Refining capacity in African countries: Same side of different coins

Africa's oil refining ambitions in focus.

Africa’s oil refining ambitions in focus.

Chijioke K. Mama

18 January 2015, Sweetcrude, Lagos – Technological improvements and the passage of time have historically been the challengers of status quo. Systems and processes that refuse to change or adapt to realities are often nudged into obsolescence. As the energy landscape in African nations gained prominence within the global energy market and local production continuously rose in the past decades; refining capacity too has been in increasing demand all over the continent. Africa has never actually lived up to expectation in that segment of the downstream sector; traditionally relying on crude product export to Europe, America and the Middle East, where refineries compete better in many aspects. That traditional dependence has now come under severe criticism and recent events are challenging the practice. Rising Oil and Gas production in Africa, tighter product specifications, international pressure on market liberalization and forecasts about rising energy demands (both in domestic markets and the global market) are contributing to a common pool of forces that challenges the status quo in African refining business. Thankfully, stakeholders are now awake to the deafening call to grow and improve refining capacity, in order to compete better and to drive regional economic growth. In 2006, African Refiners Association (ARA) was formed to achieve the needful and lead in the creation of a common voice and tool to reposition the segment.

The sad outlook:
The problem with the numerous refineries in African countries is almost the same and the pressures they face are the same side of different coins. Following the completion of the El Nasr refinery in Egypt in 1913, about 55 other refineries have been built in Africa; 21 in North Africa and 19 in Sub-Saharan Africa (SSA). Many new refineries are also proposed in various countries such as Nigeria (Dangote Refinery/Petrochemical and Fertilizer plant, valued at $9.0b with a capacity of 400,000 bpd) Angola (Lobito Refinery in Benguela with a capacity of 200,000 bpd and expected in 2018) Uganda and Sudan have proposed projects too. However, the older refineries’ performances are far from optimal. This is in spite of huge regional/global market potential and favorable conditions such as increasing population growth that will drive urbanization/rise in vehicle usage. Others include, regional economic growth forecasts and rising per capita income (in many African nations), all coupled to the dwindling fortune of many refineries in Europe (OGJ’s 2013 survey, shows a global drop in refining capacity in both number and volume -10 and 900,000b/cd – respectively; mostly in Europe and Asia)

In Response to the numerous challenges, ARA conducted a joint report with the World Bank in 2009 to evaluate the future investment needs of SSA refineries. The report found that SSA refineries’ operation are inefficient and have massive need for investments to enable them improve productivity and efficiency. The report suggested that the health benefits and macro-economic derivatives of such investments in refineries’ upgrade, largely outweighs the cost. What are the issues?

Low Complexity/Utilization:
most refineries in Africa have low capacity and complexity relative to the refineries in Europe, Middle East and America. Refineries in these regions process upward of 200,000 bpd and frequently possess cracking capacity. In contrast, of the twenty one (21) refineries in North Africa only eight (8) have a capacity of 100,000 bpd or more and only one (1) has cracking units (MIDOR in Alexandria, Egypt) In Sub-Saharan Africa, seven (7) refineries have capacities greater than 100,000 bpd and ten (10) have cracking units. In spite of the relatively low As-Built potential, these facilities normally operate below capacity due to many reasons. Some of which are operational and maintenance negligence, investors’ unwillingness (or inabilities) to support upgrade initiatives, low power supply and frequent pipeline vandalism (for example in Nigeria). The low complexity, make some of these refineries unable to take economic advantage (import parity pricing) of refining local products (when they are sour crude). This is because additional functional units required for processes such as desulfurization are lacking. This is the case of SoNaRa Refinery in Cameroon and its local Kole terminal products, as well as, SIR in Ivory Coast and its Baobab and Espoir fields. They prefer Nigeria’s Forcados and Bonga light crude products, to minimize both desulphurization needs and the production of large volumes of low-fuel oil.

Political/Fiscal Uncertainties:
Product subsidies and a regulated petroleum products market which is common in most African markets is also a problem. African nations are increasingly coming under pressure from the international community, through the IMF and the World Bank to liberalize markets and deregulate products. The response has been slow from many African leaders. However, the challenge is that government imposed prices on refined outputs make domestic price artificially low (where the primary market is domestic). This discourages a market driven private sector participation and encourages corruption. In circumstances where governments delay in paying subsidies to these refineries, cash flows are negatively impacted leading to enterprise problems that may be cascaded throughout the plants’ operations.

Tighter Product Specifications:
Adapting to the need for tighter product specifications is a big challenge for most African refineries. The move to unleaded gasoline proved herculean for many of these facilities. Other specification changes such as the lowering of sulphur levels in both gasoline and gas oil are proving to be very big hurdles for them to cross too. Upgrading to meet these new challenges and the provision of additional units will require huge sums that are either not available due to dwindling margins or are impossible due to other internal considerations.

These challenges are valid threats to continued operation and they make majority of the refineries unprofitable/uncompetitive with those in other regions of the globe. Unless Africa’s refiners – through ARA – and the leadership of African nations come together to collectively chat a way forward, this segment may experience even more threats. Through valid policies and collaboration with all stakeholders, strategies and action plans may be crafted that holds the promise of salvaging the segment. Only then can the positive economic indices in Africa and the promises which its resource endowment holds for the people, be actualized.
*Chijoke K. MAMA is a Senior Oil and Gas Analyst in Lagos, Nigeria. | 070-6101-3333

Sources of Information
African Refiners Association | CITAC Africa LLC | Richard Augood (Downstream focus) |Final Report: Sub-Saharan Africa Refinery Project (Africa Refiners Association and the World Bank) | Dangote Group | Oil and Gas Journal (OGJ).

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