“Though oil is only available in certain areas, energy usage is throughout the world, even in the darkest places of Africa.” – Michael Hick
There is something sinister at play in the geo-political arena, and it smells of oil. The US and Russia literally have a modern cold war going. The United States have an exceptionally close relationship with Saudi Arabia, who a no friends of Iran. In the middle, we have Saudi Arabia and the United States and on either side, Russia and Iran, both who are feeling the negative effects of the seriously low drop in oil prices.
For how long this will continue we do not know, but we do know that it should last for a while, based on the relationships and political quagmire and the balancing of market share between shale gas and oil. This has positive implications for Africa. This based on the fact that Africa’s demand and growth for oil outpaces that of China and India.
Two of Africa’s top business minds, Nigeria’s Dangote and Tadesse Tilahun, CEO of National Oil Ethiopia both see tremendous potential in the African market not only for oil refining, but for oil itself. Dangote has a $9 billion project in the pipeline and Ethiopia sees room for a significant refinery to compete with importers flooding Africa’s $80 billion petrol market.
Africa is home to some of the world’s fastest-growing economies, sustained by new oil and gas discoveries made in Mozambique, Tanzania, Kenya, Uganda and Ghana. These discoveries are for oil, not shale gas, even though Africa has these as well. Africa can boast an extended list of oil producing countries.
“According to data from the US Energy Information Administration (EIA) from 2010, 16 of the 54 countries in Africa are exporters of oil, namely Nigeria, Angola, Libya, Algeria, Sudan, South Sudan, Equatorial Guinea, Congo (Brazzaville), Gabon, Chad, Egypt, Tunisia, Cameroon, Ivory Coast, Democratic Republic of Congo (DRC), and Mauritania.”
Against this backdrop is OPEC. OPEC’s mandate among other things according to their charter is, “the stabilisation of prices in international oil markets”. Is this possible at the moment, even before shale and gas? Despite vowing to keep oil production up, this has not impacted on the slide of the oil price.
Africa on the other hand has its development geared towards the extraction, development and transport system geared at oil at the cheapest prices. This is possible considering that Africa has her own oil. The down side is that it imports most of its petrol due to the incapacity to refine its own oil. This we see in all African countries that extract oil. There is no reason to justify the complete or majority switch to shale gas for Africa.
Cheaper oil may just be the steroid that Africa needs to fuel its own development through the reduction of costs associated with almost every aspect of business that is carried by the consumer. Globally this is over $1.3 trillion to consumers. This has a significant impact on monetary policy which could see lower inflation and more liquidity leading to investment decisions being made, especially related to African FDI.
According to figures from the US EIA, Africa’s proven oil reserves have grown nearly 120 percent over the past 30 years, from 57 billion barrels in 1980 to 124 billion barrels in 2012. It is estimated that at least another 100 billion barrels are waiting to be discovered offshore the African western coast. Africa has also discovered additional reserves of natural gas expanding from 210 trillion cubic feet in 1980 to 509 trillion cubic feet in 2012, a growth of over 140 percent.
Why should Africa chose oil as an ingredient to drive petroleum on the continent? The question delves into different levels of thinking. “Though refineries exist throughout sub-Saharan Africa, their capacities are still dwarfed by the continent’s production. Africa’s substantial oil wealth is still largely sent overseas to have value added by others and then re-exported as refined products. In many other parts of the world, oil is extracted, refined and sold in the same country, which involves value addition and, of course, job creation. Africa’s oil-producing states are largely disengaged from the most lucrative and advanced part of the petrochemical value chain, and their economies are less dynamic as a result. It is thus imperative that Africa increase its refining capacity.” – Michael Rettig, Mwangi S. Kimenyi and Brandon Routman
As with most of the natural resource sectors across the African continent, Africa fails on almost every level to extract, retain and channel into value adding downstream sectors and then through reduced costs, make it available on the continent. This equates to less skilled jobs and in turn paying for the value-add in currency that is stronger than ours.
Refineries
In 2013 I interviewed one of the KPMG Nigeria Partners at the World Economic Forum (WEF) in Cape Town. He clearly iterated that AMCOM had performed its job. However, refineries for Africa’s largest oil refineries were completely dilapidated and needed to investment so kick-start the major losses experienced in the petroleum down-stream sectors and in the major banking collapse in the Nigerian market.
Promisingly, Sub-Saharan Africa alone boasts over 132 trillion barrels oil reserves. This represents more than 8 percent of the world’s supply and there are more to be discovered. Nigeria leads the African oil industry, ranking 13th in global oil production. Nigeria has the capacity to pump over 2.5 million barrels per day (bpd). Yet because of ageing and neglected infrastructure, refineries can refine only about 445,000 bpd. This leaves Nigeria with an 80 percent refining gap. This leaves Nigeria importing refined products to meet local demand.
Given Africa’s reserves, the missed opportunities are exerting more pressure on Africa’s market development, exports and development. Soon oil production in sub-Saharan Africa will grow from 7.4 million bpd today to 8.8 million bpd in 2020.
Continually new oil fields are found and drilling technologies improve, analysts predict a serious market uptake. What exactly is the market potential in Sub-Saharan Africa at the moment? Keeping it unpretentious, only 30 percent of sub-Saharan Africa’s 2,900 existing oil clusters are licensed, this represents room for investment and with the potential liquidity in the market from the drop of oil, lower inflation and interest rates, domestics markets have reason to boom.
Signs of positive developments are already raising their heads around the continent and investors showing interest and commitment. To date, Kenya plans aims double the 35,000 bpd capacity of its Mombasa refinery. Plans in Uganda for another refinery in the region to handle 60,000 bpd are well underway. And Nigerian billionaire businessman Aliko Dangote is investing $3 billion ($3 of his own and $6 private equity) to build his country’s first private refinery by 2016. Dangote’s investment will double Nigeria’s refining capacity (400,000 bpd) and halve the country’s fuel imports.
For these reasons, and the investment signs and sentiments, African investors must chose oil and start regulating the oil prove for unprecedented growth on the continent.
