October 20, 2017

First things first: Turning African refineries into global competitors

African governments need to create incentives to nurture local refinery capacity (image credits: www.energyfuse.org)

Any investment in the petroleum refining business, which is typically capital-intensive and prone to market volatility, should be made with a long-term view. So, to graduate from mere crude oil producers, African countries have to nurture conditions favourable for the development of robust, sustainable and competitive domestic oil refineries, African Mining Brief gathers from the research team from London-based, CITAC AFRICA Ltd.

 As Africa has become one of the world’s fastest growing markets of refined petroleum products, some commentators, through various conferences on gas and oil investment, have been lamenting about the failure or half-hearted efforts of continent’s oil-rich countries to develop sustainable local downstream industries, particularly oil refining capacity. As a result of this, they argue, the continent has been ‘losing’ billions of much needed dollars in potential revenue.

Recent developments in the continent’s refined petroleum products market have fueled the debate.  Currently, overseas refineries meet around 40% of Africa’s 3.9 million barrels of daily consumption of petroleum products, according to CITAC Africa. CITAC forecast this to rise, by around 250,000 barrels per day between 2016 and 2018 depending upon which refinery projects come to fruition.

Nevertheless, instead of ruing what could have been, oil-rich countries should take a long-term view and focus on how they can nurture sustainable domestic petroleum refining capacity.

Key issues

From an interview with the team CITAC Africa, headed by Consulting Director Ms Elitsa Georgieva, African Mining Brief, gathers key issues that are ignored in the charged debate on the stagnant state of African’s downstream petroleum industry. CITAC Africa is a consulting firm that has extensive experience in Africa’s oil and gas industries and is the retained consultant for the African Refiners and Distributors Association (ARA).

CITAC Africa clarifies a few misconceptions about the oil refining business in Africa, suggest how domestic capacity can be nurtured, and offer vital information to prospective investors as well as governments.


 In the course of working on the continent, CITAC has documented several constraints which resource-rich countries face, in particular: limitations of state ownership, lack of capital, volatility, country risk, and quality issues.

  1. State ownership

First of all, it is important to clarify that, if a country is ‘resource-rich’ it does not mean it is ‘rich’. The resources still have to be translated into tangible revenue. Even countries with flourishing oil sectors have competing demands on their dollar revenue, which include but not isolated to debt repayment, education, public health, infrastructure (ports, roads, rail, amongst a host of others).

Thus, due to the burden of meeting these obligations, the countries do not have sufficient financial resources to invest in the development of fully fledged refineries. It is worth mentioning out that, in African countries, with the exception of South Africa, refining companies have significant share of state ownership.

  1. Capital constraints

Refining is a capital-intensive industry. Capital is needed not only during the construction, but also during ongoing maintenance and enhancement, as well as running. Securing the necessary capital for a project in Africa is more complicated, given that, comparatively, there is a perception that there may be more risks to investment than in other regions.

  1. Volatility

 Typically, profitability in the refining business is very volatile, affected by factors in the global oil market, many of which are difficult to predict. For instance, in the past there was over-investment in global refining and subsequent poor margins.

Financing banks and the major oil companies (but perhaps not all NOCs) are very aware of this risk. The risk is heightened by product market developments, mainly the increasing size and cost of a modern, efficient and economic refinery.

  1. Country risk

Country risk, as perceived by international financiers and their insurers, will escalate the financing costs of an African refinery, over that of other potential locations such as the USA, the Middle East or India.

  1. High standards of Fuel quality

Between now and 2020, fuel qualities for shipping and road fuels are expected to change significantly. This places major capital investment requirements on refining companies with no guarantee of a decent return.

  1. Smaller markets

Many African markets are too small to justify developing their own refineries, when competing with massive, new efficient world-scale refineries, built in the Middle East and India, or existing refineries in Europe and the Far East working at marginal cost. Similar large-scale plants in Africa would, first, have to be as competitive as the foreign competing refineries and, secondly, get their neighbouring countries to perhaps accept to close their own refineries.

  1. Currency fluctuations

Refiners are exposed to currency fluctuations and require access to US dollars to purchase capital equipment, services and crude oil. Normally, local sales are made in local currency, operating expenses are a mix of local currency and US dollars, while exports are paid in US dollars. Thus, currency risks need to be managed well.

Nurturing capacity

In order to develop domestic oil refining capacity, oil-rich countries have to put basic things in order, mainly:

  1. Fuels Policy

Governments must establish Fuels Policies – preferably in agreement with the political opposition – that are longer than the term of their mandate. This would give the refiners confidence about long-term stability of their investments.

  1. Recapitalising existing refineries

Governments must re-capitalise their existing refinery companies in order to establish a firm foundation and to ease financing charges, and then enable proper working capital funding and allocation of new capital for maintenance and development in their forecasting process.

  1. Identifying benefits

Governments must identify the benefits (both direct and indirect) of a domestic refinery rather than product imports (employment, strategic stocks, tax collection, amongst others)

  1. Clean fuel requirements

Governments must lay down a clear road map for clean fuel requirements, and enforce it.

  1. Equity requirements

Refinery shareholders (often governments) must be willing to supply probably 25% of equity requirements for investments so as to get bank support for any project.

  1. Abolition of subsidies and harmonisation

Abolish fuel subsidies to gain International Financial Institutions’ (IFC, for example) support. In addition, encourage regional product specification harmonisation to enable regional trade.

  1. Tax rebates for refinery investments

If their creditors (for instance, International Monetary Fund) would allow it, and governments decide for strategic reasons (for instance, security of supply, employment, multiplier economic benefits), they could tax petroleum product imports, but not crude or feedstocks; offer tax incentives for refinery investments; and price benefits for domestic sales of crude oil.  This approach would not find favour with global IFIs. However, some of these policies have been adopted by various governments in the past, but are increasingly out of favour when other social and infrastructure projects compete for capital funds.

What the investor wants

The refinery investor would like to take their capital to a destination where it is going to gain significant value. Sadly, conditions in some countries have deterred investment in downstream industries. Instead, the following conditions are ideal for a refining business to thrive.

  1. Assurance

The investor wants the following assurances that the Government will offer investor confidence in the country and support the project:

  • support the application of international market prices
  • honour commitment to any subsidy payments (on time)
  • create an “enabling” environment – playing by the rules with a clear fiscal and political vision beyond the lifetime of the current parliament.
  1. Viable domestic market

The refinery investor seeks an inland market and logistical infrastructure, limited lower value exports, regular domestic product purchasing, petrochemical integration and ‘molecule management’ capability (maximising value), and little product import competition, preferably alongside local crude of suitable quality for the refinery hardware.

  1. A predictable road map

 A clear and certain-to-be-enforced government road map on fuel quality evolution (including fuel quality for shipping) is essential to gain banker support. More to the point, the following factors are essential for investment:

  • The assurance that, preferably, international market prices (import price parity) will always apply;
  • A robust view on the likely evolution of refining margins over the next 10-20 years and the demand expectations for each product in their target markets; and
  • A forecast on the evolution of crude price differentials and lifetime of crude oil fields (if local crude).

Ray of hope  

What can be considered as a positive development is the likelihood that the massive Dangote Refinery Project in Nigeria is going ahead. Once complete and fully operational, the world scale plant will be a ‘game-changer’ in West African product supply. Algeria and Egypt are also other countries where state oil companies have announced large refinery projects which seem to be moving ahead.

Calculated risks 

As there are more discussions on the benefits of a refinery system, for strategic reasons, over product imports, final decisions should be made prudently.  This is because refining is a capital-intensive industry in a marketplace with volatile margins. It requires a high level of commercial and financial discipline from its shareholders and management to succeed and to gain the support of the world’s financiers.


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