Listen: Exploring West Africa's oil product flows in a changing refining landscape

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Joel Hanley: Hello and welcome to the Oil Markets podcast from S&P Global Commodity Insights. I'm Joel Hanley. Africa has always been one of the most interesting continents for energy, but what do the latest developments for West Africa mean for the region as a whole?

The last full week of April 2024 sees the return of the African Refineries and Distributors Association Conference in Cape Town, South Africa. Now, Africa has always been a fascinating region for oil, not least by being host to what is probably the world's greatest imbalance of oil supply and oil refining. Granted that imbalance might have finally been slightly addressed by the long-awaited start-up of Nigeria's Dangote refinery recently. But what does it really mean for the continent as a whole, and what's the current status of refined products, particularly in West Africa?

Well, with me to discuss just that, our three colleagues from the London office at S&P Global Commodity Insights, Matthew Tracey-Cook, Kelly Norways, and Elza Turner. Matthew, you assess European and African gasoline markets for us so you're very well-placed to talk flows of refined products. Given the upheaval across markets since Russia's invasion of Ukraine, for example, and all sorts of other turmoil more recently, what's the latest on product flows in and out of West Africa?

Matthew Tracey-Cook: Yeah. Thanks, Joel. There's been a lot to keep track of across the West African oil product space. It's been very dynamic in recent months. I think two big trends to keep an eye on will be a move towards improved quality for imports across many products. And the question surrounding Russia's involvement in oil trading into Africa. On the gasoline front, Russia became a much bigger exporter into Africa after the Netherlands capped fuel quality in their exports in 2022. So Russia has refined product exports. Ultimately, they aren't that heavy on the gasoline side, they're more diesel and naphtha. But nevertheless, we saw fairly solid monthly flows coming from Russia into West Africa, especially during the winter months.

But now, to keep domestic fuel security, Russia has completely cut off exports to West Africa, which actually saw some other regions that we haven't previously seen exporting take some space in the total export pool. So the Mediterranean, specifically Spain, has been taking a larger role in Europe, exporting gasoline into Nigeria in particular. So traders with storage in Barcelona have been exporting a lot more into Nigeria. And again, this is a new trend following this 2022 law, which capped sulfur, benzene, and manganese content in the Netherlands. Previously, most of the exports came from the Amsterdam Rotterdam Antwerp hub, but ever since this law, we've seen, as I said, Russia and now the Mediterranean exporting more. But this goes along with this general trend of improved for exports.

So there's a similar thing happening on the gas oil side. In West African gas oil, there was a recent spec change by Nigeria, which cut the maximum sulfur content for gas oil imports from 3,000 parts per million to below 500 parts per million. And this saw a really significant reshuffle in the market. We were hearing high sulfur gas oil cargo stranded in offshore Lomé suppliers looking long of product that they couldn't discharge. But now, with things kind of settling into a new equilibrium, the reduced sulfur limits in Nigeria mean that high sulfur gas oil from Northwest Europe is seeing fewer export prospects than before. And there's a lot of confusion in the gas oil space in West Africa.

Joel Hanley: Well, it's interesting considering the Russian interest in Africa through the Wagner Group, and they're clearly trying to plant seeds across Africa for the future. Are we not seeing any Russian material go there, or indeed, is the real challenge maybe this tightening of sulfur constraints that you mentioned?

Matthew Tracey-Cook: Yeah, it's a mix. There's a lot of flux in West Africa at the moment. On the Russian side, we've seen some interesting features popping up in diesel. One thing to keep an eye on in the diesel market, this affects all products, but it's popped up in diesel most recently, is Russia has reduced significantly its use of the US dollar in oil trading. This has resulted in a decent amount of diesel stranded off the coast of Nigeria.

As of last checking, according to CAS data, there was about 1.4 million barrels of Russian diesel floating off the coast of Nigeria, and this actually has popped up in other countries as well. So India and Brazil have reportedly had some payment problems, but it's tricky. It's a pretty opaque part of the Russian products trade. We know, for example, that in the Indian situation, the counterparties were able to ultimately agree on a transaction in Yuan, but it just goes to show some of the frictions that are rising in the Russian oil trade with regards to African imports more broadly.

Joel Hanley: Yeah, and around the world more broadly, in fairness. Interesting you mentioned that you can see that data on CAS, or Commodities at Sea, or the S&P Global Commodity Insights shipping tracker, which is a really useful tool right now given the amount of cargo that often sit off the coast of West Africa. If you've ever been to Lagos, you see these enormous queues of refined products tankers waiting there. Now, one thing that I think people thought might relieve some of the pressure and, as I said, redress the imbalance somewhat would be the Dangote refinery, which we've talked about on the podcast several times.

And it's finally got going, not fully up to speed perhaps, but we started to see a cargo coming out, which is exciting. And, Kelly, you've been covering this on the news team. How important is Dangote in reshaping West African flows? Because I think originally, when it was built, there was maybe an idea that it might take West African crude and supply refined products into Africa. It turns out it's taking crude from elsewhere in the world and probably exporting most of its fuel.

Kelly Norways: Yeah. So the Dangote project is not one that's come without its fair share of trust issues when it comes to the timing of the startup. Obviously, it's a project that's been in the works for quite some time. And while it promises to vastly overhaul the flows that we've historically seen into West Africa, it's taken some time to reach its full scale. But excitingly, we are now starting to see the first signs of activity from that plant. As you mentioned, we saw the first cargoes tendered from Dangote in February this year, and there's news of diesel being supplied from Dangote to the domestic market this March. So we are starting to see signs of activity, but all eyes are really on when gasoline production will commence from that project. In terms of what that means for the market, Matt has touched on the fact that West Africa has previously been extremely reliant on European imports while Nigeria does have a refining capacity of around 445,000 barrels per day.

In practice, utilization rates have been near zero. So we really have seen a very strong reliance on pulling those imports from Europe. Once Nigeria sees Dangote reach a steady state capacity, that could mean some 327,000 barrels per day gasoline supply and 244,000 barrels per day of diesel or gas oil. In practice, how that splits between the domestic market and the export market remains to be seen. There's a significant amount of pressure from the Nigerian government for significant volumes of that supply to flow to the domestic market to try and solve this cost of living crisis and prevent significant payouts that need to be made onto importing those large volumes. But in reality, when we see that start to scale up is still subject to debate. Dangote have been espousing some pretty punchy timelines.

They've most recently been saying that they're looking to produce gasoline by May latest, but in reality, our analysts expect that that would be something like the fourth quarter of this year and in a more realistic timeline. Once we see the refinery ramp up, that could mean that West African gasoline imports or the import reliance that they have at the moment could drop by as much as 290,000 barrels per day between 2023 and 2026. So really, this could become quite a dominant supplier in the West African market, subject to when we start to see those barrels hit the market in Nigeria and the local region.

Joel Hanley: Well, yes, the ramp-up is important, but also where the money is. As you say, there's pressure from the Nigerian government because, of course, they would like this much-vaunted, long-awaited, Waiting for Godot kind of refinery to supply the local market and take some of the pressure off. But if the international markets are prepared to pay up for that product, then it's going to be tricky. It's a very tricky balance to decide where that flow will go. And, Elza, you've been tracking this. You are key refining expert at the Platts branch of S&P Global. What timeline do you see because Kelly mentioned there the ramp-up? What do you see?

Elza Turner: Oh, I think it's very hard to be sure about Dangote because there have been constant indications from the refinery or close to the refinery sources over the years that it's starting up. We've seen that after many delays, it's just properly started this year, even though it was officially inaugurated last May. Incidentally, when we were at ARDA last year or so, March 2023, the refinery was giving indications it will be starting in Q2, but analysts at ARDA and people from the industry really doubted that this will happen until 2024, which turned out to be the case really.

So the refinery is only now producing... Coming up with some products. As Kelly said, gasoline is still uncertain. Another thing about Dangote is that even though Nigeria has been hoping to stop imports of gasoline after the start of Dangote, there have been doubts throughout the years, ever since Dangote has been coming up to completion, whether how much it will actually supply the domestic market and how much it will go for exports. So I think any forecast in that area is mired in uncertainty. I can't be certain. The other thing that Nigeria is currently working on is upgrading the refineries, which have been offline for a number of years.

Joel Hanley: Is there a realistic chance that Port Harcourt and the Warri, these old refineries are actually going to get going again?

Elza Turner: Well, Port Harcourt has been expected to restart, at least part of the refinery, for a year now. So it has been postponed and postponed. The latest was by the end of March this year. Up to our latest information, of course, it could change any moment, it still hasn't restarted. I'm talking about part of Port Harcourt because it has two parts. But I think based on the indications from NNPC, this upgrade should be completed at some point this year and maybe in the first half of this year.

Joel Hanley: It all sounds quite familiar, though, doesn't it? So, Elza, what about other parts of Africa, then? That's Nigeria covered. We're seeing much investment across the continent. Obviously, South Africa has three or four major refineries that keep the southern part of Africa well supplied. Indeed, some of that goes elsewhere around the world. But what about other parts of Africa? Are there many refinery projects going on?

Elza Turner: Yes. Well, unfortunately, even South Africa had two refinery closures. So this refining situation is not that good. We have several projects for new refineries in Africa, apart from Dangote. I know that all the focus or the interest has been on Dangote because it's obviously a very big refinery, very modern refinery. But we also have a new refinery in Ghana, which finally was inaugurated early this year after quite a big delay as well, the Sentuo Oil Refinery. It was expected to start last year. It started some test runs based on information we were finding.

But in the end, it only started this year, but still with reduced capacity. So there is some progress there. Angola is undergoing quite a massive change in the refinery landscape. They're building three new refineries. There are all sorts of other projects in Africa. Over the years, there have been indications of Russian companies interested in building some of these refineries. There has been hardly any update in the recent years about those. But we have a lot of upgrade programs in Africa, and quite a few refineries are involved in building new secondary units.

Joel Hanley: Right. So they're lacking the complexity as opposed to produce the higher-quality products that are required as the energy transition kicks in. So that's encouraging. And, Kelly, just coming back to you briefly on that, how does the Dangote refinery in particular fit in with the energy transition goals and indeed the general situation of the tightening of specifications of fuel in Africa?

Kelly Norways: Yeah. Well, I think really the interesting split that we're starting to see here when it comes to the energy transition and longer-term demand profiles is this split between OECD countries and non-OECD consuming nations. Africa really is one of the last major demand hubs where we're still forecasting dramatic growth beyond the next 15, 20 years. So while we're starting to see Europe come in with much more aggressive targets when it comes to environmental regulations, when we start to see this wave of rationalization or refinery upgrades in Europe looking at the clean energy space, you are still seeing very bullish forecasts when it comes to demand in Africa and West Africa specifically. So that's why you're starting to see a lot of focus when it comes to refiners like Dangote on really ramping up this production.

So to throw some numbers out there, while Europe's expecting to see peak demand approach as early as in the next 15 years, you're seeing projections of non-OECD markets having some 5.4 million barrel per day increase in oil demand. That's by 2050, in contrast to 2022 levels. And for Nigeria alone, that means a 70% increase in gasoline demand between 2022 and 2050. So while Europe's looking at alternative fuels, you've got Nigeria, in the long term, really expecting to still be using gasoline for 70% of its fuel demand beyond that 2050 mark. And what that means is that you're still going to see a significant focus on ramp-ups from Dangote, but it also means that you will see Nigeria and West Africa flip back into becoming a net importer in the future as well.

So it's not necessarily the case that you'll see, say, European flows to Africa seize up entirely. So to put some timelines on that, while we're expecting to see Nigeria's gasoline imports reach a floor by as early as 2026, those are set to start ticking up again in the 2030s, and for Nigeria and West Africa to become a net importer again in the 2040s. So it's a very volatile situation. And it means that while Dangote is expected to weigh on refining margins in the Atlantic basin more broadly, you might also see some more exposure to any outages at that site in the future if there is downsizing in conventional refining capacity in Europe, if there's more of a focus on domestic demand hubs for West Africa. So it's an interesting spot to watch. And it's why there's a lot of eyes on this project.

Joel Hanley: Always... Absolutely. And what you're saying there about the demand balance is really critical because Nigeria and other parts of West Africa are into a huge population booms, and obviously demand is only going to increase. And whether or not the region can afford such high-spec fuels, of course, has always been a bit of an issue and will continue to be.

Now, I mentioned at the top of the podcast the African Refiners and Distributors Association Week, or ARDA. That's, as I mentioned, coming up in Cape Town as we record this. And Matthew and Elza, you're heading down to South Africa, you lucky things. And I'm just keen to know, Matthew, what you are looking out for and what you think people will be discussing other than the things that we've been talking about. Can you briefly just let us know what you're looking forward to?

Matthew Tracey-Cook: Yeah, I think as reporters, it'll be a great opportunity to try and understand the African downstream market more deeply. It's a great opportunity to meet more market participants and understand... We've gone over a ton of shifts on this podcast, with Russian flows into Africa with specification changes, with obviously the startup of Dangote that's on everyone's lips. So it'll be a really great opportunity to meet more sources and understand this market more deeply.

Joel Hanley: Excellent. How about you, Elza?

Elza Turner: I'm hoping to get some more information, some update on actually some of the numbers that Kelly mentioned because Africa is a developing region and it will have bigger population, bigger oil demands, how is this going to pan out in the next years. And of course, I'm hoping to meet a lot of refineries and see how their projects are progressing.

Joel Hanley: Excellent, Elza. Well, I'm sure they're looking forward to meeting you as you are them. Thank you, Matthew. Thank you, Kelly. And thank you Elza. And thank you, the listener, as well. Now I should tell you that the 31st Annual MPGC 2024 returns to Dubai on May the 20th to the 22nd with the Emirates National Oil Company, ENOC, as the host, bringing together the global oil and gas markets leading NOCs, IOCs, traders, refiners, petrochemicals, storage, financial institutions, you name it, in a confluence of dialogue, debate, and business interactions at the very highest level. So for 2024, the event will focus on the theme of evolving core energy markets within a sustainable landscape. You can find out more about the Middle East Petroleum and Gas Conference by looking on the Commodity Insights website. This edition of the Oil Markets podcast was recorded in London and produced by Felix Fernandez.