EAC fuel market set for major changes over next three years

Following the shutdown of the Kenya Pipeline and Refinery (KPRL) last year, significant
changes are happening in the East Africa Community (EAC) downstream market. Crude oil
imports have dropped to zero while fuel imports have increased considerably.

According to a research note by continental bank, Ecobank, early June, trade between the EAC and countries such as the United Arab Emirates, Saudi Arabia and Yemen from which the region previously sourced crude oil and petroleum product imports have declined. Conversely, petroleum product imports from countries such as India, Malaysia and South Korea have increased.

East Africa consumed petroleum products worth $7.9bn in 2014. This translated to
a 14 percent decline in value from the level in 2013 but was largely reflective of the decline in crude oil prices and by extension the cost of petroleum product imports. ‘In volume terms, the region’s fuel imports rose from 7.8 million tonnes in 2013 to 8.2 million tonnes in 2014. Fuel demand averaged 6 percent over the past five years but could rise by over 8 percent in 2015 and maintain the same growth rate till 2016 as rising urbanization of city centres, population growth and demand for transportation services, says Ecobank.

It says the increase in demand is also accompanied by significant changes in the region’s petroleum consumption mix. Diesel remains the key fuel consumed within the region, rising from 43 percent in 2010 to 49 percent in 2014. However, gasoline consumption has risen faster, rising from 16 percent of fuel consumption in 2010 to 24 percent in 2014. While diesel consumption grew by an annual average of 7 percent in the past five years, gasoline volumes grew by 13 percent within the same period. ‘This growth in consumption is driven by population growth, rapid urbanisation of major cities and increase in the number of gasoline-fuelled vehicles, in countries such as Kenya, Tanzania and Uganda, which have averaged 15% increase in gasoline consumption in the past five years,’ says the bank.

The bank projects that within the next three years, gasoline could comprise about 32 percent of the region’s fuel consumption while diesel rises to 54 percent. More importantly, as power generation from diesel-fuelled power plants is replaced by cheaper generation from geothermal sources, and pipelines are developed replace trucks in distribution of petroleum products, the share of diesel in the consumption mix could potentially reduce.

Kenya imports the bulk of the fuel for the region and is expected to see imports rise by over 14 percent in 2015 and 2016. This is expected to increase demand for storage capacity in Mombasa to cope with the rise in imports and general fuel demand. The recent fuel shortage was largely linked to inadequate storage for key petroleum marketers at the Mombasa terminals, while other marketers hoarded their fuel in anticipation of a fuel price hike by the Energy Regulatory Council (ERC) in May/June. The situation could escalate as higher imports and fuel demand continue to put pressure on existing storage capacity. This could potentially tilt discussions on the future of the KPRL towards conversion into a storage terminal. Conversion into a storage terminal could free up almost 275,000m3 of storage currently being used for crude oil.

However, the government will have to first dispose of existing stock of crude oil, most of which had been imported since 2014 but could not be processed by the refinery. Efforts to sell the crude could be complicated by the dip in oil prices and state of the crude. The Kenya Pipeline Company (KPC) is likely to be tasked with management of the storage terminal if the decision is made.

More importantly, Kenya requires investment in petroleum product pipelines to link storage
depots in other parts of the country with Mombasa the main storage hub. Mombasa accounts for 80 percent of the country’s storage capacity and boasts of over 70 days of fuel supply at full capacity. However, the remaining storage plants in other parts of the country are much smaller. Nairobi, another major consumption hub, hosts an estimated 190,000 cubic metres of petroleum products storage and just over 3,000 cubic metres of LPG storage. However, Nairobi is Kenya’s largest city and accounts for nearly a quarter of Kenya’s fuel consumption. Thus, the province is quite vulnerable to fuel shortages or issues with fuel logistics at the Mombasa ports as it has less than enough storage of its own. The rest of the EAC equally requires additional storage, especially Rwanda and Uganda, which both had less than a month of storage for petroleum products at the end of 2014.

Going forward, the EAC region is expected to invest about $1.5bn to support the downstream
segment with intra-regional and domestic petroleum product pipelines within the next two years. The pressure on the Mombasa port and the Kenya – Uganda – Rwanda trade corridor for the bulk of the trade in petroleum products, underpins ongoing efforts to develop over 700 kilometres of intra-regional petroleum product pipelines between Eldoret (Kenya), Kampala (Uganda) and Kigali (Rwanda). A consultant is to be selected for the project in 2015, and will supervise the construction of the 784-kilometer pipeline, which is to be developed in three phases, over a 2-year period. The project is expected to be developed alongside other domestic pipelines such as the new Mombasa to Nairobi (Line 5) pipeline in Kenya, expected to cost about $500 million.

Uganda is also evaluating bids by various international firms to construct the $220 milion 200-kilometre petroleum products pipeline between the Hoima, where the new refinery will be built, and Kampala.

Rwanda is positioning itself to be the leading re-export hub in the region with significant trades heading towards the Eastern part of Democratic Republic of Congo, neighbouring Burundi and some back into Uganda and Tanzania. Jet fuel, fuel oil and lubricants comprise the bulk of these re-exports. According to official statistics by the National Bank of Rwanda, petroleum re-exports have risen from 43 million kilograms in 2012 to 50 million kilograms in 2014.

Although the revenue from this business has remained relatively flat at $69 million between
2012 and 2014 due to decline in the price of crude oil and petroleum products, it reflects the
strong drive by the government to position Rwanda as a major trade leader in the East Africa
region. By the end of 2015, new storage depots are expected to raise the country oil storage
capacity from 30 million litres to over 75 million litres. The government plans to achieve 150
million litres by 2017. This could represent about 6 months of storage as the country consumes an estimated 290 million litres annually.

The East African downstream market could be quite different within a few years if plans to build new refineries at Hoima in Uganda and Isiolo in Kenya go ahead successfully. The construction of Uganda’s planned 60,000 bpd refinery is being slowed down by delayed start-up of field development activities at the Lake Albert oilfields following legal tussles between the state and oil companies operating in the country. Furthermore, the refinery is to be constructed by Russian firm RT Global Resources, a subsidiary of Russian State-owned Corporation Rostec. The decision to select the Russian consortium threatens an already fragile trade relationship with the US and EU, which have place a sanction on the Chief Executive of the Russian firm. This could also affect funding from financiers in these regions, Ecobank believes.

Kenya’s new 120,000 bpd refinery is to be built as part of the Lamu Port South Sudan Ethiopia (LAPSSET) project. The refinery will complement the development of a Northern corridor and facilitate trading in crude and petroleum products especially between South Sudan, Kenya, Uganda and Ethiopia. However, rising insecurity in the northern part of Kenya, which borders Somalia, could dampen investor interest in the project. The recent spate of attacks by Al-Shabab militants from Somalia at Lamu and Garissa have slowed down the pace of development of the Lamu ports, which is expected to precede the development of the LAPSSET pipeline and ancillary infrastructure. Furthermore, the depreciation in the Kenyan shilling relative to other major currencies due to weakening trade balance could also impact on the attractiveness of a midstream project, which utilises dollar-priced feedstock but earns its revenues in shillings. Talks over the Kenyan refinery are however less advanced compared to the Ugandan refinery, hence may take a longer time to completion.

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