Africa's refining resurgence on course despite margin risk

The threat of a permanent downswing in global refining margins has not stopped African refinery projects from progressing, as amplified energy security concerns have spurred new capacity additions.

Postcolonial ambitions to develop Africa's downstream sector have historically been blighted by underinvestment, leaving the continent reliant on imported fuel as small-scale, simple refineries have struggled to turn a profit.

Now, competition from giant refineries in the Middle East and Latin America will only exacerbate the challenge, with supply injections set to weigh on margins at a time of stalling global demand growth. Yet, as established refining hubs like Europe verge on downsizing, African refinery builds are plowing ahead.

Angola has three greenfield projects set to come online by 2027, while Chinese-built refineries in Ghana and the Republic of Congo promise to add almost 100,000 b/d of combined capacity additions by 2026. Uganda has secured UAE investment to bring its first refinery online around 2027, while the South African government is discussing a major revamp and potential expansion of its Sapref refinery, once the country's largest.

The oil price volatility of recent years has sparked renewed unease over import exposure, made particularly punishing by costly fuel subsidies paid out by many African governments. In Nigeria alone, the government spent $10 billion and around 2.2% of gross domestic product on artificially keeping gasoline prices low in 2022, according to the International Monetary Fund.

Speaking at African Energy Week on Nov. 7, Godfrey Moagi, CEO of South Africa's new national oil company SANPC, said that redressing the country's import reliance is a matter of national priority despite profitability concerns. "We are conscious of the fact that you are competing with massive refining capacity in the Middle East," he said.

New oil producers have also planned refining integrations with upstream operations to fully harness the value of their hydrocarbon resources. After achieving first oil in June, Senegal is preparing to add 70,000 b/d to its refining capacity via a newbuild and upgrades to its existing SAR plant. Uganda has also pledged to bring its first refinery online no later than two years after achieving first oil, expected next year.

Last refining frontier

Enduring oil product demand growth has set Africa apart as one of the last investment destinations for the remaining refinery financiers, as population gains promise to increase consumption 50% by 2050, according to S&P Global Commodity Insights forecasts.

Despite a withdrawal from Western lenders, the continent's downstream segment has attracted investment interest from global traders as well as Chinese, Russian and Middle Eastern financiers. Nigeria's 650,000-b/d Dangote refinery, now one of the world's largest, was prominently funded by Africa's richest man, Nigerian cement tycoon Aliko Dangote.

Speaking on the sidelines of African Energy Week on Nov. 7, Anibor Kragha, executive secretary at the African Refiners and Distributors Association, noted the strategic advantage of African refineries to serve fast-growing supply chains for copper, cobalt and other critical materials powering energy transition initiatives.

Angola has made strides in preparing to service growing railway traffic along the Lobito corridor, which connects Zambia and the DRC to its West African coastline, Kragha said. "They're not just looking at self-sufficiency for Angola, but also the regional market and energy security for that area," he said.

The newly-formed Africa Energy Bank, which has secured a fifth of its $5 billion equity from the Middle East and other non-African investors, has also vowed to alleviate inland distribution costs for refiners by prioritizing intra-African pipeline projects.

Omar Farouk Ibrahim, secretary general of the African Petroleum Producers' Organization, lamented that existing pipeline links have stayed mostly export-oriented but said a protectionist policy turn by Europe through an expanded "carbon border adjustment mechanism" taxing imports could provide a pivot point. "That's how the Chinese made it. They literally closed their society," he said.

Regional hubs

Competing in the new refining landscape requires producing at scale, but giving up on domestic capacity and supporting regional hubs remains contentious for many countries.

The Republic of Congo currently spends millions of dollars on subsidizing supplies from its state-owned CORAF refinery, which it gives prioritized access to the domestic market, while Ghanaian officials have pushed to keep the country's "obsolete" Tema refinery running.

Speaking at African Energy Week, Congolese energy minister Bruno Jean-Richard Itoua called the country's state-owned CORAF a "small refinery that doesn't make any money" but backed plans to modernize the tiny plant and said it will continue running.

In contrast, Namibia has urged against a siloed approach, seeking partnerships with Angola for its fuel. "It doesn't make sense to say you will have a refinery in Namibia, Botswana, etc. We need to find out at what level we need to collaborate to make refineries competitive enough to pull off," said the country's energy minister Tom Alweendo, also speaking at the conference.

Zambia is also in discussions with Angola over a potential fuel pipeline link, while Kenya has revived talks over extending its fuel connections into Uganda and Rwanda. In Central Africa, DRC officials have welcomed Russian interest in funding a products pipeline with the Republic of Congo, though none of the projects have reached a final investment decision.

APPO's Omar Farouk Ibrahim underscored the need for rapid investments to ensure the success of refining projects. "There is no point in producing energy if you can't move it from areas of plenty to areas of need," he said.