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August 2014

Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer Industries By Dr. Timothy Okon. August 2014. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer Industries Outline.

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August 2014

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  1. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer IndustriesByDr. Timothy Okon August 2014

  2. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer IndustriesOutline • Nigeria’s Resource Endowment • Resource Diversification and Monetization • The oil and gas value chain • Resource diversification from oil to gas • Resource diversification from Refining to manufacturing (fuels to non-fuels) • Diversification approaches: global best practices • Strategies to support employment and wealth creation in Nigeria • Closing remarks

  3. Resource Diversification and Monetization

  4. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer IndustriesResource DiversificationThe Oil & Gas Value Chain Upstream Midstream Downstream Also touches consumers through thousands of products such as fuels (gasoline, diesel, jet fuel, heating oil and non-fuels (asphalt, lubricants and no, synthetic rubber, plastics, fertilizers, antifreeze, pesticides, pharmaceuticals)

  5. Majors Upstream Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer Industries Diversification (2)The Importance of Resource Diversification 1 Downstream • Diversification involves two major activities • Diversifying the energy mix (rebalancing crude oil versus gas exports) • Value adding activities for the domestic manufacturing sector Beyond primary use of hydrocarbons, there are significant secondary derivatives that are essential for a modern economy Midstream 2 Chemicals & Petrochemicals Gas Transmission and Marketing Retailing

  6. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer IndustriesResource Diversification (3) Diversifying the Energy Mix from Oil to Gas • Gas is a major catalyst in industrial development • Gas fired power generation vital to jumpstart manufacturing sector / small scale businesses • Gas intensive industries (feedstock for fertilizers, petrochemicals) • Gas light industries (as secondary input and/or heat generation, e.g.paper mills, glass manufacturing) • Significant multiplier potential on domestic economic through linkages with power, agricultural and manufacturing sectors. • The case for diversification from oil to gas is further compelling since a significant quantity of the resource is currently being flared.

  7. Gas to Power

  8. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer IndustriesResource Diversification: Oil to GasPotential for Gas use in Power Generation

  9. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer Industries Resource Diversification: Oil to Gas (2)Power Consumption and Impact on GDP Growth

  10. Gas for Industrialization: Petrochemicals & Fertilizer

  11. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer IndustriesMajor Hydrocarbon sources for Petrochemicals Production • The adjacent diagram schematically depicts the major hydrocarbon sources used in producing petrochemicals are: • Methane, ethane, propane and butanes: Obtained primarily from natural gas processing plants. • Naphtha obtained from petroleum refineries. • Benzene, toluene and xylenes, as a whole referred to as BTX and primarily obtained from petroleum refineries by extraction from the reformate produced in catalytic reformers. • Gas oil obtained from petroleum refineries. • Gas-based petrochemicals offers certain advantages in Nigeria than oil-based petrochemical industry. This is largely due to feedstock costs and the environmental benefits of gas flare reduction that would arise from greater use of associated gas. Nigeria’s attempts at oil-based petrochemicals via attachment of petrochemical plants to the refineries faltered due to the historical epileptic performance of our refineries.

  12. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer Industries ResourceGas for Petrochemicals: Impact on Economy

  13. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer Industries Resource The Petrochemical Value Chain

  14. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer IndustriesThe Global Fertiliser Competitiveness • Fertilizer is any organic or inorganic material of natural or synthetic origin (other than liming materials) that is added to a soil to supply one or more plant nutrients essential to the growth of plants.[1] • Conservative estimates report 30 to 50% of crop yields are attributed to natural or synthetic commercial fertilizer Global market value is likely to rise to more than US$185 billion. The European fertilizer market will grow to earn revenues of approx. $20 billion per annum. • Fertilizers typically provide, in varying proportions: • Six macronutrients: nitrogen (N), phosphorus (P), potassium (K), calcium (Ca), magnesium (Mg), and sulfur (S); • Eight micronutrients: boron (B), chlorine (Cl), copper (Cu), iron (Fe), manganese (Mn), molybdenum (Mo), zinc (Zn) and nickel (Ni) (1987). • The macronutrients are consumed in larger quantities and are present in plant tissue in quantities from 0.15% to 6.0% on a dry matter (0% moisture) basis (DM). Micronutrients are consumed in smaller quantities and are present in plant tissue on the order of parts per million (ppm), ranging from 0.15 to 400 ppm DM, or less than 0.04% DM. • Only three other macronutrients are required by all plants: carbon, hydrogen, and oxygen. These nutrients are supplied by water (through rainfall or irrigation) and carbon dioxide in the atmosphere. • Nitrogenous fertilizer based on combination of Nitrogen and Hydrocarbon these are ammonia based fertilizer such as urea. These can then be blended with phosphate and potash to yield NPK fertilizer blend.

  15. Enhancing Employment And Development Opportunities Through Gas, Petroleum Refining, Petrochemicals And Fertilizer Industries Schematic of Fertiliser Manufacture Process Nitrogenous fertiliser manufacture involves the combination of nitrogen and methane to produce ammonia and ultimately urea. About five (5) new urea plants are proposed in Nigeria, plus an existing plant owned by Notore. About 70 mmscfd of gas is required per 1MTPA fertiliser plant

  16. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer IndustriesGlobal Fertiliser Intensity

  17. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer Industries Gas for Fertiliser: Impact on Economy

  18. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer Industries Key Building Blocks in the Fertiliser Value Chain

  19. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer Industries Gas Supply Requirement for Petrochemical / Fertiliser Industries • About 30 million standard cubic feet per day (mmscfd) of propylene rich gas will yield 1MTPA of polypropylene. • Similarly, about 2.3 – 2.4 tons of NGLs will yield 1 ton of polypropylene. • In general, current plans for both fertiliser and petrochemicals will require about 500 – 750 mmscfd of rich gas. This requirement is applicable to domestic demand for fertiliser and petrochemicals. However, Nigeria can capture a portion of the global market for petrochemicals and fertiliser and the potential in this regard is huge. • Gas availability is a key requirement for building a successful petrochemicals and fertiliser industry. Rising domestic demand for gas means that a rationalisation and ranking based on the economic value for which gas can create is necessary. • Some analysis based on this yields some interesting results.

  20. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer Industries Impact of Gas Utilisation Plants to Job Creation

  21. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer Industries Impact of Gas Utilisation Plants to Job Creation (2)

  22. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer IndustriesImpact of Gas Utilisation Plants to Job Creation (3)

  23. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer Industries ResourceStrategies to Support Development of World Class Petrochemical / Fertiliser Industry • Create national focal point for developing industries beyond fuels. E.g Saudi Arabia Basic Industries Corporation (SABIC) • A clear fiscal system that is supportive of high value hydrocarbon spin-off industries but not dependent on cost recovery from upstream oil activities. • Right Incentives through price deregulation in order to support a commercial framework for the development of refineries. • Industrial parks with pre-investment in infrastructure by the State.

  24. Resource Diversification: Refining to Manufacturing

  25. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer Industries Resource DiversificationFuels to Non-Fuels • Oil contributes over 80% of Nigeria’s revenue stream but only about 13% of GDP due to its limited linkages to the domestic sector of the economy. • Nigeria currently exports about 2.2 mmbbl/d mostly crude oil. However, nearly 80% of the fuels demand in Nigeria is imported (about 30 Million litres /day of PMS), fuelling a significant part of our current account deficit. • Diversifying refined products from fuels only (PMS, AGO, Kero, LPFO) to value added feedstock for domestic manufacturing is vital to link the oil sector to the domestic economy and increase the contribution of the oil industry to GDP growth.

  26. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer Industries Resource Diversification: Fuels to Non-fuelEconomic Benefits of Downstream Non-Fuels Industrial Developments SADAF SABIC

  27. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer Industries Resource Diversification: Fuels to Non-fuel (2)Potential Hydrocarbon Value Chain Options Diversification further downstream will add maximum value to the Nigerian Economy through these Industries:

  28. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer IndustriesResource Diversification: Fuels to Non-fuel (2)Potential Hydrocarbon Value Chain Options

  29. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer Industries Resource Diversification: Fuels to Non-fuel (3)Benefits of Non-Fuels Diversification - Packaging

  30. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer IndustriesResource Diversification: Fuels to Non-fuel (4)Benefits of Non-Fuels Diversification - Automotive

  31. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer IndustriesResource Diversification: Fuels to Non-fuel (5) Benefits of Non-Fuels Diversification – Building Materials

  32. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer IndustriesResource Diversification: Fuels to Non-fuel (5) Benefits of Non-Fuels Diversification - Electronics

  33. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer IndustriesResource Diversification: Fuels to Non-fuel (6) Benefits of Non-Fuels Diversification – Textiles and Sportswear

  34. Diversification Approaches: Global Best Practice

  35. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer IndustriesDiversification Approaches: Global Best PracticeNigeria’s Export vs. Import

  36. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer IndustriesDiversification Approaches: Global Best Practice (2)Resource Diversification: Case Studies in the Middle East Country Diversification agenda / vision Specific initiatives Examples from Top 10 gas-rich countries • Qatar • Release of 2030 Vision with diversification goals • Set up of specialist, autonomous free-zone business districts (e.g., Qatar Science & Technology Park) • Saudi • Arabia • Release of 2025 Vision with diversification goals • Leveraging on existing experiences (e.g., Jubail,…) • Targeting initiatives to improve ease of doing business • Plan to build six economic cities, for several sectors: • Energy-intensive (Plastic, Steel); Transportation • Knowledge based (ICT, Healthcare, Education) • Abu • Dhabi • Release of 2030 Vision identifying growth sectors and setting non-oil trade balance parity as a goal • Promotion of trade and manufacturing • Set up of industrial zones (e.g., Petrochem, Aluminium) • Investment in infrastructures and logistic centres • Investment in zero-emission city as free zone and R&D centre • Set-up of numerous Economic Cities (e.g. dredging of Dubai Creek, Jebel Ali Port, Jebel Ali Free Zone) • Dubai Other examples • Bahrain • Development of Vision 2030 with diversification agenda • Development of banking, aluminium and IT • Heavy promotion of tourism (mainly regional) • Oman • Vision for Oman Economy 2020 with 81% non-oil GDP • Focus on tourism and energy-intensive export sectors • Policies for promotion of local employment (‘Omanisation’), privatization and FDI attraction SOURCE: Press searches, Expert interviews 36

  37. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer Industries Diversification Approaches: Global Best Practice (2)Successful Case Studies of industrial Development by Resource Rich Nations

  38. Strategies to Support Employment & Wealth Creation in Nigeria

  39. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer IndustriesStrategies to Support Wealth Creation in Nigeria • Create national focal point for developing industries beyond fuels. E.g SABIC/SADAF in Saudi Arabia. • A clear fiscal system that is supportive of high value hydrocarbon spin-off industries but not dependent on cost recovery from upstream oil activities. • Right Incentives through price deregulation in order to support a commercial framework for the development of refineries. • Industrial parks with pre-investment in infrastructure by the State.

  40. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer IndustriesStrategies to Support Employment & Wealth Creation in Nigeria (2)National Focal Point for Creating Value Added Oil Derivatives:SABIC Case Study • Saudi Basic Industries Corporation (SABIC) is a diversified manufacturing company, active in chemicals and intermediates, industrial polymers, fertilizers and metals. • SABIC was founded in 1976 by Royal Decree to convert oil by-products into value added chemicals, polymers and fertilizers. • It is the largest public company in Saudi Arabia with the Saudi government still owning 70% of its shares. • SABIC employs over 40,000 people globally and has 60 manufacturing and compounding plants in more than 40 countries.

  41. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer IndustriesStrategies to Support Employment & Wealth Creation in Nigeria (3)National Focal Point for Creating Value Added Oil Derivatives: SABIC Case Study (2) Key Features of SABIC: • Focuses on manufacturing, using oil by-products as feedstock. • It is a Holding Company, with investment in Joint Ventures with oil majors. (SADAF) • It is not an operator and does not have 100% ownership. • The structure ensures commercial operations and commercial viability of its business arrangement across the world. • Its investments are not only domestic, but international, to secure markets for its oil by-products. • SABICs diversification strategy includes market diversification

  42. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer Industries Strategies to Support Employment & Wealth Creation in Nigeria (4)National Focal Point for Creating Value Added Oil Derivatives: SADAF Case Study • Saudi Arabia Petrochemical Company (Sadaf) was established in 1984 and is the largest petrochemical complex in the Middle East. • It Owned jointly by Shell Chemicals Arabia LLC and Saudi Basic Industries Corporation (SABIC). • The Sadaf complex covers a 460-acre site in the Industrial City of Al-Jubail. It contains six-world scale petrochemical plants with a total average output of more than 4.7 million metric tons per year of various chemicals.

  43. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer IndustriesStrategies to Support Employment & Wealth Creation in Nigeria (5)Clear Fiscal System for Midstream Oil with Fiscal Rules of General Application • There has not been a clear fiscal system for the midstream oil sector. As such, IOC carry on midstream projects but integrate it with upstream investment. The midstream is defined as “Construction and operation of crude oil and gas transport pipelines, oil refineries and gas processing facilities, oil and gas storage facilities and coastal or ocean going tankers, rail cars and trucks for transporting and marketing petroleum products on wholesale basis” • CITA section 39 which applies to gas utilisation may be applied to midstream gas but not midstream oil. • A clear fiscal system that is supportive of high value hydrocarbon spin-off industries but not dependent on cost recovery from upstream oil activities. • Fiscal rules of general application are important because they lay the foundation for non-discriminatory fiscal system which are most desirable in giving investors confidence. • The PIB intends to address this by amending CITA section 39 to include midstream oil activities.

  44. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer IndustriesStrategies to Support Employment & Wealth Creation in Nigeria (6)Create Right Incentives through Price Deregulation • Our experience from price regulation in the downstream petroleum sector shows that regulation has the following downsides: • Discourages investment: Companies invest where there is clear and transparent mechanism to recover cost and earn a profit • Lacks fiscal sustainability: Subsidy funds are required for other critical sectors of the economy • Distorts markets: Encourages hoarding and smuggling and creates arbitrage opportunities (black markets) • Benefits mainly the wealthy and middle classes, with a limited share going to those Nigerians most in need. • Under section 6 (1) of the Petroleum Act, pricing of petroleum products are to be approved by the Minister of Petroleum Resources. It states as follows: “The Minister may by order published in the Federal Gazette fix the prices at which petroleum products or any particular class or classes thereof may be sold in Nigeria or in any particular part or parts thereof.” • Under the powers of the Minister to regulate the industry, the pricing of petroleum products could be based on a market determined mechanism through a pricing formula.

  45. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer IndustriesStrategies to Support Employment & Wealth Creation in Nigeria (7)Relationship Between Crude Oil Prices and Product Prices: Fuels

  46. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer Industries Strategies to Support Employment & Wealth Creation in Nigeria (8)Relationship Between Crude Oil Prices and Product Prices: Non-Fuels • Market derived pricing is a key incentive for investors in the petrochemical and manufacturing sectors of hydrocarbon derivative industries. The benefits of the market derived pricing mechanism are as follows: • Requires minimal government intervention therefore minimizes arbitrage opportunities • Protects payment securitization system by avoiding fixed pricing floors. • Self adjusting to reflect current market conditions which should also be captured by the end products. FRP=0.409PRP-175

  47. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer IndustriesStrategies to Support Employment & Wealth Creation in Nigeria (9)Relationship Between Crude Oil Prices and Product Prices: Non-Fuels (2) • End product derived feedstock prices are common in jurisdiction with significant petrochemical production. • The only distinction between these different pricing mechanisms is in the rate of increase of feedstock prices with end product price. • Nigeria cannot jumpstart a petrochemical industry without a clear and transparent market derived feedstock pricing mechanism.

  48. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer IndustriesStrategies to Support Employment & Wealth Creation in Nigeria (10)Threats in the Horizon: The advent of US Shale Gas • Above $4/mmbtu, residual fuel oil switching takes place in the US market using a reference price of WTI $45/bbl • Above $5/mmbtu, ammonia and methanol plants are no longer economic and gas demand is lost. • In order therefore to position Nigeria competitively vis’ a vis’ the Atlantic basin market dominated by Trinidad and Tobago, the proposed pricing formula has a dynamic cap at $3/mmbtu (RT 2008) which is below the gas to fuel oil switching price and below T & T upstream price for similar end product prices.

  49. Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer IndustriesStrategies to Support Employment & Wealth Creation in Nigeria (11)Threats in the Horizon: The advent of US Shale Gas has (2) • The advent of shale gas has made the US chemical industry to be the most competitive within the OECD countries. • Nigeria needs to match Middle-Eastern competitiveness in order to secure investment for its chemical industry

  50. Industrial Parks

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