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Investment in the refining industry

Hydrocarbon Engineering,

Anthony Ogbuigwe, former Group Executive Director, Refining and Petrochemicals, Nigerian National Petroleum Corporation and President, African Refiners Association presented on 17th February at IP Week, a paper titled ‘the future investment landscape for global refining capacity development: What does this mean for refiners?’ Below are some of the highlights.

Focus on Africa

In Africa there are highly volatile margins in refining investment but molecule value maximisation due to its synergies with petrochemicals are what is part of the appeal of investing in them. Yet Ogbuigwe said that IOCs are downsizing their African refinery investments as they are seeing them as too high risk with little or no vertical integration within the continent.

Political and fiscal uncertainty throughout the continent is also deterring investors. For example, there have been 120 refineries announced over the past decade, but only four have been built. In Nigeria alone, Ogbuigwe highlighted that Nigeria has been given 24 refinery licences but only one has been built and this makes no fiscal sense whatsoever.

Mr Ogbuigwe highlighted the main points for the lack of successful refining investment in Africa succinctly:

  • Failure to raise finances.
  • Volatile margins.
  • Unreliable government behaviour.
  • Environmental impacts.
  • Banks requiring 25 – 33% equity.
  • New entrants need higher margins than ever before to invest.
  • Small capacity refineries struggle.
  • There is strong CAPEX competition.
  • Government policies are influential.

However, despite the negatives with regards to investing in refineries in Africa, Obguigwe did label Dangote as the ‘one to watch’ and called it a prime example of what money can achieve.

Focus on Europe

Ogbuigwe commented that there are further refinery closures expected between 2016 and 2020 in Europe, however, this is surely not news to the industry. He also commented that Europe is suffering due to the drop in its export volumes to Africa as the US is now using Africa as a large export hub.

Europe versus Africa

When broached with a question regarding the fundamental reasons why the African refining industry is suffering compared to Europe, the following points were made:

  • African crude infrastructure has a negative reputation along with plant maintenance.
  • The cost of freight in Africa fluctuates dramatically. Shipping a barrel of oil via boat costs US$ 7 whilst the same volume via pipeline is 50 cents.
  • Africa evaluates the risk of refining against other investments such as health, education and security.
  • There is the money in Europe to purchase the oil necessary for a refinery to run for one month. It was estimated that this price is US$ 1.2 billion and accounts for 90% of refinery OPEX.
  • Europe has easier and greater access to places of and is home to component manufacturing so maintenance and construction of plants is cheaper and easier.

The rest of the world

As well as focusing on Europe and Africa Ogbuigwe highlighted how he views refining in the rest of the world, what needs to be asked and what to expect in the future:

  • USA – is refining the new Eldorado?
  • Middle East – refining is a strategic business.
  • Asia – expanding, but demand growth is slowing and better timing is needed. Focusing on India he said that new refining strategies would be linked to domestic economy growth.
  • South America – there is expansion and a commitment to refining but major delays are impacting the industry.

To conclude

In conclusion Mr Ogbuigew said that the refining industry worldwide needs to be more commercially driven and government policy needs to encourage private sector participation if the industry is to flourish. He finished by saying that ‘targeted investment, environmental leadership and efficient management will separate the leaders from the rest.’

Written by Claira Lloyd.

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