A recurring theme of the African Economic Conference held on October 28-30, 2013 in Johannesburg, South Africa was the interaction among regional integration, natural resources and economic transformation. Regional integration provides opportunities for African countries to exploit regional value chains and expand the size of markets, which are otherwise small and fragmented. Regional value chains are, in turn, important anchors for industrialization and broader economic transformation. The recent discoveries of oil and gas deposits in several African countries provide a great opportunity for African economies to catalyze industrialization through investments in oil refining and related petro-chemical industries, until now largely neglected by many of African oil producers today.
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.
Sub-Saharan Africa boasts over 132 trillion barrels of proven oil reserves—more than 8 percent of the world’s supply. Yet, by exporting most of this oil to refine it elsewhere, including for eventual domestic consumption, the continent has long missed out on a huge opportunity for economic transformation. More recently, Africa’s policymakers and private sector have begun to consider new plans for various refineries on the continent. The accelerated pace of regional integration and the new discoveries of oil deposits provides excellent opportunities for Africans to invest in large-scale refining capacity and in associated industries such as plastics and chemicals. Deepened regional integration should also support investments in regional refining and related infrastructure.
The African oil industry is led by Nigeria, which ranks 13th in global oil production and has a capacity to pump over 2.5 million barrels per day (bpd). Yet the country’s three refinery complexes can refine only about 445,000 bpd, less than 20 percent of its total production. Moreover, poor upkeep and aging infrastructure have reportedly reduced those refineries’ operating capacity by half. As a result, Nigeria ends up importing some of its refined oil products to meet the local demand. Consequently, the country often ends up suffering from periodic fuel shortages and ensuing political turmoil.
The scope of these missed opportunities is growing. As things stand, it is estimated that oil production in sub-Saharan Africa will grow from 7.4 million bpd today to 8.8 million bpd in 2020. As new oil fields continue to be found and drilling technologies improve, analysts expect these figures to be revised upwards. And with only 30 percent of sub-Saharan Africa’s 2,900 existing oil blocks licensed, significant room for growth remains in the sector. In addition to adding value to oil products for export, enhanced refining capabilities in Africa will also be driven by rising domestic demand for refined oil products, which is set to increase by 50 percent over the next decade. If sub-Saharan Africa is going to truly transform its resource wealth into economic dynamism and leave behind the colonial model of exporting primary resources in exchange for refined goods, it must increase its refining capacity and better capture the more sophisticated economic opportunities that exist along the petrochemical value chain.
Promisingly, a number of new plans to do so are underway. Kenya plans to almost double the 35,000 bpd capacity of its Mombasa refinery, currently the only major crude oil refinery in East Africa. Uganda plans to add another refinery to the region that would handle 60,000 bpd (to be constructed in collaboration with Kenya, Rwanda and South Sudan.) And Nigerian billionaire businessman Aliko Dangote is investing $3 billion to build his country’s first private refinery by 2016. Dangote’s plant would almost double Nigeria’s refining capacity (handling 400,000 bpd on its own) and is expected to halve the country’s fuel imports.
Unfortunately, these plans to upgrade refining capacities could be too modest in ambition. For instance, even if Kenya’s and Uganda’s refinery plans are both successfully implemented, the region’s oil consumption of about 200,000 bpd (and growing) will outstrip its planned refining capacity of 135,000 bpd. That means, at the very least, the region will continue to export about 65,000 bpd of crude, unrefined oil, only to import it further up the value chain. Similarly, even after Dangote’s ambitious new refinery comes online, Nigeria will remain an importer of refined oil products. In sum, Africa’s oil producing countries should think hard about boosting their capacity to refine oil, consider investing in world-class refineries that process a minimum of 200,000 bpd (an industry standard) and design plans for small-capacity refineries that can be upgraded to such a level in the future.