THE DOWNSTREAM PETROLEUM SECTOR: KEY TO ECONOMIC GROWTH AND

SUSTANABLE DEVELOPMENT
ABSTRACT
Economic growth is the increase in the market value of the goods and services produced by an
economy over time, conventionally measured as the percent rate of increase in real gross domestic
product, or real GDP. Therefore economic growth on the back of the downstream sector is the most
viable source of an increased wealth for the nations treasury as one sectors output creates an input
source for the utilization and value maximization of another sector, thereby creating for a non-stop
circulation of wealth across every sphere of the economy and in the process, terminating
unnecessary sources of economic breakdown such as an increased inflation rate etc.
The downstream petroleum sector comprises of various branches as seen in crude oil refining,
petrochemicals, gas utilization and sales, fertilizer production etc. all of which contribute immensely to
a nations economic growth as seen in gas sales via LPG etc.
This paper sheds light on the vast economic gains which can be generated from investment in the
downstream petroleum sector as components within this sector are highly interconnected, as seen in
the gas sector which opens the door to other dying sectors of the economy (e.g. the manufacturing
companies) through power generation, which can also be exported to other countries of the world as
it generates more income as compared to selling gas in its crude form (LPG). Furthermore, with an
increased gas production, yet another sector is revived and strengthened; the oil and gas refining
sector, and it creates room for the production of petrochemicals which are in use in our everyday life
ranging from plates, cups, pens, jerry cans, electrical fittings etc and better still, in fertilizer production;
yet another vital sector of the economy which will go a long way to ensuring food security and an
increased GDP through a combined source of wealth i.e. agriculture and petroleum.
In conclusion, this paper takes a dive into an extensive feasibility study into the various components
of the downstream sector, utilizing an Artificial Neural Network in the process to justify the vast gains
derived from investment in the downstream oil and gas sector of the economy, in particular, natural
gas utilization in the country via power generation, its benefits to the economy, as well as a compared
rate of return in terms of exports and its utilization within the country; fertilizer production which opens
the door to a once strong economic force of the country, the agricultural sector via the benefits of an
indigenous oil refinery.
INTRODUCTION
The Nigerian economy is built on two major sectors: the oil and gas sector and the agricultural sector,
with the oil and gas sector accounting for more than 95% of her foreign exchange earnings. The
downstream sector commonly refers to the refining of petroleum crude oil and the processing and
purifying of raw natural gas, as well as the marketing and distribution of products derived from crude
oil and natural gas.

In Nigeria today, a lot more emphasis is placed on the black gold Crude oil i.e. the upstream sector,
with gas resources associated with the oil being flared which results to economic losses as well as
devastating environmental implications.
The world wide use of natural gas is expected to grow at a very fast rate in response to the energy
need of the world, the environment and its abundance in nature. The unique characteristic of natural
gas makes it a premium fuel/energy source in many applications in the industrial, commercial and
domestic sectors. Its purity and freedom from pollution, desirability for electricity generation, heating
and use as fuel and industrial feedstock are few of its acclaimed attributes.
Various industrialized nations of the world such as the United States of America, China, Russia,
France, Egypt, India etc, have shown that utilizing natural gas both within and outside a country goes
a long way to securing a nations economy and also ensuring a reputable work force due to energy
availability.
In the year 1956, as at the same time oil was discovered in Nigeria, gas was also discovered. Nigeria
till date, has an estimated natural gas reserve of 187 trillion ft 3 (2, 800 km3) which is three times as
substantial as the crude oil reserves. Of this amount, 17.2 billion m 3 of natural gas is flared per year in
the Niger delta. Asides the proven reserve, 3.5 billion cubic feet (1,000,000,000 m 3) of associated gas
is produced annually with 2.5 billion cubic feet (70,000,000 m 3), or about 70% being wasted as a
result of flaring. The annual gas wasted due to flaring is estimated to cost the country about $2.5
billion annually, an amount, which would have been used to improve the economic growth of the
country.
But nonetheless, with natural gas being an untapped gold in the green lands of this nation, a positive
step to harnessing it would prove worthwhile as it could help curb the increasing unemployment rate,
revive other economically neglected sectors (agriculture, industry, steel and mine, refinery etc),
reduce spills and green house gases in our atmosphere and also create room for the discovery of
other undiscovered use of this resource.
In conclusion, this paper creates awareness in the vast economic growth and diversification derived
from investment in the downstream oil and gas sector of the economy, in particular, natural gas
utilization via power generation, its benefits to the economy through a compared rate of return in
terms of power exports and its utilization within the country, fertilizer production which opens the door
to a once strong economic force of the country i.e. the agricultural sector, and also the benefits of an
indigenous oil refinery.

LITERATURE REVIEW
Economic growth is the increase in the market value of the goods and services produced by an
economy over time, conventionally measured as the percent rate of increase in real gross domestic
product, or real GDP. It is majorly affected by the ratio of economic outputs to inputs (capital, labor,
energy, materials and business services (KLEMS), because increase in productivity lowers the cost of
goods, called a shift in supply.
The Nigerian downstream sector provides three main areas of investment:

1. Gas and power

2. Refining, petrochemicals and fertilizer plants
3. Services such as haulage and logistics services; equipment leasing; pressure vessels;
fabrication yards; turbo-machinery procurement and servicing; spare parts fabrication; financial
services; manufacturing of LPG cylinders and accessories.
Natural gas constituents
Natural gas is a vital component of the supply of energy. With its potential as the fuel of the 21 st
century, it is the cleanest, and most economical of all the fossil fuels (NGSA 2004). Natural gas
consists mainly of methane and other light hydrocarbons; nitrogen, carbon dioxide, hydrogen
sulphide, water, and other mineral which are in varying amounts.
Growth trends of natural gas
In 2006 according to BP global statistics review of world energy published (2007), natural gas
provides 24% of the world average energy needs and this is expected to increase likewise to 28% by
2020 as consumption of natural gas begins to increase globally in an exponential manner.
World natural gas consumption
Step by step, natural gas is over taking coal in terms of energy provision especially in the power
sector as seen in China and USA and is slowly out-pacing crude oil as the fuel of the future. The
reason for its growth can be seen in:
1. Cost effectiveness
2. Environmental benign characteristics
3. Energy security concerns
4. Fuel diversification needs of consumers
5. The deregulation of both natural gas and electricity sector in various parts of the world
especially in Nigeria.
With the increased demand for natural gas, its consumption is expected to double to 180 trillion cubic
feet or 500 billion cubic feet in 2020 from 104.2 trillion cubic feet in 2006.

USES OF NATURAL GAS: INDUSTRIAL USES

One of the most important uses of natural gas is in the industrial sector as it leads to diversification
into other sectors of the economy as seen in agriculture through improved crop production via the
production of fertilizer and also in petroleum refining.
Natural gas has a multitude of industrial uses, including providing the base ingredients for such varied
products a plastic, fertilizer, anti-freeze, and fabrics.

It is also consumed primarily in the pulp and paper, metals, chemicals, petroleum refining, stone, clay
and glass, and food processing industries as it provides energy source for efficiency in working.
It is also used for waste treatment and incineration, metals preheating (particularly for iron and steel),
drying and dehumidification, glass melting, food processing, and fueling industrial boilers.
Natural gas is also used as a feed stock for the manufacturing of a number of chemicals and
products. Gases such as butane, ethane, and propane may be extracted from natural gas to be used
as a feedstock for such products as fertilizers and pharmaceutical products.
Gases also provide a heat source, by the use of infrared heating units to provide an economic
method of using natural gas to generate heat in an industrial setting. They are useful in the metal
industry, as they provide innovative ways to increase the efficiency of powder coating manufacturing
processes. Natural gas is combined with a panel of ceramic fibers containing a platinum catalyst,
causing a reaction with oxygen to dramatically increase temperature, without even producing a flame.
Other uses of natural gas are seen in Residential use, hydrogen production, in the transportation
sector, as a fuel cell and in power production.
ECONOMIC GROWTH ON THE BACK OF GAS VIA POWER GENERATION
Natural gas is mostly harnessed in the power sector as it is a major source of electricity generation
through the use of cogeneration, gas turbines, steam turbines or a combined cycle. Its also used for
alimenting peak-load power stations functioning in tandem with hydroelectric plants.
Factors to be considered in setting up a new power generating unit/plant includes: The type of
generating system, the choice of energy source and its availability, Unit/plant rating, Economics.
The above decisions must thus be placed upon a number of factors. These include:
1. Technical
2. Environmental
3. Economics
FACTORS TO BE CONSIDERED IN THE SELECTION OF AN OPTIMAL GENERATING SYSTEM
TO SATISFY NIGERIAS ELECTRICITY NEED
1. Availability of cooling
2. Power generation capacity utilizing the coolant
3. Temperature reduction capacity of coolants.
4. Combustion temperature
5. Availability of the energy source
6. Emission rate
Generating
system

Cooling
components

Gas Turbine

Water and air

Power
generation
capacity
300 MW

Steam turbine

Water, air and

500 to 1300

Temperature
reduction
capacity
Reduces
temperature by
200 to 3000C
-2590C

Combustion
temperature

Emission

20000F

SO2 and NOX

in stack gases

383 to 5000F

NOX in stack

Combined
cycle

hydrogen gas
Water and
hydrogen gas

MW
100 to 300
MW

287 to 100 C

2732 F

gases
NOX in stack
gases

In line with Nigerias energy vision 2020, i.e. to generate estimated 60,000 megawatts of electricity, a
plant capable of serving the current expected maximum electrical load and providing some spinning
reserve for reliability and future load growth considerations would be appropriate. Therefore, from
table, a natural gas steam turbine(s), with a cross compound configuration and rating range of 500 to
1300 megawatts of electricity would serve the intended purpose.
ECONOMICS
The economics as used here refer to both the capital cost, operational and maintenance cost of the
turbine. In order to find out the best alternative out of the three, we compare:
1. The total power generating costs of the various systems
2. Both the fixed costs (i.e. capital plus fixed operational and maintenance costs)
3. The production costs (fuel costs plus variable operation and maintenance costs) for the various
systems.
Calculation procedure
Compute annual capacity factor
Supposed out of the 1300MW, we hope to gain 1,100MW from the steam turbine, then the annual
capacity factor will be:
Number of hours the turbine is expected

run( MWh)/ Expected power rating(MW )

8760/ year
7700000 /1100
100 % = 79.9%
8760

OR 7000hr/year

Annual fixed charge

The annual fixed charge rate represents the average, or levelized annual carrying charges including
interest or return on the installed capital, depreciation or return of the capital, tax expense, and
insurance expense associated with the installation of a particular generating unit for the particular
utility or company involved.
Table 1.5: Typical fixed charge rate for investor Owned Electric Utility.
Charge
Rate, Percent
Return
7.7
Depreciation
1.4
Taxes
6.5
Insurance
0.4
Total
16.0

NOTE: Fixed charge rate for investor owned utilities generally range from 15 to 20 percent; fixed
charge rate for publicly owned utilities are generally about 5 percent lower.
Assumptions:
The installed capital cost for:
A steam turbine @ 1,300MW = $300 million
A combustion turbine @ 250MW = $75 million
A combined cycle @ 300MW = $100 million
FIXED ANNUAL CAPITAL COST
For a combined cycle,
The installed cost per kilowatt is ($100 * 106)/ (300,000kw) = $333.33/KW
Fixed annual cost: ($333.3/KW) (0.16) = $53.328|KWyr
For a Gas fired Turbine:
The installed cost per kilowatt is ($75 * 106) / (250,000) = $300/KW
Fixed annual cost: ($300/KW) (0.16) = $48|KWyr
For a Steam Turbine:
The installed cost per kilowatt is ($450 * 106)(1,300,00KW) = $346.153/KW
Fixed annual cost: (346.153/KW) (0.16) = $55.36|KWyr
FIXED OPERATON AND MAINTENANCE COSTS
Assume the total fixed operation and maintenance cost is $3,750,000 per year for all units,
Fixed operation and maintenance cost on a per kilowatt basis is:
Combined cycle = ($3,750,000/yr) / (300,000KW)
= $12.5|Kwyr
Gas fired turbine = ($3,750,000/yr)/ (250,000KW)
=$15S|Kwyr
Steam turbine

= ($3,750,000/yr) / (1,300,000KW)
=$2.8846|Kwyr

COST PER YEAR AT A CAPACITY FACTOR OF ZERO

The cost in dollars per year per kilowatt at a capacity factor of zero is :( sum of Annual fixed capital
cost + Annual Fixed operation and maintenance cost)
For a combined cycle: $53.328|Kwyr + 12.5|Kwyr
= $65.828|Kwyr
For a Gas fired turbine: $48|Kwyr + 15|Kwyr
=$63|Kwyr

For Steam Turbine: $55.36|Kwyr + 2.88|Kwyr

= $58.24|Kwyr
Table: 1.6: Economic comparisons of the preferred electricity generating sources.
Combined cycle
Combustion
Steam Turbine
Turbine
Fixed Annual cost
$53.328|KWyr
$48|KWyr
$55.36|KWyr
Fixed Operation
$12.5|Kwyr
$15|Kwyr
$2.8846|Kwyr
and maintenance
cost
Cost per year at a
$65.828|Kwyr
$63|Kwyr
$58.24|Kwyr
capacity factor of
zero
Fuel cost (constant) $3.65|Million Btu
$3.65|Million Btu
$3.65|Million Btu
Total
$135.306
$129.65
$120.1346

ECONOMIC COMPARISON BETWEEN NATURAL GAS AND OTHER FOSSIL FUEL AS FUEL
SOURCES
FUEL COSTS
The amount of fuel used to generate electricity depends on the efficiency of heat rate of the generator
(or power plant) and the heat content of the fuel.
Efficiency is a ratio of the useful energy output by the system to the energy input to the system.
Table 1.7:
Fuel
Power plant heat rate
Natural Gas
8,152Btu|Kwh
Crude oil
10,829Btu|Kwh
(Source: U.S Energy Information Administration EIA- Independent statistics and Analysis)
Fuel cost done on a dollars per mega Joules (and million Btu) basis.
Cost of Natural Gas
On a dollars per mega joule basis, the cost of natural gas at $0.132728/M 3 ($3.76 per thousand
standard cubic feet) with a heating value of 1,030 Btu/ft 3 (38.370MJ/M3) cost
($0.132728/M3)/ (38.378) = $0.00345844/MJ $3.65/million Btu.
Cost of Crude oil
On a dollars per mega joule basis, the cost of oil at $100.81 per standard 42-gal barrel
($0.6340949/L) with a heating value of 43.733 MJ/Kg (18,800Btu/Lb) and a specific gravity of 0.91 is
($0.6340949/L) / [(43.733MJ/Kg) (0.91Kg/L)] = $0.01593322/MJ $16.81/million Btu.
Based on the definition of economic growth i.e. the increase in the market value of the goods and
services produced by an economy over time and based on the difference in cost of the two natural

resources above, natural gas which is usually exported in its crude form as LPG, if utilized in power
generation for use both in the country and most especially when exported, generates more income
and thus adds extra value to the economy. (Reference: ANN)
ECONOMIC GROWTH ON THE BACK OF THE REFINING AND FERTILIZER SECTOR
Fertilizer production utilizing gas is second to power generation in terms of gas investment. The major
constituents of fertilizer are nitrogen, phosphorous, and potassium which are blended into NPK.
Secondary constituents are sulfur, calcium and magnesium; all of which are got courtesy of gas
refining. This brings about economic diversification into a once booming sector that once saw the
country to greater heights; the agricultural sector. Agriculture is a major branch of the economy in
Nigeria, providing employment for more than 70% of the population. Currently, Nigeria has 75 percent
of its land suitable for agriculture, but only 40% is cultivated.
Based on a recent group study (Hazell et al) examining the effect of other channels of growth in lowincome earning countries of Africa, the findings can be applicable to Nigeria. According to the study,
industrial growth is less effective in reducing poverty than agricultural growth because a major
percentage of the populations (above 70%) live in rural areas. Definitely, this sector is highly
favorable for economic growth as it provides greater employment opportunities especially for the poor
and the unskilled.
Due to the discovery of unconventional oil resources by other nations of the world and with Nigerias
oil reserve fast depleting, the markets for the sales of our crude oil products are fast closing which
means attention has to be diverted into another viable sector of the economy.
In reference to historical statistics, in 2010, Nigeria spent an enormous amount on food imports. She
spent USD $635 billion on wheat imports and USD $356 billion on rice imports. It also spent USD
$217 billion on the import of sugar and USD $97 billion on fish imports, totaling $1.305 trillion, an
amount which in every ramification, exhausts to the barest minimum, every foreign exchange
earnings we make which results to a very high inflation rate.
Gross Domestic Product (GDP); an indicator of the standard of living of a country, is determined by
output, input or expenditure. The vast amount of wealth the nation gains from the sales of crude oil,
when compared to the sales/export of agricultural products, proves that the nation actually gain less
than she ought to because with the boom of the fertilizer sector, there is not only an improved crop
yield which creates for an increase in export and reduction in inflation rate, but also a market for the
sales of fertilizer both within and outside the country, is established.