May 17 - After years of seeking international investment for its refining sector, Nigeria has finally secured a major deal with a Chinese company for the construction of three new refineries in the West African country at a cost of some $23 billion.

State-owned Nigerian National Petroleum Corporation (NNPC) signed May 13 a memorandum of understanding with the China State Construction Engineering Corporation (CSCEC) to build the plants, with total nameplate capacity of 750,000 b/d, and a petrochemical plant

Despite producing more than 2 million b/d of crude and with 35 billion barrels in reserves, Nigeria imports over 80% of the fuel consumed locally due to the poor performance of its four state-owned refineries.

The existing plants -- Warri, Kaduna and two in Port Harcourt -- have been operating far below their nominal capacity of 445,000 b/d for years due to neglect.

Statistics released in November last year by Nigeria's Department for Petroleum Resources showed combined average performance of the refineries during the third quarter of 2009 at just 6.66% of capacity.

 The Nigerian government has long sought downstream investment from some of the international majors operating in the country such as Shell, Italy's Eni, France's Total and US' Chevron. However, western companies have been reluctant to spend on the downstream.

Nigeria also promised preferential rights on prolific oil blocks to companies -- mainly from Asia -- that promised to build refineries during the country's oil licensing bid round in August 2005.

But none of the projects has taken off, and one deal, signed after the bid round with South Korea's KNOC to develop two oil blocks in return for downstream investment, was revoked by the Nigerian government because of a lack of downstream spending.

Now China is entering the sector, which could revolutionize Nigeria's downstream oil industry. According to the agreement, CSCEC is to build one refinery each in Nigeria's commercial capital of Lagos, in Brass in southern Baylesa state and in north-central Kogi state, while the petrochemical plant will be sited in Delta state, NNPC said in a statement.

NNPC said the projects would cost $23 billion and would be contractor-financed with funding coming from the China Export and Credit Insurance Corporation and a consortium of Chinese banks.

NNPC aims to accelerate the construction of the new refineries in Nigeria to stem the flood of imported refined products into the country, currently costing an estimated $10 billion/year, it said.

For its part, CSCEC wants to expand its presence in Africa and to firmly establish its footprint in the Nigerian oil and natural gas sectors, NNPC added.

Chinese investors have also been in talks with the Nigerian government to buy into oil production licenses that have lapsed with other international producers.

Offshore specialist CNOOC was reported as trying to buy 6 billion barrels of oil, equivalent to one in six barrels of the proven reserves in Nigeria for up to $50 billion.

However, CNOOC CEO Fu Chengyu in March this year denied the reports, marking the first time the company commented on the speculation it had approached the Nigerian government regarding the oil blocks.

"We will not talk on [taking] any concession that is not in the hands of the government," he said. "Only if the blocks are controlled by the government, then we can negotiate."

Oil majors including Shell, ExxonMobil, Chevron and Total, which account for the bulk of Nigeria's 2 million b/d crude output, are currently negotiating renewal of their leases.

Construction of the refineries is slated to kick off in Lagos before the end of this year, while the projects are to be executed over the next five years, the company said.

NNPC CEO Shehu Ladan said the new refineries would reinforce Nigeria's bid to reform its oil and gas industry, for which the controversial Petroleum Industry Bill would give legal impetus, and also signal the imminent deregulation of the country's downstream petroleum sector.

NNPC's former Managing Director Mohammed Barkindo said in March the PIB would create an environment for the deregulation of the downstream sector and would ease the present fuel supply and distribution burden on NNPC.

The country has been battling oil product shortages since last November after private companies abandoned fuel imports due to the delay in the government settling claims on subsidies on the imports.

Nigeria's powerful oil unions have been skeptical about China's role in the country's energy sector largely because they fear job losses and competition from foreign-based companies.

"We will not support the Chinese deal to build new refineries if they do so without taking the welfare of indigenous workers into consideration. That is our main priority," Pengassan General Secretary Bayo Olowoshile said. "We want them to respect and comply with local labor regulations and this means addressing issues such as equal partners and stakeholders," he said.