Despite the growth of Africa’s oil and gas industry over the past decade, the continent still imports more than half of the oil it consumes, according to Evaluate Energy. Even though there have been significant upstream discoveries, Africa’s total refining capacity has hovered at around 1.2 million barrels per day (bpd) for the past decade. With the oil price having recovered in the last year, this looks set to change.
According to oil and gas consultancy Gaffney, Cline & Associates, the project economics of oil refining have made it a difficult industry for most African countries to develop. The conventional wisdom is that refineries should be built close to centres of demand but that ‘much of Africa’s [refined product] demand is widely dispersed’ and, with challenging logistics infrastructure, many African nations do not provide the large volumes that big export refineries require. This is one of the main reasons why Africa, which produces three-and-a-half times the oil it uses, has just 46 refineries. Many of these have been run down, with production at only a fraction of capacity.
However, in 2019 the situation is being transformed. Refurbishments and expansions are under way on existing refineries in South Africa, Egypt, Ghana, Nigeria, Zambia, Sudan and Angola. In January, the African Finance Corporation announced financial closure for a project to refurbish Côte d’Ivoire’s national refinery, to bring it up to international emissions standards. New-build projects are taking place at two locations in Nigeria as well as in Algeria and Uganda, and intentions have been made public for greenfield refineries in South Africa, South Sudan, Angola, Egypt, Ghana and Nigeria.
In early 2018, the Egyptian Ministry of Petroleum committed to increasing production of diesel, gasoline, butane gas and jet fuel by 11.6 million tons over the next four years. This requires not only refurbishments and expansions to several of the country’s existing nine refineries but also that progress be made in bringing the US$4.2 billion (145 bpd) Mostorod refinery north of Cairo into full operation. The refinery, which is substantially complete, has lagged since the first construction contracts were issued in 2007. The government of Egypt is also discussing plans with Japanese company Toyota for the construction of a large refinery complex in northern Sinai. Total anticipated investment so far is in the region of US$9 billion.
In Africa, the jewel in the crown will without doubt be the Dangote refinery (under construction since July 2017) at Lekki near Lagos city, Nigeria. The refinery, with a capacity of 650 000 bpd, is set to be the biggest in Africa by some distance and one of the 10 largest in the world. By comparison, South Africa’s largest refinery, Sapref (Durban), has a capacity of 180 000 bpd.
The Dangote refinery is a unique African example of a large export refinery. There has been a trend in the past decade to build mega installations – such as India’s 1.24 million bpd Reliance Refinery (the world’s biggest refinery hub), located at Jamnagar in Gujarat – that are intended to sell refined product into the international market, rather than depend on locations close to market. These plants can achieve economies of scale that overcome the freight disadvantage resulting from being located far from the customer.
In Dangote’s case, however, location is not a constraint. The refinery is intended to sell about just 35% of product internationally, with the rest going to the local market. In 2018, Nigeria had to import 70% of its total fuel requirement (mainly gasoline), an expense that accounts for around one-quarter of the country’s total imports.
The Dangote refinery’s project economics are not solely dependent on producing gasoline, however. Feedstock from the same source (natural gas from the Niger River Delta) will be used to drive a US$2.5 billion fertiliser factory. The plant should start production during the course of 2019.
Dangote’s project is not the only Nigerian initiative. The government has plans to refurbish the four older state-owned refineries in the country and has appointed an Italian firm to advise on the biggest, the 210 000 bpd Port Harcourt facility. The four refineries have a combined capacity of 445 000 bpd but have been refining just a fraction of that. In 2017 they worked at a combined 8.67% of potential. Port Harcourt’s last revamp was 19 years ago. Across the continent, however, there are reasons for caution. Six years ago the Financial Times noted that of the 50-plus projects proposed by various African countries over the previous decade, only three were actually built. Industry experts suggest that refineries in developing countries are often ‘vanity projects’, driven by ‘oil nationalism’, where project numbers do not add up.
Against this background, it is encouraging that the Kenyan government has made a series of rational decisions about oil refining. First, it closed its only oil refinery, at Mombasa, after consultants had stated that the US$1.2 billion required to upgrade it would not make economic sense. Then earlier this year, Andrew Kamau, principal secretary of Kenya’s Ministry of Petroleum and Mining, announced that the country would not be proceeding with a new refinery to process locally produced crude oil as the volumes were too small to justify the expense.
Kamau demonstrated an ability to stand up to the oil nationalist argument. ‘I know to some people it’s an anathema to have the crude oil exported and then you import refined product. But at the end of the day if you can import refined product cheaper than you can refine it yourself, that’s what makes more sense,’ he said.
South Africa differs from other sites of refining activity in Africa in that it produces only vestigial volumes of oil and gas. The country’s six refineries are, with the partial exception of the small (45 000 bpd) Mossgas oil-from-gas plant, examples of refineries located close to market.
However, most South African refineries are more than 50 years old and have been struggling to upgrade to meet the Euro 5 emissions standard introduced by the government in 2012. This does appear to be changing though. In November 2018, Shell and BP – owners of Sapref – announced a US$1 billion investment, with more than a quarter of that sum set aside to upgrade the refinery to produce lower-sulphur diesel.
Chief executive of BP Southern Africa Priscillah Mabelane says the objective was ‘to make sure the refinery can meet the new specifications in terms of low sulphur and Marpol regulations’. Marpol regulations are an international convention to prevent pollution from ships. But there may still be issues ahead in achieving cost recovery for refineries, in the context of South Africa’s highly regulated (and taxed) liquid-fuels industry. ‘From an industry perspective, we’re pushing very hard to ensure there is policy clarity because we have been on this journey [for] very long – almost a decade,’ she says.
Another of the country’s big refineries is the 100 000 bpd Astron Energy facility located in Milnerton, Cape Town. Astron, which owns 810 local service stations (19% of the retail market), recently entered the local market through a majority acquisition of the former Chevron South Africa, after a shareholding transfer to Glencore. Jonathan Molapo, Astron’s CEO, says: ‘Investment in South Africa has positive potential. [It] has the highest fuel consumption in sub-Saharan Africa. It is 25% higher than Nigeria’s demand yet has a population three times smaller.’
The deal, first mooted in 2016, was conditionally approved by South Africa’s Competition Commission in March. Among the commission’s conditions is that ZAR6 billion be spent within the next five years to upgrade the refinery’s product quality.
There was considerable excitement in early 2019 when the world’s biggest oil company Saudi Aramco announced its intention to invest US$10 billion in a new crude oil refinery and petrochemical plant in South Africa. The South African government has been trying to attract a new refinery – Project Mthombo – for several years and has previously held talks with other potential investors, including the Chinese state-owned company Sinopec.
In January this year, Saudi Arabia’s Energy Minister Khalid Al-Falih signed a declaration of intent with his South African counterpart, Jeff Radebe. But this is a long way from an actual investment plan. One issue is that the intention on the part of Saudi Arabia to invest was initially a political response to South African President Cyril Ramaphosa’s initiative to attract foreign direct investment. A hurdle that looms large is the location within South Africa of the investment. The Saudis have already turned down a suggested crude oil storage site in ‘the western side of the country’ (most likely Saldanha Bay).
Commenting on the potential location of the Saudi-owned refinery, Radebe promised a quick decision. ‘You’ve mentioned Coega [near Port Elizabeth], but we’re also looking at Richards Bay. The final location of the oil refinery will be determined in the next few weeks when we finalise the MOU and the concept document after doing some preliminary studies,’ he said.
There is no doubt that the collapse in the oil price in 2014 was a big blow to plans to construct refineries in many parts of Africa. This saw the continent refining about just one-fifth of the oil it produces. However, the upturn in the oil price in 2019 now offers more favourable project economics than have prevailed for the past five years, and signs are that many long-delayed projects are coming to fruition.