Africa’s richest man, Aliko Dangote has recently announced plans to build a privately owned oil refinery in the Lekki Free Trade Zone in Lagos, Nigeria, by end-2018. Over recent years, numerous planned refinery projects in Nigeria have failed to come to fruition and only time will tell if this new 400-million barrels refinery will indeed be built. There is little doubt that Nigeria would benefit from a well run and economically viable oil refinery, but is local refining the best solution to Africa’s fuel needs?
Many African countries view national refineries as a source of national pride, as strategically important and as the preferred means of ensuring security of supply of refined products. But do these reasons justify the high cost involved in the construction and operation of an oil refinery?
In recent times, sub-Saharan Africa’s refining capacity has shrunk, and several refineries have been mothballed or allowed to run down by natural process in countries like DRC, Eritrea, Madagascar, Senegal, Tanzania, Zimbabwe, Mozambique to name a few. Some – such as the Togo refinery – have been converted into import terminals to serve their domestic and neighbouring markets. Of those still operational, many run on a sporadic basis, most are dependent on government finance, and a large percentage suffer financial losses due to government regulated and domestic subsidised petroleum product prices (although with the recent significant drop in the value of crude, subsidy issues have become less of an economic burden).
Of those refineries that remain “operational” – the Tema refinery in Ghana has run on an erratic basis in recent years due to issues in raising finance for crude purchases, and there are signs of government reluctance to continue funding refinery losses (albeit there is a current tolling arrangement to run Nigerian crude funded by a Nigerian bank).
The Kenya refinery has not, for close to two years, during which time its part private shareholder Essar India has been negotiating its exit strategy due to the negative refinery economics.
The Nigerian refineries continue to run at very low utilisations due to a combination of mismanagement and technical issues. Currently, a large percentage of the domestic crude earmarked for running in the Nigerian refineries is farmed out to provide payment security for imported petroleum products under controversial offshore processing and crude for product swap arrangements.
The Indeni refinery in Zambia has ongoing finance and operational issues, and the recently constructed inland refineries in Niger and Chad have had issues with respect to refinery viability in the light of low government controlled refinery gate prices. Refineries in Gabon, Congo-Brazzaville, Cameroon and Ivory Coast have significantly better operational track records while lack of transparency with respect to Angola makes it difficult to comment meaningfully on the running of their downstream oil industry.
In recent years the only significant outside investment has come from China and India. The Chinese investment in the Niger and Chad refineries was linked to interests in the countries’ upstream industry (and the refineries are of extremely small capacity). The Indian (Essar) investment in the Kenya refinery is coming to an end due to economic challenges in the running of the refinery.
Why would the proposed Dangote refinery succeed where others have failed? And why does the continent need another refinery in a world of global refinery over-capacity and oversupply, with further large new refineries coming onstream in the Middle East. These new Middle East refineries already have surplus volumes and Africa is the natural home for much of this surplus. The United States is no longer the major pull for surplus European refinery or blended gasoline, while Africa – particularly Nigeria – is fast becoming the natural home for this gasoline. Why incur the huge cost of building an African refinery when Europe and the Middle East have excess products that are a natural fit to supply Africa?
Many Africans would argue that it makes perfect sense for a country to build a refinery to run its home grown crude to produce refined products for its own domestic use. But the issue is more complex. How many African refineries run their own domestic crudes in their refineries? The answer is, “not many”. With respect to Nigeria – the biggest sub-Saharan consumer after South Africa – their main shortfall is in gasoline and to a lesser extent in gasoil. Any refinery will by default produce a full slate of products from LPG through to fuel oil and will have to sell its surplus product in an increasingly competitive international market.
The refineries in Cameroon, Ivory Coast and Congo-Brazzaville already have surplus barrels to sell into the neighbouring and international markets, therefore building another refinery would further increase African refinery surplus in an already over-supplied market.
In general, imported petroleum products is cheaper than locally African produced ones – and as markets become more transparent and African buyers become more aware of international market forces, they are able to import more competitively and cost effectively.
Whilst there has been considerable discussion around the benefit to Nigeria of the current off-shore processing and crude-for-product swaps, the swaps in particular are a simpler, more streamlined means of meeting Nigeria’s gasoline shortfall. Albeit a transparent and vigorous competitive tender process should be implemented to ensure all contractual parties achieve fair value.
For a country like Nigeria whose fuel needs are heavily skewed towards one product, and where a large proportion of imports are channelled through state-owned entities with limited financial means, using domestic crude as payment security is an appropriate and cost effective use of natural resources. Government and private funds can be invested in local infrastructure so as to cut costs and improve the reliability of discharging and distributing imported refined products. Such investment could include the construction of new deep water ports, the dredging of existing ports in African ports to allow the discharge of larger vessels and the construction of new underground pipeline systems to minimise theft and vandalism.
Dangote’s ambition to create a privately owned refinery is to be commended, but the funds can be as effectively spent on these afore-mentioned infrastructure projects, with the proviso that private investment should create privately owned and operated infrastructures, which are managed commercially and free from the constraints of corruption and cronyism