Nigeria & China Sign Oil-Refinery Deal

Nigeria and China have come to an agreement to enhance their energy relationship. Both sides agreed on an oil refinery deal.

Nigeria and China signed a tentative deal to build three oil refineries in the West African state at a cost of $23 billion, strengthening the countries' energy partnership.

Nigeria, Africa's most populous country and one of its top oil producers, has been eager to boost gasoline supply and overhaul its rickety refineries. By helping Nigeria build new refineries, China may be able to expand access to the country's 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 added that the refinery deal puts China "in the running" for getting additional access to oil acreage. "This is business, but it builds goodwill."

Under terms, Nigeria's state oil company, along with a host of Chinese government-run entities, would build three refineries and a petrochemical complex, according to a statement from the state oil company, Nigerian National Petroleum Corp.

Officials said critical details remain unsettled, such as the pact's financial terms and who would operate the plants.

Yinka Omorogbe, the legal adviser for NNPC, said there was no timetable on the deal. Ms. Omorogbe called Friday's deal a "nonbinding" memorandum of understanding, adding that "we're going to sign an agreement in the next couple months." Asked about pricing details, she said, "We haven't done anything in terms of costing. These are just preliminary talks. ... The details aren't worked out."

Similar deals have failed to get off the ground. India's ONGC-Mittal Energy has been in talks to build a $4 billion refinery in Nigeria since 2005, but the project hasn't materialized. Government plans to privatize Nigeria's refineries have never moved beyond the planning stage.

Still, the Nigerian government's provisional deal with China could represent a major expansion in their energy ties, and possibly come at the expense of European and U.S. competitors.

Western oil companies haven't been eager to build and operate refineries in Nigeria because of poor financial returns. Nigerian gasoline and diesel prices are highly subsidized, so the refineries operate at little or no profit.

Meanwhile, the government has struggled to strike a balance between inexpensive fuel for its poor and a commercially viable industry for domestic refiners. The cheap Nigerian gasoline makes it a hot product on the black market of other African countries, so fuel is smuggled out, resulting in shortages at home.

Nigeria's tough refining economics haven't deterred China, which has been scrambling to secure access to oil reserves in other parts of Africa and around the world. Nigeria is looking to offer offshore oil fields to foreign companies, but hasn't yet announced the timing for bids on new licenses.

Funding for the three refineries is expected to 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 their funding. Each new refinery is slated to pump 250,000 barrels a day of refined products. It is unclear whether Nigeria would permit exports from the new refineries.

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

China now has limited drilling rights in Nigeria, something it is trying to change in order to reduce its dependence on oil from Angola, the Asian giant's top supplier. China imported just 28,000 barrels a day of Nigerian crude last year., compared with its total oil imports of 4.77 million barrels a day, according to China Customs data.

This is simply just a continuation of China securing and enhancing the sources where its energy comes from to power its growing and expanding economy. While some may point out  China is simply over paying for access compared to their western counterparts, one has to think from the Chinese point of view. China doesn't have that long of a track record like western countries-companies of dealing with energy African states like Europe and the U.S.  Second, this is the right time since China is flush with cash, thanks  to its economy rapidly growing and the down turn due to the global financial crisis. This is a good opportunity for Chinese firms to increase their stake and say in the energy-resource game in Africa.