Business Daily (Nairobi)
Zeddy Sambu
28 April 2008
The performance of the sub-Saharan Africa's refining industry is at a crossroads: One path, involving reforms, holds the prospect of new investment for more viable refineries. The other-the status quo, threatens extinction of the facilities. For now, most refiners have joined forces with the World Bank to study the benefit of reforms.
The joint World Bank/ Africa Refiners Association (ARA) study that is due to get under way later this year, is set for completion in 2009 . The steering committee comprises representatives from South Africa, the Republic of Congo, Ivory Coast, Kenya and Nigeria, members of the United Nations Environment Programme and the International Petroleum Industry Environmental Conservation Association.
The study is being unveiled at a time when African refineries face some bitter ironies. While sub-Saharan Africa's upstream sector powers ahead with crude exports approaching five million barrels a day, its refiners are struggling to meet local demand of approximately 1.4 million barrels a day (b/d). This is because they operate at less than half the nameplate capacity of 1.7 million b/d.
Industry players also blame the sector's ills on government intervention, such as price regulation and subsidies. Adding insult to injury, governments have to import 700,000 b/d of clean products, which refiners could, with some investment, produce at home. At the close of 2007, the Kenyan refinery processed just about the base load volume that the marketers are required by the Energy ministry to process in one year.
This is a minimum of 1.6 million tonnes, providing for about 65 per cent of total Kenyan oil requirements , while the balance of about 35 per cent is imported as finished products.
Over the past year, Kenya's oil import bill grew by 18.8 per cent to Sh113.7 billion . Total domestic demand also went up to 3, 131, 500 tonnes up from 2, 797, 200 tonnes in 2006, due to higher consumption.
Some 33, 000 tonnes of Liquefied Petroleum Gas is imported compared to a demand of 81, 000 tonnes.
Refining capacity and technology has not been upgraded for many years. A study commissioned by the World Bank and undertaken by KBC Technology Consultants also called for the upgrade option . In their recommendations, Kenya Petroleum Refineries Limited (KPRL) will be made a storage facility in future.
Diesel sulphur problem will be sorted out when it is reduced from the current 10, 000 parts per million (ppm) to 50 ppm. The refinery will also generate as much as 13 megawatts of electricity. If the refinery upgrade succeeds, the production pattern will change, with production of more valuable products from fuel oil substantially increasing, making the overall production cost lower for the economy.
"Kenya, like the rest of Africa, is a net producer of crude oil and a net importer of white products," said John Mruttu ," the general manager of the Kenya Petroleum Refineries Ltd.
George Wachira , the general manager for the Petroleum Institute of East Africa-the industry lobby- says production of crude oil in Africa, especially on the Atlantic side of the continent, will continue to increase , especially in Angola.
For the Kenyan market that is still unregulated, oil companies have the advantage of lower operational costs compared to multinationals.
In Nigeria, there is an actual upgrade of refining capacity to meet local demands, which had hitherto been balanced through imports. Angola on the other hand is contemplating investing in a large refining capacity for exports of refined products. Mr Wachira says the WB/ARA study will help analyse the economic viability of various small refineries dotted across sub-Saharan Africa.
Most of these refineries constructed in the 1960s and 70s are of marginal economics and likely to be recommended for closure while others will be needing upgrade.
"This will strive to improve refining economics, tackle environmental issues, harmonise specifications, boost intraregional trade and encourage the bank's affiliate, the International Finance Corporation (IFC), to muster investment for the most viable operators," he told Business Daily.
Industry players, however, say for refineries to be economical, they should be competitive when compared with alternative imports markets. But there will also be cases of national interests overriding economics.
There is also the view that 'Big Oil' is rationalising refining interests around the world. While some national oil companies are stepping into the breach, their downstream interest lies mainly at home, not abroad.
Still another challenge emanates from Africa's new competitors-those refineries being built/expanded in India by private oil companies and the Middle East -most of which largely benefit from hidden subsidies.
Essar Oil-India's second biggest private oil company is -is currently attempting to buy half stake in the Kenyan sole refinery. Its main competitor-Reliance Industries Ltd is building a 60 million b/d while Essar whose earlier but failed attempt at an African presence was through a bid for the Port Harcourt refinery in Nigeria is expanding the capacity of existing facility to 34 million b/d in Mumbai.
Kenya Petroleum Refinery plant in Mombasa
Apart from competition from planned new refineries in the Middle East and Asia threatening to put many African refiners out of business, refineries are also facing tougher new environmental regulations - requiring reduced sulphur content in gasoline and diesel.
In recent years, performances of refineries has been varying by region and plant. West and Central African refineries, for example, managed a utilisation rate of barely 52 per cent of capacity in 2006 - the latest figures available from the London-based consultancy, Citac.
Cote d'Ivoire's 70,000 b/d SIR refinery ran at nearly 100 per cent capacity that year, but the regional average was dragged down by others.
Nigeria, in particular, limped through 2006 and 2007 to at less than 30 per cent use, after two of its three refineries were closed by militant attacks on a crude feeder line.
South and East African counterparts averaged a healthier 72 per cent, with South African ones at more than 76 per cent. Most African refineries are simple topping plants, built more than 50 years ago. They are caught in a vicious cycle. They can't meet demand for transport fuels-The main growth sector. They therefore export large volumes of fuel oil, often at discounts. As a result, they do not make enough money to fund the upgrades that would deliver profits for reinvestment.
"The secondary refining capacity amounts to only 20 per cent of nameplate crude distillation capacity," Citac's Elitsa Georgieva told a meeting in Cape town in March. It brought together all stakeholders on the continent. Private-sector companies too, are reluctant to fund upgrades on the continent, claiming that regulated pricing would prevent decent returns. In total , the refinery needs some Sh22 billion to boost efficiency from its current levels.
Royal Dutch Shell, Chevron and BP plc, for instance are bailing out of the 80,000 b/d Kenya's petroleum 43-year old refining facility. If it goes through, the Kenyan refinery is Essar's first international acquisition in the refining sector.
"Essar's upstream assets in Africa, followed by the acquisition of a refinery, point towards the next logical step for Essar, which is to set up or buy petro-retail operations on the continent.
Buying a refinery in Kenya will help the company grow in East African countries like Tanzania, Kenya, Uganda and Sudan. Unlike India, Kenya is a net importer of refined petroleum products," a Mumbai-based analyst who did not wish to be named said.
Analysts feel it makes sense for Indian firms to move into African markets, because that country's market is now saturated. Essar, Reliance and Bharat petroleum are all making losses in the retail petroleum sector in India because of the cap on sale prices by the government.
KPRL's products including liquefied petroleum gas, unleaded premium gasoline, regular petrol, automotive gas oil, industrial diesel, fuel oil and special products like bitumen and grease are sold into the Kenyan market and exported to neighbouring countries including Tanzania, Uganda, Burundi and Rwanda. Demand for petroleum products in these markets is estimated at five million tonnes per annum.
The facility has two refinery complexes with distillation, hydro treating, catalytic reforming and bitumen production units. Crude oil from the Middle East is transported by sea to Kipevu Oil Jetty in Kilindini Harbour (three kilometres from the complex at Changamwe) and then carried by pipeline to the refinery. The finished products are also transferred to customers by pipeline.
When it was designed, technological configuration of the plant did not take cognizance of production for unleaded petrol. In its current state, the refinery does not also produce low sulphur diesel due to lack of a desulphurisation facility. Upgrade will lead to environmentally-friendly products but has been overdue. Modernisation will lead to costs of growing demand for unleaded petrol and low sulphur diesel for the region.
Just as important, many African leaders treat the downstream sector as a patronage tool, and politicians often take decisions over the heads of refinery managers.
Product supply contracts are often allocated to earn or reward political support.
"Some refiners could use more octane enhancers to increase the flexibility of their refining operations. But they are blocked at a higher level, where there are vested interests in perpetuating product imports," says a brief obtained from the recent meeting in South Africa.
Analysts say suppliers exploit Africa's more lenient environmental regulations, sometimes shipping in lower quality products from aging refineries in Eastern Europe and the Baltic states. At the same time, well-connected local companies have built up interests exporting the excess fuel oil produced at home.
This business is particularly coveted in Nigeria, where straight-run fuel oil finds a ready market in US refinery crackers, for upgrading to gasoline.
Even though Kenya, has free market pricing and some protection from imports, Shell, BP plc and Chevron have all been scaling back refining activities for strategic reasons, to focus on higher profit areas.
In 2006, Shell divested 23.6 per cent of Senegal's 18,000 b/d SAR refinery, 10 per cent of SIR and 8 per cent of Cameroon's 43,000 b/d Sonara - in each case selling to local governments. But in the Kenyan case, the three private investors are attempting to sell to another private sector player but in a sale that is being blocked by the Government-the other co owner.
Last October, Exxon Mobil sold its assets-70 service stations and associated supply and distribution facilities in Kenya . And now, even Total, once hailed as Africa's downstream champion, is scaling back its operations.
Last year, it sold its 56 per cent stake in Angola's 57,000 b/d Luanda refinery to state Sonangol - at the latter's request - and in January reduced its stake in SAR by eight per cent to 34 per cent. Total is rumoured to have put its 50 per cent stake in Zambia's 20,000 b/d Indeni refinery on the market. This has put even more equity in state hands - more of a disadvantage in Africa, where many states are weak.
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