performance of North American refiners, the entire organization need to adopt a philosophical volte-face and expand beyond their traditional thinking and maintenance work practices. In short, the thinking “ that got us here simply will not get us there “. And to the dismay of ired Nigerians, they will soon learn that the monstrosity of refinery operations & maintenance does not succumb to conjured operations commencement dates. Any startup dates promised in the future, again pulled out of thin air, will equally pass with nothing to show for it.

Stakes are incredibly high and refinery leadership should have the incentive to embrace new philosophies and thinking. It’s impossible to correct course without transitioning through conscious incompetence to conscious competence. This will be evident when they adopt the holistic use of the right tools, systems, techniques and methodologies needed to get the protracted revamps in Warri and Port Harcourt back on track, avoid startup and commissioning hiccups whenever the time comes, and offer the opportunity for Kaduna to start on the right footing.

Adopting a reliability-based maintenance strategy is the key to setting the business up for success in the long term and unlocking value on a sustained basis in Nigerian refineries. This involves instituting foundational elements; (establishing corporate standards for work management in line with best practices, stores and inventory optimization, defining equipment hierarchy/classification/naming convention, accurate equipment master list development, criticality ranking, adoption of RCM techniques, effective use of CMMS, PM/PDM optimization, addressing culture change etc.). These activities, when holistically weaved together and implemented will eventually bring the plants’ operational DNA in line with those of top performers globally. From past experience and also looking at several case studies over the years, value begins to manifest in savings on maintenance spend, increased uptime, higher throughput, reduced fuel costs etc. The right work is being done right, relevant performance indicators are developed and tracked with rigor, time-based preventive maintenance is optimized (PM) to only be performed on no more than 25% of the asset population and over 50% of daily work activities are driven by asset condition data obtained from a robust predictive maintenance (PdM) program.

With several exogenous factors outside of a refinery operators control, the sweet spot is learning to master the balancing act of achieving consistently high utilization at the lowest operations and maintenance—including turnaround—cost.

In conclusion, good refinery operations start with efficient turnaround execution which starts with in-depth understanding of how best-in-class reliability practices enhances refining operations economics. Combining enhanced technology-enabled project controls with a realibility-centric maintenance approach better attuned to new knowledge of machine health, and of how equipment functions, and fail, is the way out of the ongoing revamp fiasco and the way to set the refineries up for sustained success.

If nothing else, the opportunity to alter the narrative buoyed by a sense of accountability to its 200Million Nigerian shareholders, and perhaps personal ambition, should incentivize the project owners to seek outside help in steering the adrift revamp projects back on course, lest they perpetuate the status quo—abundance of promises and bereftness of delivery. Hope is never a strategy, neither is optimism.

Bassir is an oil and gas industry executive with international experience managing a range of major capital projects of varying complexity and scale along with experential knowledge spanning the entire Exploration and Production (E & P) lifecycle. He manages Ofserv, an independent consultancy specializing in subsurface engineering, project management, process improvement and reliability services. He is a certified maintenance and reliability professional (CMRP).