April 2018

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Africa: The challenge of investing in Africa’s additional capacities

According to BP’s Statistical Review of World Energy 2017, Africa’s total crude oil production is approximately 7.9 MMbpd.

Oirere, S., Contributing Editor

According to BP’s Statistical Review of World Energy 2017, Africa’s total crude oil production is approximately 7.9 MMbpd. Nearly 78% of the continent’s oil production is located in four countries—Algeria, Angola, Egypt and Nigeria. The region’s crude oil production significantly outweighs its refining capacity, and its oil production is more than double the amount it consumes. However, lack of investment, along with failing infrastructure and inadequate refining capacity are forcing the continent to rely on imports to satisfy increasing fuel demand. Most African refineries operate well below capacity, and the majority of new refining investments rarely progress beyond the initial concept stage. As a result, refined-product imports have increased for years. Africa’s oil demand is forecast to increase from approximately 4.3 MMbpd in 2017 to nearly 5 MMbpd in 2023, according to the International Energy Agency’s Oil 2018 report.

The region’s underperforming refinery output has stagnated at around 2.1 MMbpd or less. As this trend continues, Africa’s oil producing countries are grappling with the question of whether to embark on upgrades of their existing refineries or to build additional facilities to satisfy demand. Although the region’s crude oil production is more than enough to satisfy demand, the low utilization of the continent’s refineries forces Africa to import refined products. At present, Africa exports a significant amount of crude oil to countries in the Middle East and Europe. These refiners are more capable of processing the crude oil, at a cheaper cost, than are African refiners.

Across sub-Sahara Africa, refinery utilization rates are expected to remain low, unless announced plans to ramp up investments for the expansion and improvement of the quality of refined products come to fruition. This may be difficult, especially since African governments favor fuel subsidies and give priority to projects that provide leadership with political capital.

Despite these challenges, new refineries have been announced in countries such as Angola, Chad, Ivory Coast, Mozambique, Nigeria, South Africa, South Sudan and Uganda. According to Hydrocarbon Processing’s Construction Boxscore Database, Nigeria and Egypt hold the largest market share in active refining projects on the continent. A breakdown of active refining project market share in Africa includes:

  • Algeria—11%
  • Egypt—23%
  • Nigeria—34%
  • South Africa—14%
  • Other—17%.

Nigeria and Egypt represent nearly 60% of all refining projects in the region. However, unanswered questions include the amount of financing that will be needed to develop these refining plans, and the best public or private investment model to ensure that these investments actually happen.

Nigeria. One capital-intensive project is being built by the private sector. Located in Nigeria’s Lekki Free Trade Zone, the $10-B Dangote Industries Ltd. (DIL) integrated complex is being developed by Africa’s richest man—Aliko Dangote. The project, which will consist of an oil refinery, petrochemical plant and fertilizer manufacturing facility, is one of the few in Africa that has seen progress in mobilizing financing. In 2013, DIL announced it had received financing commitments of approximately $6.7 B from 12 banks, with the remaining $3 B to come from equity. The refinery will be operated by DIL’s subsidiary, Dangote Oil Refinery Co. Ltd. Once completed, the facility will be the largest single-train refinery in the world. 

Financial woes are holding back planned rehabilitation projects at Nigeria’s four existing refineries. The nation’s refineries suffer from operational problems due to insufficient management and a lack of regular maintenance. The primary goal of Nigerian National Petroleum Corp.’s (NNPC’s) rehabilitation program is to upgrade its existing facilities to boost utilization to at least 90%. It is not clear how Nigeria intends to finance the rehabilitation of its refineries, which are operated by NNPC affiliates—Port Harcourt Refining Co. Ltd., Warri Refining and Petrochemical Co. Ltd., and Kaduna Refining and Petrochemical Co. Ltd. The refineries, which previously underwent a $500 MM rehabilitation phase, have a collective utilization capacity of below 20%.

In June 2017, Nigeria’s Petroleum Resources minister, Ibe Kachikwu, indicated that Nigeria needs $1.2 B to restore and upgrade its domestic refining system. This cost includes the installation of new technology to enable the facilities to comply with global emissions requirements. The government has put in place a team to produce a financing model that could help attract potential investors; however, no firm agreements have been reached to help finance this program. The Nigerian government had also issued 25 licenses to private investors to build refineries in the country, but no progress has been made on these endeavors. A lack of funds and government-backed fuel subsidies make investing in new midstream and downstream processing operations unattractive to private and public investors.

Uganda. In August 2017, the Ugandan government confirmed that it had awarded the Albertine Graben Refinery Consortium (GE Oil and Gas, YAATRA Ventures LLC, Intracontinent Asset Holdings Ltd. and Saipem SpA) as the preferred bidder for the development of its 60-Mbpd refinery. The facility will process crude oil from the Hoima oil fields that are being developed by Total SA and Tullow Oil Plc.

According to a statement by Uganda’s Ministry of Energy, the winning consortium “... proposed to government a financing approach and a path to establish, develop and operate a commercially viable refinery company with a strategic benefit to the country and the region.”

Before the consortium was awarded the contract for the $4-B project, Uganda had offered Tanzania and Kenya an 8% equity stake each in the refinery. Tanzania accepted to pay $150.4 MM for its share, while Kenya expressed interest in a 2.5% stake rather than the 8% offer. Total SA announced in late 2016 that it would take a 10% share of the refinery project. With the addition of multiple equity stakes in the project, Uganda is hopeful that the project will be implemented on a timely basis.

Angola. The struggle to raise adequate financing for crude processing projects in Africa is best epitomized by the delayed 200-Mbpd Lobito refinery project in Angola. The $8-B refinery was proposed by Angola’s national oil company Sonangol. Although no financing commitments were in place, the company began site works on the project. In late 2016, Sonangol announced it was suspending construction of the refinery due to unfavorable economic conditions in the oil market.

After failing to attract international financial suitors, along with a lack of political goodwill on the part of the Angolan government, Sonangol had to suspend the construction to allow for the “reassessment of the strategic vision of development and implementation” of the refinery and marine terminal project.

Capacity rationing. By 2040, the International Energy Agency (IEA) forecasts that approximately 400 Mpbd of African refining capacity will be shuttered if additional investments are not made to upgrade the facilities. If investments come to fruition, however, the continent could see an increase in utilization rates, along with an additional 800 Mbpd of new capacity by 2040. This ambitious capacity expansion and upgrade program would cost approximately $40 B, according to the IEA. An additional $15 B would be required for regular maintenance. Although the additional refining capacity and modernization of existing facilities are needed, they may not be high on the list of priorities. African countries will need to find ways to fund these projects, or risk a future of import dependence. HP

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