1. Oil refineries in Africa – issues and options Lamon Rutten Officer-in-charge, Commodity Risk Management, Finance and Information 9 th African Oil&Gas Trade and Finance Conference Maputo, 31 May - 3 June 2005 NOT AN OFFICIAL UNCTAD RECORD

2. Overview Current refinery structure What is the future for small refineries? Is there room for new refineries?

3. Algeria Angola Nigeria Egypt South Africa Libya Cameroon Gabon Congo Less than 60,000 bpd 60,000 – 100,000 bpd Over 100,000 bpd Senegal Kenya Sudan Cote d’Ivoire Zambia Madagascar Ghana Tunisia Morocco Current refinery structure 19 active refineries in sub-Saharan Africa, 19 in North Africa, almost all constructed before 1990 (except one in Egypt, one in Sudan).

4. Capacity utilization of Nigerian refineries Percentage In sub-Saharan Africa, the only large refineries are in Nigeria and South Africa. The South African refineries are doing well. But the Nigerian refineries, suffering from lack of maintenance, are not – capacity utilization has been as low as 22% in 2000. The Nigerian government has spent hundreds of millions of US$ to improve its refineries pre- privatization, and in some months, capacity utilization is up to 75%. But over the year, it still hovers around 50%. Nigeria imports around half of its fuel products.

5. Current refining capacity is sufficient to meet current and even future demand, if only capacity were fully utilized.

6. But much of the capacity is at small refineries.

7. What is the future for small refineries? Between 1980 and 2003, 10 refineries were closed in Africa. Pressure is large on some of the remaining refineries to close down (and convert into a storage terminal). Nevertheless, some of the new refinery projects (particularly in Nigeria) envisage the creation of small refineries… It is all a matter of economics. Large refinery: - High per barrel investment costs - low operating costs - large flexibility Small refinery: - Low per barrel investment costs - high operating costs - little or no flexibility Access to funds Distance from sea Market requirements

8. Small and large refineries: the basic economics Small-refineries provide a practical, cost effective way of providing reliable source of oil products in remote, inaccessible regions. Suitable for de-regulation programmes. Nigeria: First private refinery(12000 b /d). Facilitates an independent model for oil or condensate producing regions. Benefits of scale in processing. The difference in the per barrel fixed cost of output could be as much as 2.4 USD / barrel. Small refineries Large refineries Can afford and accommodate sophisticated technologies, which is particularly important where there are strong environmental regulations. Benefits of scale in transport - 0.5 to 1 USD / barrel. Input/output flexibility.

9. – Refining margins differ according to the extent to which the oil has been processed, or ‘upgraded’ – The more complex the refinery, the more value-added the products derived as a result – The upgrading contribution, or conversion margin, represents the difference between the cash margin from a simple refinery and one from a refinery with more sophisticated conversion capabilities. – When oil prices are rising, upgrading contributions also tend to rise, since refining profitability is principally determined by the differential between the prices of light products (gas oil and gasoline) and heavy products (residual fuel oil). Input/output flexibility.

10. Economic Viability : Refiner’s ROI Location: Local demand conditions Synergies (nearby production) Policy: Pricing structures De-regulation Environmental requirements Competitiveness parameters Technical: Crude source Product slate Configuration Operational flexibility US case

11. Is there room for many new refineries? Refinery margins have improved, and are expected to remain above 4 $/barrel.

12. This is somewhat surprising. One of the principles in the downstream industry was: quickly rising crude oil prices consistently erode refining margins and almost eliminate retail margins in the short term, while falling crude prices sometimes benefit refining margins but invariably expand retail spreads

13. Coupled with expanding production, this creates room for new refineries in Africa In the 1990s, no new refineries. In 2001, a new refinery in Khartoum, and in 2002, one in Egypt. Now, many projects: - New large refineries (e.g. Angola, Nigeria) - New small refineries (e.g. Chad, Nigeria) - Revamping mothballed refineries: case of Sierra Leone refinery (majority was held by Nigerian companies, but they have been selling out to a local group which wants to restart refinery operations)

14. China National Petroleum Corporation (CNPC) Sudan In May 2000, construction of the Khartoum Refinery Project, whose annual oil refining volume now stands at 2.5 million tons, was finished. The unit upgrade project was started in 2003. Once concluded, the refining capacity will be expanded to five million tons of annual crude. Nigeria: involvement in both upgrading and new projects Algeria Last month (May, 2005), CNPC won the EPC contracting project of Algerian 5Mt/a condensate refinery (a total contracted value of US$385 million). In the country, CNPC is implementing 4 projects including the Adrar integrated upstream and downstream project and three exploration projects.

15. Angola The Angolan hydrocarbons industry is currently benefiting from an expansion in the country's offshore oil and gas fields. These have given the state owned oil and gas monopoly, Sonangol, a scope for extending refining capacity to match its enhanced oil and gas production. Currently, the country has only one refinery in Luanda (built in the 1960’s) with a capacity of 39,000bpd and it is already working at about 90% capacity. After several delays, the construction of the Lobito Refinery is expected to start at the end of the year.

16. Angola The new refinery capacity will be 200,000bpd It is argued that the majority of products refined at the new facility will be exported regionally. That would be the main reason for the choice of Lobito as a site - it has extensive port facilities, helping the refinery to export around the region. Last year, the Angolan government spent more than US$330 million on fuel imports.ucer in sub-Saharan Africa.

17. Nigeria Nigeria imports about half of its fuel needs. The Nigerian government is making efforts to privatise the 3 existing refinery complexes, but so far with little success. E.g. in 2004, there were no bids from any of the major international players for the Port Harcourt complex, despite investments already made by the government to counteract some of the effects of 15 years of poor/absent maintenance. The Department of Petroleum Resources has attributed the reluctance of investors to government's continued regulation of the price of petrol. With such policies unchanged, it is unlikely that an August 2004 directive to oil majors to refine half of their oil in Nigeria by 2006 will make much difference. The Government now hopes for Libyan, Indian and/or Chinese interest …

18. Nigeria In 2002, the government started a process towards construction of new refineries, and after receiving 31 applications, it gave preliminary licenses to 18 (Nigerian) to companies to establish private refineries. But most of these companies failed to meet Government requirements, and as of September 2004, only 5 had received permission to construct. In October 2004, the Government then gave permission to construct to the other 13… but it is doubtful whether these really have the ability to secure foreign bank loans and investors/technology partners. Nevertheless, the Government expects three new refineries to come onstream before 2008.

19. ExImBank USA Consortium of 6 local banks 12,000 bpd refinery, US$ 100 mln, in Calabar Export Free Zone Total Support Refineries (local cy) 40% Commerz- Bank (NY) 60% (incl. payments to US suppliers) 85% loan guarantee Agreement US suppliers Equipment & services Payment September 2004; refinery to be onstream in 2006 The companies that received construction licenses have rather different models. E.g. the Amake Modular Refinery is a 12,000 bpd 29.8 mln $ project, while the Tonwei refinery in Bayelsa State is for 100,000 bpd, at an estimated cost of 1.5 billion $. Financing is falling in place. For the Amake and the Total Support refineries, US ExImBank has provided loan guarantees. An example of a financing structure:

20. But better refinery margins may not be enough to survive. The US$ is low, and any new refinery in Africa will still compete with the large, specialized refinery companies in Europe and the Middle East. And can you do what they do? One example… A note of caution…

21. Step 1: buy a second-hand refinery that is to be scrapped, and identify the relatively new parts that would be useful for your refinery. Cut them out and load them on really big trucks. Pictures taken from a presentation by Petroplus at UNCTAD’s 8 th African Oil&Gas Trade and Finance Conference, Marrakech 2004 Keep in mind that you have to compete with the large, specialized refinery companies in Europe and the Middle East. And can you do what they do?

22. Step 2: put it on a big boat and ship it to your refinery.

23. Step 3: offload and install. Cost savings compared to buying new: tens of millions of $s.