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Nigeria, China Sign Major Oil Deal

Source: The Wall Street Journal 5/15/2010, Location: Africa

Nigeria and China have signed a tentative deal to build three oil refineries in the West African state at a cost of $23 billion, in a move to boost badly needed gasoline supply in Nigeria and to position China for more access to the country's coveted high-quality oil reserves.

"This is a deal we need for Nigeria to cut our reliance on imports," said a senior Nigerian oil official.

He said the Chinese commitment to build refineries in Nigeria—a country that has long spent billions of dollars annually importing gasoline due to rickety refineries at home—would also help put China "in the running" for getting additional access to oil acreage in Nigeria, one of Africa's biggest crude producers and exporters. "This is business, but it builds goodwill in addition," the official said.

For the Nigeria government, the deal represents a victory of sorts over U.S. and European oil companies, which have long turned a deaf ear to Nigerian government calls to operate refineries in the country because of the poor financial returns.

Nigerian gasoline and diesel prices are highly subsidized. This government benefit is one of the few that Nigerians, most of whom live in poverty, have seen over the years from their country's big crude reserves. Nigeria's mostly low-sulphur crude, exported largely to the U.S. and Europe, is relatively easy and cheap to refine into gasoline.

The fuel subsidies mean refineries operate at little or no profit, a primary factor that has hurt new investment and upkeep at existing facilities. The subsidies have also encouraged a thriving black market for Nigerian gasoline and other fuel products in neighboring states like Benin.

But Nigeria's tough refining economics are an opportunity for the Chinese government, which is bent on procuring its state oil companies access to new oil reserves to fuel the country's speedy economic growth. Nigeria is looking to offer offshore oil fields to foreign companies but hasn't yet announced a date for any new licensing rounds.

Funding for the three refineries, each expected to pump out 250,000 a day of refined products, will come from the China Export & Credit Insurance Corp. and a group of Chinese banks. The Nigerian official said he didn't have details on what sort of returns Chinese banks might see from funding the projects.

Officials from China State Construction Engineering Corp. and Cnooc Ltd., the Chinese state offshore oil company, weren't immediately available for comment, while China National Petroleum Corp, China's largest oil company by assets, said it had no information on the Nigerian government's announcement.

The deal also envisages Chinese help in constructing a petrochemicals facility, which could help Nigeria convert some of its big natural gas reserves into higher-value products such as plastics for export.

China imports a small amount of Nigerian crude, averaging just 28,000 barrels a day last year—a drop in the bucket compared with China's total oil imports of 4.77 million barrels a day in 2009, according to China Customs data.

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