When Femi Otedola, chairman of Forte Oil Plc, announced he was selling his entire 75 percent shareholding in the company, the decision was based on a desire to explore and maximise business opportunities in refining and petrochemicals.
He is not alone. Savvy investors have caught a whiff of a pile of money in refining and petrochemicals on the African continent within the next five years where over one million barrels a day worth of new refining projects are billed to come on stream on the continent.
Africa is positioning itself from being a major exporter of crude to becoming a refining hub. The Dangote Refinery is promising a 650,000 b/d capacity by 2020. Ghana plans to build a 150,000 b/d refinery in Takoradi along with potential upgrades at the country’s existing Tema Oil Refinery, while Angola plans a 200,000 b/d refinery in Lobito by 2022 along with a smaller plant in Cabinda.
“In a few years from now, the winners will no longer be the countries that produce oil, but the refiners,” said Ayodele Oni, partner at Bloomfield law firm. “This is because refiners dictate the price,” Oni said.
According to the International Energy Agency (IEA), petrochemicals are becoming the largest drivers of global oil demand, in front of cars, planes and trucks.
Petrochemicals, components derived from oil and gas, are used in all sorts of daily products including packaging, plastics, clothing, detergents and tyres. Even though there are environmental concerns, the world does not look set to be rid of plastic soon.
The Paris-based energy think tank further said that petrochemicals are set to account for more than a third of the growth in world oil demand to 2030, and nearly half the growth to 2050, adding nearly 7 million barrels of oil a day by then. They are also poised to consume an additional 56 billion cubic metres (bcm) of natural gas by 2030, and 83 bcm by 2050.
The volatility of oil prices and its capacity to upset the world’s geopolitical balance have consequences for refining margins. Bearish oil prices result in marginal gains for buyers of its derivatives but high oil prices send the price through the roof.
Local investors see money in ramping distribution across the sub-region which will cut down freight costs and improve delivery timelines.
West African investors are also betting to cash in on the International Martime Organisation (IMO) regulation which places a 0.5 percent sulfur cap on marine fuels and comes into force on January 1, 2020.
“This IMO regulation will drive demand for lower sulfur products, and consequently trigger stronger demand for sweeter crude feedstocks around the world. This could work in West Africa’s favor as the global appetite for sweet crudes will also be greater,” according to analysts at S&P Global Platts, a commodity tracking firm.
The Federal Government, analysts say, will loosen its grip on Nigeria’s three grossly underperforming refineries. According to the NNPC, refinery utitlisation from January to August 2018 averaged 12 percent from 18 percent in 2017 and there is no indication that it will improve.
Already, the NNPC has drawn up several arrangements including collocating refineries to attract investments. As the Dangote Refinery nears completion and agitations to remove the bruising subsidies continue, it will make no economic sense to continue to regulate the retail price of petrol.
Chuks Nwani, an energy lawyer, says Nigeria has to rethink its engagement with crude oil.
“We have so much depended on selling crude that we forget that we can make more money if these products are refined and sold to African market,” Nwani says.
Nwani concedes that making concessionary sales as a short-term measure will be encouraging, but argues that state-run NNPC should speedily take steps to use tolling arrangements to refine Nigeria’s products locally and sell to the African market.
“There are so many idle refineries all over the world and if they are guaranteed tolling arrangement with appropriate guarantees in place, they will relocate and assemble these refineries in Nigeria within a space of eight months. NNPC will supply crude to them, they will refine locally and send back to NNPC to sell to the market. NNPC will pay them for the cost of processing only. It guarantees market for our product and creates employment to Nigeria,” he said.
NNPC operates a crude swap arrangement under which crude oil is exchanged for derivatives, but analysts say a lot value is lost in the process as such arrangements rarely account for other derivatives besides petrol, diesel and kerosene.
ISAAC ANYAOGU
