enhancing employment and development opportunities through gas, petroleum refining, petrochemicals...

Enhancing Employment and Development Opportunities through Gas, Petroleum Refining,

Petrochemicals and Fertilizer Industries

By

Dr. Timothy Okon

August 2014

1

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 remarks2

Resource Diversification and Monetization

4

Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer IndustriesResource DiversificationThe Oil & Gas Value Chain

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)

Downstream

Midstream

Upstream

5

Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer Industries Diversification (2)The Importance of Resource Diversification

MidstreamDownstream

1

2

Chemicals &Petrochemicals

Gas Transmissionand Marketing Retailing

Majors

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.6

Gas to Power

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

8 8

5.4

3.2

8.6

-6.8GW

201

Installed capacity

Peak demand1

101

Average hourly

generation

Average capacity

not available

2.194.35

6.63

12.83

Ethiopia

0.04

Nigeria

0.12

Egypt

1.34

BrazilSAGermanyUS

Nigeria’s significant power supply gap represents one of the largest strains on economic growth and job creation

1 Peak demand estimates vary significantly, but indicate that if demand was not suppressed by supply constraints it would be at least 10 GW

SOURCE: NBS fact sheet 2009, CBN quarterly economic reports, EIA, World Bank, UCT Graduate School of Business

Nigeria power generation capacity shortfallsGW, 2010

Capacity

Peak demand upperestimates

World average

Implications of power supply constraintsMWh/capita/year, 2008

▪ Electricity consumption levels in Nigeria are low

▪ Supply constraints and shortages are a strain on economic growth and industry competitiveness– World Bank enterprise survey indicates that typical grid-

connected enterprises operate on 9 days of power outages/month and lose 9% of sales

– Over 90% of larger businesses and ~80% of micro enterprises rely on back up power generation for ~60% of their power needs

– Diesel is the top spend item for many industries, including banks and telecoms

▪ Increasing power supply will enable unlocking GDP growth and creating jobs

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

9 9

y = 0.9582x1.1341

R2 = 0.8562

-

15,000

30,000

45,000

60,000

75,000

0 5,000 10,000 15,000 20,000 25,000

Strong statistical correlation between power consumption and GDP per capita (R2 above 80%) with every KWh leading to ~$2.5/GDP capita increase on average

All countries

Power consumption correlates strongly with GDP per capita world-wide and for countries with lower GDP

SOURCE: WEO, 2010; Team analysis

Power consumptionKWh per capita 2009

GDP/capita, USD 2009

Power consumptionKWh per capita 2009

GDP/capita, USD 2009

Countries with GDP below $15,000

Countries with GDP below $15,000

y = 3.3083x0.9294

R2 = 0.8306

-

2,500

5,000

7,500

10,000

12,500

15,000

0 2,000 4,000 6,000 8,000

Gas for Industrialization: Petrochemicals & Fertilizer

Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer IndustriesMajor Hydrocarbon sources for Petrochemicals Production

11

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.

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

12

127

Assuming conservative growth, the Nigerian market will require another high-performing mid-sized ethylene plants by 2020

Room for additional domestic supply capacity Ethylene Feedstock for plastics, rubbers, petchem1

400505

305

695

~1 plant

590

<1 plant

2020 Consumption

190

2015 Consumption

190

Current Consumption

495

190

(000’s tonnes, industry)

Current domestic production

Net Imports

Potential demand

Example of a typical plant

1 Includes ethylene and inferred feedstock needed to replace plastic, rubber, and chemical imports by ethylene feedstock needs2. Assumes average plant size is 450K mpta, no need for large dedicate natural gas feedstock as most would come from LPGsSOURCE: TECHNON, press clippings, expert interviews SRI; Team Analysis

Capex,USDm

Capacitymmtpa

Gas needsmmsfcd

Direct jobsFTE

Time to buildyears

▪ 1bn-3bn USD, some projects dip below 1bn to 800 million

▪ Recent projects included:– PE: 400-600 kt/y– Ethylene: 500-900 kt/y– HDPE: 400-450 kt/y– Aromatics: 500 kt/y– LDPE 4000-450 kt/y– MEG 550 kt/y

▪ A small/mid-sized ethylene cracker of 450kt/y would require 210-230 mmscfd

▪ From Middle-East comparables, a 1bn USD cracker might employ 300-500 people

▪ 2-4 years depending on size and complexity

PRELIMINARY

20Gas needsmmscfd

+6 +10

1 200Jobs, FTE▪ Direct▪ Total

+3 400 +4 300

280GDP impact $ mn

+580 +730

6 700 +14 100 +18 000

Feedstock as LPGs would require ~2.3-2.4t of butane or propane per t of ethylene

13

125

The petrochemical cluster in Nigeria is comprised of traditional petrochemicals alongside finished plastic goods and rubber

Detailed in next page

A viable petrochemical industry would require inputs of Naphta from crude as well as LPGs from natural gas to function fully

C2 chain

C4 chain

C3 chain

C5 chain

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

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.

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

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

16

108

Africa has a high yield improvement potential because of its current low fertilizer use

Fertilizer intensity1

Kilograms/hectar

30

93

105

111

114

115

170

241

248

24

China

WesternEurope

NorthAmerica

Asia

Latin America

Middle East

Eastern Europe

India

FSU

Africa2.7

0.9

4.2

8.8

143.4South Africa

109.9Maghreb2

Sub-Saharan Africa

257.8Egypt3

60.0Morocco

68.6Malawi

Nigeria

Congo

Cape Verde

141World totalmn tons

23

45

32

30

9.3

4.5

3.9

0.01

0.01

4.3

Fertilizer intensityKilograms/hectar

Share of African fertilizer use%

Africa total mn tons

1 Total N, P, and K consumption in relation to area harvested (2002)2 Algeria, Egypt, Libya, Morocco, and Tunisia3 Showing the four countries with highest fertilizer consumption and the two with the lowest

SOURCE: FAO; Global Insights WMM; team analysis

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

17

100

With these bottlenecks removed, there is room for one fertilizer plant to meet local demand of 2.4mm tons by 2020

Room for additional domestic supply capacity1

2.4

1-2 plants

1.4

90% capacityutilisation

2020 Consumption2

2015 Consumption

Current Consumption

0.7

0.5

0.3

Million tons, Urea fertilizer

Current domestic production

Imports

Potential demand

Example of a typical plant

1 Assumes that kg/ha urea usage increases from 21 kg/ha to 40 kg/ha in 2015, to 60 kg/ha in 2020, and that area harvested increases 20% by 2020.2 In a “Green Revolution” scenario, Nigeria would need 4.4mm tons per annum, or the equivalent of 4 new plants

SOURCE: IFDC Africa Report, FAOStat as of 2009; Team analysis; Fertecon Limited (Nov 2009); Based on comparables.

Capex,USDm

Capacitymmtpa

Gas needsmmsfcd

Direct jobsFTE

Time to buildyears

▪ US$1.2bn – US$1.8bn▪ $1,200 per ton of annual capacity

▪ 1.0mm – 1.5mm tons/annum

▪ 50 – 80 MMSCFD

▪ 300-400 direct jobs (regional avg.)▪ 3,000 total jobs from bagging,

marketing, and distribution

▪ 3-4 years

~25Gas needsmmscfd +50 +100

400Jobs, FTE▪ Direct▪ Total

+1,650 +3,700

150GDP impact $ mn

+280 +625

3,700 +7,000 +15,500

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

18110

Value Chain

Developing the fertilizer value chain requires several critical building blocks

SOURCE: McKinsey analysis

Raw material sources

Farm supply store

Ammonia: Production to Distribution

Processing plant

Which fertilizer component to focus on? Full-chain NPK or urea production?

1

Priority focus on which regions and geography? Export or domestic focused?

2

Focus on production or build-out downstream logistics and distribution?

3

Distributor/wholesale

▪ Abundance of cheap gas (< 1.50 USD mm/btu to be globally competitive)

▪ Pipeline/ transport in-frastructure

▪ Processing plant for mid to large-scale urea production

▪ Must master manage inventory stocks with seasonal consumption

▪ Requires dynamic understanding of farmers' behaviors, needs, and economics for a good supply chain management (e.g., seasonality) and advisory role toward farmers

▪ Requires existence of comprehensive transport, distribution and logistics infrastructure

▪ Requires significant breadth across Nigerian market to reach consumer base in rural areas

▪ High transport cost and low margins make moving product twice almost prohibitively expensive

Depen-dencies

Key questions

• 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.

• 19

Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer Industries Gas Supply Requirement for Petrochemical / Fertiliser Industries

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

• 20

31

Mapping the relevant industries across the 3 dimensions show no clear “winners” across all criteria

SOURCE: OECD; US federal statistic office; McKinsey analysis

2,4001,1001,0009008006005004003002001000 700

30

100

70

80

90

110

60

50

40

20

10

0

Total job impactTotal jobs created per mmscfd of gas used, Nigeria1

Energy competitivenessMmscf gas used per m$ output, Nigeria(2)(3)

Power generationLNG export

Methanol

Cement

Petrochemicals (ethylene from LPGs)

Nitrogenous fertilizers

Pulp

Aluminum

Synthetic rubber

Iron & Steel

Corn

Paper

Downstream plasticsGlass

1 Estimate based on USA impact and x3-4 ratio for job creation and x1,2 energy efficiency between developed and developing countries2. Ethylene feedstock in Nigeria would be LPGs, consumption of natural gas is only utility needed for conversion vs feedstock. Downstream

plastics, only non-ethylene energy required is taken into account not initial feedstock needs.

Absolute import to Nigeria (2009, Mn USD)

Illustrative, relative mapping of Power and Export

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

• 21

32

110

100

90

80

70


60

50

40

30

20

10

0


2,4001,1001,0009008007006005004003002001000


Methanol

Cement



Pulp

Aluminum

Synthetic rubber

Iron & Steel

Corn

Paper


Making any of the dimensions leading to meet the economic agenda, generates a distinct pecking order list for industries

SOURCE: McKinsey analysis

Leading dimension analysed further in this document

Priority industries

Total job impactEconomic agenda priorities

▪ Job creation driven by domestic economic growth

Industry prioritisation based on leading dimension

Energy competitiveness▪ Creation of competitive global

players supported by low gas price

1. Methanol2. Cement3. Fertilizers4. Aluminum smelting5. Pulp6. Food products (agro-

processing)7. Iron & steel products8. Ethylene9. Synthetic rubber10. Paper11. Glass12. Plastics

1. Plastics2. Glass and glass products3. Paper and paper products4. Ethylene (from LPG)5. Synthetic rubber6. Iron & steel7. Food products (agro-

processing)8. Pulp9. Aluminium10. Nitrogenous fertilisers11. Cement12. Methanol

Leading dimension

Imports▪ Import substitution through

domestic production

1. Food products (agro-processing)

2. Plastics3. Iron & steel products4. Synthetic rubber5. Ethylene6. Paper7. Aluminum smelting8. Cement9. Glass10. Fertilizers11. Methanol12. Pulp

Fairly similar prioritisation

110

100

90

80

70


60

50

40

30

20

10

0


2,4001,1001,0009008007006005004003002001000


Methanol

Cement



Pulp

Aluminum

Synthetic rubber

Iron & Steel

Corn

Paper


110

100

90

80

70


60

50

40

30

20

10

0


2,4001,1001,0009008007006005004003002001000


Methanol

Cement



Pulp

Aluminum

Synthetic rubber

Iron & Steel

Corn

Paper


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

• 22

36

Impact of gas allocation to achieve domestic self-sufficiency and maximise job creation and GDP under the Base Case

SOURCE: NNPC, US RIMS II Multipliers (2005), industry reports, expert interviews, MGI; McKinsey analysis

Potential gas useMmscfd, 2020

GDP impact potential$bn GDP, 2020

Imports substitution$bn, 2009 imports

2

475

91

255

196

104

43

32

21

24

10

0

335

700

Glass

Power & Existing Industry, 2020 3,335

3

Power, new

Current demand, 2010 1,035

Industry, current

Power, current

Ethylene

2,300

Rubber

Plastics

4,200 mmscfdGas available

domestically in 2020

Total shortlisted users 4,650

Pulp & Paper

Methanol

Cement

Aluminium smelting

Iron & Steel

Agro-processing (Corn)

Fertilizers

Existing demand

Additional domesticgas demand

Total employment potentialThousand jobs, 2020

460 thousandjobs

513

0

54

29

151

99

16

36

74

18

25

12

$18.0bnGDP2

20.7

0

2.8

1.0

5.8

3.7

0.6

1.5

3.1

0.7

0.9

0.5

0.0

0.3

0.5

0.9

0.2

0.6

$7-8bnimports

7-9

2-3

2.61

0.2

0.0

1 Imports of ethylene, plastics and rubber2 GDP impact of Power has estimated using potential sales recovery and savings from substituting diesel generation with grid power; assuming

demand continues to surpass supply by 20203 Includes demand for new cement capacity additions to meet local demand by established Nigerian players

Base case scenarios▪ Gas availability ▪ Power supply roll-out

Gas users

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.

Resource Diversification:Refining to Manufacturing

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.

25

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

SABICSADAF

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:

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

28

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 - PackagingBenefits of Non-Fuels Diversification - Packaging

29

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

30

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 MaterialsBenefits of Non-Fuels Diversification – Building Materials

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 - ElectronicsBenefits of Non-Fuels Diversification - Electronics

32

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 SportswearBenefits of Non-Fuels Diversification – Textiles and Sportswear

33

Diversification Approaches: Global Best Practice

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

3

Industrialisation could enable Nigeria to substitute imports (e.g., plastics, rubber, food) and help diversify its exports base

SOURCE: International Trade Center; UN Comtrade; McKinsey analysis

Exports, USD bn, 2009 Imports, USD bn, 2009

Primary sector

5.3

Food(2.6)

Wheat(1.1)

Minerals &Othermaterials(0.8)

Rice(0.5)

Oil & Gas(0.3)

Manufacturedgoods

28.6

Electrical and electronic equipment,machinery & advanced goods

(10.5)

Vehicles(6.6)

Chemicals(2.7)

Plastics & rubber(2.6)

Iron & steel(2.4)

Other materials (1.4)Metals (1.1)

Pulp & paper (0.6)

Other (0.3)Glass (0.2)

Fertilizers (0.2)

Total imports : 33,9 bn$Total exports : 49,9 bn$

Metals(0.2)

Chemicals(0.5)

Machinery &advancedgoods(0.6)

Othermaterials(0.7)

2.1

Manufacturedgoods

Other (0.1)

Primary sector,excl. oil & gas

2.7

Cocoa (1.4)

Food (1.1)

Minerals &other materials (0.2)

Oil & gas

45.1

Oil (42.2)

Gas (2.9)

Country

Abu Dhabi

Dubai

Oman

Diversification agenda / vision

▪ 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

Specific initiatives

▪ Release of 2030 Vision with diversification goals

▪ Set up of specialist, autonomous free-zone business districts (e.g., Qatar Science & Technology Park)

Qatar

SaudiArabia

▪ 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)

▪ 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)

Bahrain ▪ Development of Vision 2030 with diversification agenda

▪ Development of banking, aluminium and IT▪ Heavy promotion of tourism (mainly regional)

Other examples

Examples from Top 10 gas-rich countries

SOURCE: Press searches, Expert interviews

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

16

Successful case studies of industrial development by resource rich nations show focused diversification of economy

Highlights of actions taken Outcomes

SOURCE: Team analysis

Broad-based improvement in poverty reduction through the creation of alternative employment options not redistribution

Copper fueled growth drove diversification of economy and promotion of Chilean exports

Other economic sectors have benefited from the presence of mining and have delivered inputs to mining and associated activities

Clear economic diversification with spill over benefits to other sectors

− Copper exports 45% (2005) vs. 80% (1976)

− Besides manufacturing exports, exports substantial quantities of chemicals

− Developed new sectors like telecomm., construction, banking and retail

Leading development indicators in S. America

Poverty reduced 42% (1990) to 18% (2005)

Chile (1970)

Established transparent Petroleum Fund as fiscal to smooth out spending of oil revenues and act as a long-term savings vehicle

Resource-based economy dominated by oil and gas served as a source of funds

Strong investment in technology and infrastructure knowledge

Traded goods sector did not shrink or disappear as a result of targeted public investment

By the 1990s, Norway had forged ahead of neighbors on economic production per capita

Onshore industries have benefited to a limited extent from technology spillover effects

Norway (1960)

Finland (1990)

Recovered from severe economic crisis by successfully reorienting entire economy around telecommunications cluster

Resource-based economy dominated by wood, pulp, and paper exports to spur growth

Fall of Soviet Union devastated export industries (GDP fell >10% from 1990 to 1992)

Technology-based economy – Growth dominated by ICT sector (rising from 4% of GDP in 1993 to 18% in 2008)

Strong GDP per capita growth (3.5%) since 93

Developed global centre for innovation in telecommunications and other knowledge industries (e.g., biotech, environmental)

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

Strategies to Support Employment & Wealth Creation in Nigeria

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.


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.

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

40

• 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.

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)

41

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

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

42

• 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.

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

43

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.


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.

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

44

• Our experience from price regulation in the downstream petroleum sector shows that regulation has the following downsides:

a) Discourages investment: Companies invest where there is clear and transparent mechanism to recover cost and earn a profit

b) Lacks fiscal sustainability: Subsidy funds are required for other critical sectors of the economy

c) Distorts markets: Encourages hoarding and smuggling and creates arbitrage opportunities (black markets)

d) 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.

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

y = 0.9577x + 10.378

R² = 0.9449

020406080

100120140160

0 20 40 60 80 100 120 140 160

PMS

(RO

TT) $

/bbl

Crude Brent ($/bbl)

Crude _PMS Regression Analysisy = 1.2123x + 3.6963R² = 0.9479

0

50

100

150

200

0 20 40 60 80 100 120 140 160

KER

O (N

WE)

$/b

bl

Crude Brent ($/bbl)

Crude _KERO Regression Analysis

y = 1.2156x + 2.5348

R² = 0.9833

0

50

100

150

200

0 20 40 60 80 100 120 140 160

AG

O (

NW

E) $

/bbl

Crude Brent ($/bbl)

Crude _AGO Regression Analysis

y = 0.8421x - 4.4656

R² = 0.9162

020406080

100120

0 20 40 60 80 100 120 140 160

Fuel O

il (N

WE)

$/b

bl

Crude Brent ($/bbl)

Crude _Fuel Oil Regression Analysis

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

y = 0.4039x - 166.73R² = 0.9994

0

100

200

300

400

500

600

700

0 500 1000 1500 2000 2500

FRP

($/T

on)

PRP ($/Ton)

Relationship Between Feedstock Price and End Product Price • 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

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)

-2.00

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

0 100 200 300 400 500

Gas

Pri

ces

@ 1

5% R

oR

$/m

mb

tu

End Product Prices$/MT

AmmoniaMethanol

Urea

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

100 150 200 250 300 350 400 450 500

Gas

Pri

ces

($/m

mb

tu)

End Product Prices $/MT

Egy GP to Urea Plant IHS Studies GP to Urea Plant T&T GP to Ammonia Plant

EPP Based GP T&T GP to Urea Plant IHS GP to Urea Plant, 10% RoR

y = 0.0077x + 3E-15

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

50 100 150 200 250 300 350 400 450 500 550

Gas

Pri

ce($

/mm

btu

)

End Product Price$/MT

Egyptian Model: y = 0.01 x - 0.4 T & T Ammonia Model: y = 0.015x -1.063

T & T Urea Model: y = 0.013x -1.320 NDGP Model: y = 0.007x

• 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.

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.

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

Industrial Parks

Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer IndustriesStrategies to Support Employment & Wealth Creation in Nigeria (10)Industrial Parks with Pre-Investment in Infrastructure by the State: General Features

General Features of Clusters

• Location Allows for ease of importation of feedstock and evacuation of products

• Near Sea Ports• Good Transport Network• Railway Lines• Funding of infrastructure• By Government• By Private-Public Partnership• Management & Operations

• By Centralized Agency• Nature of Cluster• Industry-Specific • Conglomeration of Industries• Establishment• National Government• State Government• By Local Authorities• As Custom Zones • Policies

• Favorable Government Policies & Incentives

Factors that Attract Companies to Clusters

• Availability of Infrastructure such as road networks, electricity supply, ports, sewerage etc.

• Low cost of setting up and doing business

• Reduced cost of materials and services supply

• Availability of market for products and services; a high concentration of firms generate an increased market hence more opportunities for reaching to more customers;

• Liberal Government policies and support• Opportunities for training and

knowledge spill - over• Adequate security for investment and

facilities

51

Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer Industries Strategies to Support Employment & Wealth Creation in Nigeria (11)Industrial Parks with Pre-Investment in Infrastructure by the State: Relative Attractiveness of Industrial Clusters to Investors

Saudi -Australian Business Forum 2012

• Clusters with government funded infrastructure are much more attractive to investors:

• Lower unit cost of land as infrastructure cost is treated as social investment

• Viability of investors project is enhanced (Yanbu Industrial Clusters

• Clusters with private sector financed infrastructure are less attractive to investors:

• Higher land lease rate as developers seek for high returns within a short period

• Viability of investors project could be less attractive

Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer Industries Strategies to Support Employment & Wealth Creation in Nigeria (13)Industrial Parks with Pre-Investment in Infrastructure by the State: How Clusters Facilitate Efficient Supply Chain Management

Reduction in the cost of supply

• Proximity to sources of supply• Utilization of joint purchase agreements for

procurement of goods and services• Information sharing and collaboration among

companies on inventories and supplies• Utilization of joint suppliers data base

Reduction in holding cost • Just-in Time delivery of materials and services due to closeness of suppliers

• Minimal resources expended on materials handling

• Less likelihood of having obsolete materials

Reduction in cycle time • Closer sources of supplies• Inter organizational linkages

53

Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer Industries Strategies to Support Employment & Wealth Creation in Nigeria (12)Industrial Parks with Pre-Investment in Infrastructure by the State: Examples of how Clusters Facilitate Economic Development

• Generated $5 billion in Business output• Generated $1.7 billion in household Income• Contributed $2.7 billion to State GDP• Generated 30,000 Jobs• Paid $56 million in local taxes • Paid $54 million in State taxes • Generated $224 million in Federal tax revenues• Accounted for average wages of $63,000

annually (15% higher than State average)

• Contributed 3.16% of the Kingdom’s GDP• Attracted over $40 Billion in private investment

in the industrial sector• Generated 54,949 jobs as at 2008 and this is

expected to reach 83,064 in 2013• Sustained an average annual population growth

rate at 6%

• Generated employment of 15 million, 2% of the national total

• Contributed US$113.8 billion to China’s GDP, 5% of Total GDP

• Attracted US$5.5 billion of Utilized FDI representing 9.1% of China’s total

• Accounted for merchandize export of US$168.6 billion, 21.1% of China’s total

• Attracted over 150 companies into the country and N900bn ($6bn) worth of investments

• Created over 30,000 direct and indirect jobs for Nigerians.

• The Zone is now a hub of Oilfield activities, covering the whole Gulf of Guinea up to Angola and Southern Africa

• Enabled technology transfer to Nigerians through manpower training. For example, Tenaris, which is the largest pipe producing company in the world, has trained over 70 Nigerians overseas on pipe technology

Contribution of Connecticut Maritime Cluster (USA) 2011

Contribution of Yanbu Industrial Cluster (Saudi Arabia) 2012

Contribution of Special Economic Zones (China) 2007 Contribution of Onne Free Trade Zone (Nigeria) 2012

Source: Hartford Business Journal, Connecticut June 2012

Source: China National Statistical Bureau, 2006

Source: Saudi - Australian Business Forum 2012

Source: Oil and Gas Free Trade Zone Authority

Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer Industries Strategies to Support Employment & Wealth Creation in Nigeria (9)Industrial Parks with Pre-Investment in Infrastructure by the State: Global Examples

55

• Established in Year 2000 by the State of Connecticut

• Nature of Business: Maritime Services• Purpose: Improve the competitiveness of

Connecticut Maritime Industry• Infrastructure:• Port Facilities and Waterways• Intermodal Transport Connection Facilities• Infrastructure Financing: State of Connecticut

& PPP Funds within the State• Management/Operation: By the Connecticut

Maritime Coalition(CMC

•

The Connecticut Maritime cluster, USA

R E S I D E N T I A LA R E A

I N D U S T R I A LA R E A

IND U S T R IALEXPANS I ON AR EA

Yanbu Airport

King Fahd Industrial Seaport

Jeddah

• Established in 1975 by the Govt. of the Kingdom of Saudi Arabia

• Nature of Business: Oil & Gas• Purpose: Attract FDI & accelerate

economic development of the Kingdom• Infrastructure:• Developed Land 158 sq. km and Road

network• Power-1006 MW (800 MW to be added by

2015)• Industrial Sea port-7 terminals with 25

berth• Financing of the Infrastructure: By the

Government of the Kingdom of Saudi Arabia

• Management: By the Royal Commission

The Yanbu Oil and gas Cluster , Saudi Arabia

•Established in 1980 By the Govt. of the PRC•Nature of Business : Manufacturing, export processing, international trade, finance and information industry

•Purpose: Facilitate economic development and attract FDI

•Infrastructure :•Developed Land and Road network•Sea Port facilities and Railway lines•Utilities (Electricity &Telecommunications/Internet Facilities)

•Financing of the Infrastructure: By the Government of the PRC

• Management: By Administrative Committees established to manage the zones

Shenzhen, Zhuhai, Shantou, Xiamen Special Economic Zones, China

• Established in 1996 By the Federal Government of Nigeria

• Nature of Business: Oil & Gas• Purpose: To promote economic growth

and to strengthen Nigeria’s role in the regional Oil & Gas Industry.

• Infrastructure:• Road and Railway Network• Port Facilities• Electricity • Communication Facilities

• Financing of the Infrastructure:

By the Federal Government of Nigeria• Management/Operation: By D.M.S.

(NIGERIA) Ltd a subsidiary of UK based D.M.S International Ltd

The Onne FTZ ,Nigeria

Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer IndustriesStrategies to Support Employment & Wealth Creation in Nigeria (9)Proposed Ogidigben Industrial Park Federal Ministry of

Petroleum Resources

203D Imagery of Proposed Gas Industrial City - Fertilizer, Petrochemicals, Methanol, Power, Gas Processing, Housing

Moving the Oil and Gas Sector to the Next LevelStrategic Objective: Link Gas to the Wider EconomyMidstream Gas: Geotechnical Surveys at Ogidigben Industrial City

• Nigeria is taking tentative steps in its gas based industrialisation program by establishing an industrial park dedicated to manufacturing activities using gas as feedstock. This is an adaptation of successful models such as Jubail in Saudi-Arabia.

• This is distinct from Onne FTZ which is a logistics base for oil and gas activities.

Enhancing Employment and Development Opportunities through Gas, Petroleum Refining, Petrochemicals and Fertilizer Industries Conclusion

• Many natural resource rich countries are diversifying and transforming their economies using the hydrocarbon value chain for wealth creation.

• In Nigeria, diversification should involve includes diversifying the energy mix (from oil to gas) and fuels to non-fuels.

• Diversification will result in wealth creation through employment generation, import substitution and GDP growth.

• The keys to successful transformation lies in four strategies namely:• Create national focal point for developing industries beyond fuels

• Clear fiscal system for midstream oil with fiscal rules of general application

• Right incentives through price deregulation

• Industrial parks with pre-investment in infrastructure by the State

• An integrated approach to implementing the identified strategies is vital for the expected wealth creation to be realised.

BACK UP

Creating Wealth Through Diversification, Transformation and Development of our Refineries and Petrochemical Industries Strategies to Support Wealth Creation in Nigeria (12)Threats in the Horizon: The advent of US Shale Gas (2)

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