Africa needs greater oil refinery capacity urgently

Heather Brooks, Evaluate Energy

Africa is struggling over the growing need for fuel accompanying its economic expansion and the stagnation of its refining capacity.

Despite producing 3.5 times the amount of oil consumed in its raw state, there is still a reliance on imported fuels. There is no denying Africa’s growing need for fuel but refineries are not being built as planned when left to the free market. For example, Algeria’s crude production has remained roughly the same over the past decade according to Evaluate Energy’s latest data available. However, consumption has increased by 50% over the same time frame. This is well over the demand growth rate within developed regions such as the United States which had a 6% decrease in this time. Algeria and other African countries are left to rely on fuel imports to supplement their production as they do not have enough capacity to keep up with demand. It will take a long time for this to change according to Evaluate Energy data. Only three new refineries are ‘highly’ likely to be built by 2020 in Africa with the earliest of these due to be commissioned in 2017. These new projects, however, have been continually pushed back as companies abandon contracts and struggle to find investors. While European and Asian countries are expanding existing refineries and constructing new ones, there is only a 46,000 barrel per day total upgrade capacity to be added to refineries across all of Africa by 2016.

The main issue hampering the construction of refineries, even in areas with large local supplies of oil, is the lack of economic viability these projects hold in the free market. In Kenya, the recent oil discoveries would usually lead to potential expansion across the whole supply chain, yet Essar Oil abandoned plans in late 2013 to expand the country’s sole refinery, citing that the $1.2 billion cost would not be economically viable. Kenya is ploughing ahead with other development plans however, click here for more details.

This economic viability issue may be relevant for public oil companies operating in the continent but many governments subsidise oil refined in Africa due to large income disparities in the local markets, which dramatically alters the investment criteria. It is estimated that imported fuel subsidies amount to just under $20 billion in Africa per year. In the medium term, governments would lose less money building a refinery, even with its large upfront cost due to the decreased reliance on importation. Therefore, for the few currently planned refinery projects this is where the funding is predominately coming from.

There are 19 planned refinery projects being tracked by Evaluate Energy in Africa which are considered to have at least a medium likelihood of completion. Algeria takes up 4 of this total with a potential capacity increase of over 300,000 barrels per day. The government of Uganda has been pushing for an oil refinery in its landlocked country for some time now. Uganda has oil to supply the refinery but the cost of such a venture has been difficult to justify so far given the comparably low fuel prices in Africa. Therefore, the planned refinery seems doubtful especially considering the 150,000 b/d capacity it is slated to handle. One proven alternative option was carried out in Djibouti with the purchase of an existing refinery from Saudi Aramco for $150 million. The old refinery was bought, dismantled, and shipped to Djibouti where it was reassembled to avoid the high cost of constructing a new refinery.

 

* Evaluate Energy has only included refineries with at least a medium chance of being completed in this chart.

 

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