From the Eastern Cape to The Niger Delta, the continent struggles to attract investors for large sized refineries that are able to supply regional economies.
By Toyin Akinosho
Just five years ago, Africa seemed ready for a boom in construction of large scale refineries.
South Africa’s PetroSA, the state hydrocarbon company, had, in 2007, come up with Project Mthombo, planned to use 400,000Barrels of (mostly imported)crude oil every day to produce millions of litres of gasoline, diesel and a range of other products.
In Angola, the state hydrocarbon company Sonangol, announced it was up to speed with Sonaref, a 200,000BOPD refinery, to be located in the port town of Lobito in the country’s Benguela province.
Around the same time, there was talk about a group of Egyptian and Saudi Arabian investors planning to build a 130,000BOPD refinery at al-Ain al-Sokhna on the Red Sea coast, east of Cairo. In the same country, Essar Global, the UAE company, proposed a $3.4Billion, 300,000BOPD refinery in Northern Egypt, to come on stream in 2010. The target market was Europe. Refineries in Egypt, as a rule, have state participation.
Nigeria didn’t have in mind a state sponsored refinery project at the time. But its plans were more elaborate; it hoped to open up its downstream and create a private sector led refinery construction effort. By December 2004, it had licenced 24 companies to come up with proposals. By mid-2007, eighteen (18) of these companies had been granted approvals to construct refineries, at least eight(8) of which would each process 100,000BOPD of crude. The country was about to have, in the minimum, 800,000BOPD refinery capacity, on top of the three state operated refineries with nameplate capacity 445,000BOPD.
Down the road, the Ugandan government presented the case for a 180,000BOPD refinery, starting with 20,000BOPD plant, to Tullow Oil, the country’s main upstream operator. As the London listed company declared commerciality of Ugandan crude reserves, the government wanted it to choose refining over crude oil export.
But none of these projects looks as if it will get to construction stage any time before 2014. The Chinese had walked out on Angola’s Sonangol on account of disagreement over equity participation, and no other investor has been reported to have come along. The state now says it wants to build the refinery with own money and contracts for building the 200,000BOPD refinery are now expected to be awarded late 2013 or early 2014.
Only in May 2012 did PetroSA sign a Joint Study Agreement with the Chinese company Sinopec, which will lead to a concept framework to be reviewed by the two parties before investment decisions can be made. Construction will not start before 2014.
South African authorities are clearly embarrassed that they have not managed to move the project beyond concept planning stage, five years after it came to the table. You could tell a hint of finger pointing with this statement, made in a September 2012 BusinessDay article by PetroSA’s CEO, Nosizwe Nokwe-Macamo. “South Africa cannot afford to postpone a positive decision on Mthombo lest we find ourselves in the terrible situation with regards to liquid fuels that we experienced in 2008 during the electricity crisis”. This is a way of saying: ‘we are doing our bit, but it’s not entirely in our hands’.
In a swift reaction, the country’s department of energy explained, in a statement reported by Johannesburg’s City Press: “The department has always maintained that a new oil refinery needs to be operational by 2020”, the newspaper quoted….. “the current pace of the project is squarely in the hands of PetroSA”.
While the Angolan project is largely export oriented, the South Africans are mainly targeting their home market. Angola’s 12 million people, with a low industrial base, needs less than half the volume of petroleum products that Sonaref is expected to deliver. Coega, on the contrary will add more than 50% of products to South Africa’s 750,000BOPD refining capacity. Coega forms part of the country’s energy security master plan, which stipulates 30 percent of crude procurement occurs via state agencies.
The Nigerian plans had generally turned out to be pies in the sky, as putative investors claimed that an environment where subsidy reigned could not be favourable to free market. Even when the state announced an MoU between its hydrocarbon company NNPC and China State Engineering Construction Corporation(CSECC), murmurs of “I’d believe it when I see it” filled the air. . A government appointed task force on the investment environment for crude oil refining in the country, released its report in late November 2012 and declared that it had examined 35 greenfield private refinery licensees/applicants and “seven were found to have reasonable potential”.
The Nigerian government is currently spending about $1.5Billion to repair its three refineries(with name plate capacity of 445,000BOPD), to deliver as much as possible of the 52 Million litres per day of petroleum products they were designed to supply.
These three refineries have been able to deliver barely 20% of this volume in the last 15 years, according to the task force report. This supply gap has been bridged over the years from imports, to the extent that in 2011 as much as 76% of aggregate demand was imported. “Further analysis of the 2011 supply gap with respect to each of the products clearly shows that import dependence factors for AGO, DPK and PMS are 31%, 55% and 86% respectively”, says the report. “By implication Nigeria is almost totally dependent on imports for PMS”.
Algeria was completing its overhaul of the 350,000BOPD (nameplate) Skikda Refinery, the continent’s largest, as of the time of our going to press with this article. “The expansion will add capacity to produce four million tons per year of downstream products”, government officials say. “The project will produce gas, butane and condensate; it will reduce Algeria’s fuel imports by at least 20%”. The bill for the Samsung led upgrade was reportedly $3.5Billion.
Still, it is Egypt, where geography allows big refineries to meet the needs of their markets in Europe, that Africa is likely to commission its biggest new refining facility in the next three years. Here in North Africa’s largest economy, where government is always keen to build new hydrocarbon processing facilities, there have been reports by a flood of private investors as well as other governments, -willing to use the country as a hub to export refined products to Europe. But the only one project that can be reported here as being firmly on course is the “Citadel” Refinery, for which construction is firmed up to begin by mid- 2013. Funding for the project started coming to fruition in August 2010, when the Egyptian Refining Company (a Special Purpose Vehicle comprising state hydrocarbon company EGPC and project promoter Citadel Capital) signed a $ 2.35 billion senior financing package provided by Export Credit Agencies and Development Finance Institutions including the Japan Bank for International Cooperation (JBIC), Nippon Export and Investment Insurance (NEXI), the Export-Import Bank of Korea (KEXIM), the European Investment Bank (EIB) and the African Development Bank (AfDB). Plus:a total of $225 million of subordinated debt financing is being provided by Mitsui & Co. and AfDB.
Sited in the Mostorod Refinery Complex, the new refinery will be processing 100,000BOPD and will produce, along with other fuels, 2.5 million tons of diesel oil annually when the complex is completed. Regulatory and environmental approvals for the project have been obtained and ERC has signed a lump-sum turnkey contract with GS Engineering & Construction / Mitsui & Co.
Elsewhere on the continent, attempts to attract investment for refineries in excess of 50,000BOPD capacity have run into one brickwall after another.
Libya’s Ghadaffi-era plans for overall upgrade and new capacity were truncated by the war.
In Uganda, Tullow Oil, the flagship operator, told the government clearly that it wasn’t going to be part of the authorities’ scaling up of the proposed refinery from 20,000BOPD to 180,000BOPD. What Tullow Oil and Co would commit to is a 4,000BOPD early production system, capable of yielding diesel, paraffin, heavy oils, and aviation oil but would not produce petrol. Tullow is choosing to pursue the construction of a mini refinery because the cost of constructing a crude oil pipeline to the cost is huge.
The refinery sector has not been anywhere near the profitability of the upstream segment of the hydrocarbon industry and African refiners face the challenge of new refining capacity under construction in Asia and the non- African Middle East.
Lacking cash and ready investors, African energy projects often stay on the drawing board for long period and quietly roll off the chart. It is in the hands of Africa’s homegrown businessmen to turn this around.