Downstream investment can spur Africa’s economic development

Following the slump in crude oil prices, economic growth in 2015 is expected to be relatively sluggish, particularly for Africa’s oil and gas exporters such as Nigeria, Angola and Equatorial Guinea. However, Word Bank forecasters expect a rebound in growth beginning from 2016.

Though the long-term economic outlook may be positive for Africa, but inadequate investment in the downstream infrastructure, according to African Refiners Association (ARA) could retard future economic development.

At a time when Africa is expecting high economic growth and increasing petroleum product demand, a worldwide refining surplus, fierce overseas competition from product imports and tightening project and trade finance have led to challenging times for the downstream oil industry.

With a volatile oil prices and globally reducing margins in downstream business, multinationals are reconsolidating their balance sheets to maintain shareholder value by shedding assets that are marginal and where costs and operating risks are high. African downstream operations have suffered because of this strategy.

Nigeria accounts for 44 percent of all demand in the West African region. The Nigerian market is quite peculiar with strong demand for gasoline, a subsidized product, unlike the rest of the region. Gasoline has grown stronger compared to the rest of the region and should continue to be strong even if subsidy removal may cause a brief hiccup in the rising demand curve.

Within the Southern and Eastern Africa, South Africa represents 49 percent of demand in the region. It is a more mature market so, naturally, demand growth there is slower. South African gasoline demand growth is slow.

In North Africa, the situation is less clear given the serious political turmoil there making it difficult to predict. The biggest market in the region is Egypt, which has also experienced political disruptions and is quite unique in that the Egyptian government subsidizes all product prices, including those for industrial consumers for fuel oil for power generation.

Only 56 refineries have ever been built on the continent. Fourteen of those have closed, and two have merged at Port Harcourt in Nigeria. Africa overall has a refining capacity of 3.2 million barrels per day, but 2012 refinery output was only some 2.4 MMBOPD, 61 percent of which came from North African operations, product that is unlikely to wind up south of the Sahara. More than half the balance (58 percent) comes from South Africa’s four crude oil refineries, which between them generate some 530,000 BOPD of products.

Infrastructure bottlenecks

The key downstream infrastructure bottlenecks are inevitably country-specific. It is very difficult to generalize for all of Africa. In a number of African countries, you have bottlenecks at the import point such as ports with low draft or inadequate infrastructure for offloading a ship in addition to transport from the import point to secondary storage and to the final customer. In many cases, this is done by road which is the least efficient way of transporting oil products.

Pipelines would be the safest and most efficient means of transport but many African markets are too small to justify the upfront investment; and in places like Nigeria where investments have been made on pipeline, there have often been vandalism, theft and safety issues.

Underdeveloped and neglected road, rail and pipeline infrastructure leads to an unreliable supply of product, increasing the retail cost of fuel and resulting in fuel shortages across countries. Old infrastructure significantly affects oil companies’ abilities to operate within their strict environmental and governance constraints and drives up delivery and logistics costs, which cannot be recovered under regulated margins.

Experience has shown that in evaluating investment opportunities in Africa, multi-nationals will selectively maintain their downstream presence in countries like Egypt and South Africa, where regulatory regimes are more effective and where business/political risks are lower.

There have been a number of infrastructure investment projects, but implementation has been mixed. Altogether, it is not always a straightforward exercise because governments are involved and investment priorities change. Also, in the case of cross-border investments, the cooperation of both countries’ governments is required.

It is vital to encourage governments and economic communities to establish regional downstream infrastructure, to encourage free trade between neighboring countries, avoid smuggling and adulteration, and help create the regional cross-border optimization that is necessary for an efficient low-cost product supply.

Downstream investment deficit

Almost without exception, downstream markets in Africa are price regulated to some extent. The often high costs of doing business in the region cannot be fully passed on through higher pump prices. Furthermore, the regulatory frameworks frequently operate inefficiently, with margin increases being adjusted for slowly, or not at all. With products imports forecast to double by 2020 there is a need to invest in downstream oil infrastructure to assure efficient, economic and safe distribution of high quality oil products.

Inadequate infrastructure and inefficient regulatory processes are also major constraints to the efficient and economical transportation of refined products within the African market.

Without such investment the economic growth on which Africa will depend for its future may not be met. This is because poor distribution infrastructure constrains not only fuel supply but also limits investment needed for development of the high quality fuels.

It makes much sense for African countries to work together on a regional basis, maybe not so much to attract investment but to improve trade flows between countries. If an entire region is an importing region, it makes sense to create economies of scale.

The future will depend on how effectively the various petroleum regulatory agencies across Africa manage the sector. In many cases, a significantly enhanced regulatory framework must be established to ensure the highest petroleum standards and practices are in place and enforced, and that fair competition is protected.

The challenges remain delivery of infrastructure, security, funding, high cost of operation, obsolete legislative frame work, lack of human capacity confronting the development of the downstream sector.

Given these challenges, African countries need to rise up to the challenge. According to CITAC, African oil demand will hit 5.1 million barrels per day in 2023, up from 3.4 mbpd in 2012. By 2020, demand is set to be some 4.5 mbpd, with West and Central African demand growing the fastest (44 percent), and North Africa likely to grow by 26 percent.

The shortfall in oil products in Africa is set almost to double by 2020. Africa has been a net importer since 2007, but the situation is likely to become rather more extreme over the next seven years. The shortfall, taking into account all products except LPG, is expected to jump from 700,000 bpd in 2012 to around 1.32 million bpd in 2020. And despite North Africa’s self-sufficiency in refining, and its ongoing exports of jet/kerosene, the continent overall has already seen its clean products shortfall grow six-fold from 8.5 million tonnes in 2001 to 52 million tonnes in 2011. This will increase by a further estimated 33 million tonnes by 2020, reaching 85 million tonnes per year.

Investment in downstream in Africa will no doubt spur a downstream oil boom. But there is a wide gap between aspiration and reality, between what a government hopes for and what the commercial world is prepared to invest in, particularly at a time when the refining industry globally is challenged.

FRANK UZUEGBUNAM