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Africa's oil refining ambitions fade

Emma Farge
Friday, 20 Dec 2013 | 5:01 AM ET

* Africa's fuel demand growth is faster than China, India

* Only a third of refinery projects likely to succeed-consultancy

* Essar withdraws from Kenyan refining project

DAKAR, Dec 20 (Reuters) - Africa's efforts to supply more of its booming demand for fuel are being dashed by fierce competition from foreign oil refiners and traders flooding the $80 billion market with imports.

African governments want more oil refineries to cut fuel import bills and get better value from the continent's own crude.

But the investors they so badly need are either withdrawing or shifting their focus to trading or storage to take advantage of the region's demand growth of around 5 percent, higher than China and India.

For many distributors, it is cheaper to import fuel from refiners in India or the U.S. Gulf, and even China, than to source from old, often unreliable local plants.

"Our view is that growing African demand will by and large be met by imports," said CITAC's David Bleasdale.

The UK-based consultancy estimates that of a planned 1.1 million barrels per day (bpd) of new African refining capacity, only about a third, or 400,000 bpd, will likely be built.

India's Essar said in October it would exit from its 50 percent owned Mombasa plant in Kenya, the last refinery in east Africa, which it had planned to upgrade, saying that it was "not economically viable in the current refining environment".

Fuel marketers have boycotted puchases from the plant, blaming cost and quality, and instead upped imports from companies like Gulf Energy and Total.

Similar, upgrade projects such as Saudi Bin Laden Group's plans to quadruple output at Senegal's tiny 27,000 bpd refinery have never taken off. Even countries with a steady crude supply like Equatorial Guinea have abandoned projects, although big plants are proposed for oil producers Nigeria and Angola.

"Competition to supply Africa is only going to increase. Even if three projects do get built, there is no way they can keep up with demand growth," said Rolake Akinkugbe, Ecobank's head of oil and gas research.

The bank notes that over the last decade only 7 of 90 refinery projects in Africa were completed.

GLOBAL STRUGGLE

Larger, more sophisticated plants in Asia and the Middle East such as Reliance's 580,000 bpd export plant in India have an advantage as they can adjust their range of fuel exports quickly to exploit fleeting arbitrage windows in global markets.

Traders like Glencore and Vitol with global networks can divert cargoes to meet sudden demand changes.

"The constant challenge is competing with imports, with many global players being long in products and seeking outlets in Africa," said Robert Turner, director at PricewaterhouseCoopers consulting.

"What you need in order to compete is to build a large plant with access to competitively priced crude...because the moment you put your barrels on the water for other African markets you are competing with global traders," he added.

A further factor threatening projects is the sharp increase in gasoline exports from the United States to Africa.

A ship broker active in West Africa said that U.S. gasoline flows to the Gulf of Guinea had risen to an average of around 100,000 tonnes a month from around 20,000 tonnes last year.

Jet fuel imports from Venezuela have also increased, he added.

To minimise gasoline output in favour of diesel, which accounts for a larger portion of African demand, local refiners could install hydrocrackers - but these can cost $1 billion each.

Further encouraging imports, technology for unloading cargoes at sea has improved, making it easy for giant Suezmax product tankers to deliver to African countries with limited port capacity.

China is also looking for new markets following a slowdown in domestic demand which coincided with new plants coming onstream.

But where investment is going ahead is in storage and infrastructure. Oil trader Gunvor has pledged $500 million to build a joint fuels trading company in Gabon while Vivo, part owned by Vitol, is investing $250 million over three years.

Addax & Oryx Group said it plans to invest $400 million.

"Terminals feel more useful going forward to meet rising demand than additional small scale refining," said an official at a firm selling fuels in Africa, who asked not to be named.

But some analysts say that Africa's version of the so-called small scale "teapot refineries" that exist in China could be successful in landlocked locations.

South Sudan is building a mini 5,000 bpd refinery. Niger also completed a 20,000 bpd project with China National Petroleum Corporation (CNPC) in 2011.

But PwC's Turner said that even these projects can be risky, since success or failure will hinge on government policy. "If there is no outlet whatsoever, you are very vulnerable to government decisions on fuel prices."