Home Business Africa Now Ready For Indigenous Oil Refiners

Africa Now Ready For Indigenous Oil Refiners

Africa Now Ready For Indigenous Oil Refiners
Namibia like many other African countries imports Its oil from the gulf

AFRICANGLOBE – Simmering tensions between Iran and Saudi Arabia might have stolen the headlines but the U.S. shale revolution was never far from the discussions at last week’s Opec meeting in Vienna.

Not only are members of the producers’ cartel earning less on exports to the US as the price of oil delivered to the country tumbles, but Opec barrels are also being displaced from US refineries by fast growing domestic production.
This is being most keenly felt by west African Opec producers (especially Nigeria) that produce high quality light sweet crude similar to US shale output. So far, most of the displaced west African oil has been diverted to Asia, where demand is growing fast.

But what if more barrels get displaced? Where will the oil go? One emerging school of thought is Africa itself.

According to this theory small-sized refineries will pop up all over the continent in Gabon, Chad, Senegal, Uganda and South Africa to absorb the supply. At the same time existing refineries would process more crude to help satisfy rising local and regional demand.

Indigenous refining would also reduce dependence on imported fuel. Nigeria, for example, is Africa’s largest oil producer with output of nearly 2m barrels per day, but the country buys most of its petrol and diesel abroad and spends billions of dollars in subsidies to keep petrol prices low.

Perhaps it’s unsurprising that Nigeria is attempting to build up its refining capacity to meet booming local demand for fuel products. Dangote Industries recently secured financing to build the continent’s biggest oil refinery – a 400,000 b/d plant that would halve Nigeria’s fuel imports.

Other governments in the region also have ambitions for refineries. Sonangol, the state-owned Angolan oil company, has started work on a 200,000 b/d refinery project, costing $8bn.

Analysts at Barclays expect African crude oil demand to grow by 150,000 b/d in 2014, representing close to 15 per cent of global demand growth. That would cushion the blow if US refiners cut purchases of Angolan and Nigerian crude further from current levels of around 500,000 barrels a day.

However, Africa does not have a good track record when it comes to refineries. Analysts reckon more than 50 projects have been proposed in the past decade and only three were eventually built – and all of them by the Chinese.

One of the main problems is that, Nigeria apart, the economics of indigenous refineries simply don’t stack up.

“It’s partly about scale of the projects but the demographics and oil economics in Nigeria help,” says one senior industry executive, noting that Dangote is also building a petrochemical and fertiliser plant alongside the refinery. Nigeria imports vast quantities of fertiliser as well as oil.

But just because the economics are unfavourable that doesn’t mean projects won’t get the go-ahead says Barclays analyst Miswin Mahesh.

“Although refinery economics do not recommend these countries build their own refineries, especially given the expansion in refining capacity globally, domestic self sufficiency in refined products continues to find political goodwill in these countries,” he says.

Indeed, one banker said about a recent trip he made to an African country to discuss the idea of opening a refinery. “I told them it made no economic sense but they didn’t seem to be listening.”

That doesn’t surprise old hands in the oil industry. “Rather unkindly people say developing countries always want two things: their own airline and a refinery. It proves you are a grown up nation, apparently” says one oil trader.

A series of vanity refinery projects across Africa is unlikely the delight economists. Nevertheless, it may it make easier to the sell the region’s oil into an increasingly crowded international market and reduce the continent’s dependence on imported fuel.


By: Neil Hume

Exit mobile version