Issue 135 • 28 March, 2008

North African refinery projects test gap between ambition and capacity

Every country along the North African littoral from Morocco to Egypt has got at least one refinery project in planning or on the go. The question is: can they all succeed when so many schemes are aiming for the same export market and in many cases hoping to use the same sources of feedstock?

On the face of it, North Africa is well placed to supply diesel into the Mediterranean and southern Europe, where there is a deficit that is predicted to persist in spite of a number of planned refinery upgrades and expansions. But although the market exists, competition is high and margins are being squeezed. Domestic markets in Africa are also difficult, in spite of high demand. National oil companies are unwilling to offer discounts on their crude – even in Libya where fuel is sold at hugely subsidised prices. These issues have led to a widening gap between ambition and capacity.

Energy and Mines Minister Chakib Khelil wants to refine half of Algeria’s crude locally. Sonatrach’s planned 300,000 b/d refinery at Tiaret will increase capacity to 800,000 b/d. The national oil company’s backing means this project, which has shifted through multiple permutations as negotiations have advanced and then stalled with other partners, could go forward even if it were not strictly commercial. Most of its output will be sold on the domestic market, although it will also produce diesel for the European Union market (AE 105/10).

Tunisia is in a tougher situation. Qatar Petroleum has had trouble accessing feedstock at a competitive price from either Algeria or Libya for its planned 150,000 b/d refinery adjacent to the La Skhira oil terminal, which was scheduled to enter production in 2010 at a cost of $2bn-3bn; this is aimed at domestic and Mediterranean export markets (AE 100/18). If La Skhira goes ahead it will have to compete not only with other North African refineries, but also potentially with a number of Middle East plants now under construction.

Libya, where a large number of potential projects have been announced in recent months, has special problems (AE 134/15). A proposed upgrade of the largest refinery at Ras Lanuf by Dubai-based Star Consortium, backed by the powerful Al-Ghurair Group, is focused on shifting production from fuel oil to higher-value diesel. A recent ‘fuel crisis’ suggests this could be a potentially commercial prospect, providing a satisfactory agreement on prices can be reached with the government. In unusually frank comments, National Oil Corporation chairman Shokri Ghanem has linked shortages to excessive demand stimulated by heavily subsidised prices – which are costing some $7bn/yr. He is looking to a massive hike in the forecourt cost of petrol (see Downstream and markets, above).

Export-focused refinery projects in Libya are also in some difficulty. Last year, Egyptian private equity group Citadel Capital withdrew from exploratory talks with Zwara Oil Refining Company (Zorco) on the financing of a 200,000 b/d refinery near Mellita. Citadel partner Marwan El Araby told African Energy it had not gone ahead with the project as it had been unable to negotiate a deal on cheap feedstock. “It is difficult to make money in refining,” he explained in mid-March: “If you are getting crude at international prices you are no different from anyone else in a competitive market.” El Araby added that NOC had not taken an unreasonable position, noting: “Why should they subsidise me?” The project’s backers may now be looking at expanding output of diesel to improve margins, but it is not certain that even this can work.

By contrast, Citadel’s Egypt refinery, aimed at the domestic market, is going ahead. In common with many North African countries, Egypt suffers from a deficit of all products except for fuel oil, of which it has excess supply. Demand for diesel is strong – growing at 5%/yr, according to one source – more than the Citadel project can handle. The deficit is projected to grow to 2.3m t/yr, even though a further 140,000 b/d facility aimed at the domestic market is planned. Egyptian General Petroleum Corporation will purchase the diesel at international prices, which will still be cheaper than having to bring it in, says El Araby: “The government expects that it will save $200m per year.”

This project appears to be the exception to the rule. “It is difficult to see how you can make money over a normal pay back period,” says Roy Jordan, an economist at the UK-based oil market analysts EMC. The pressures confronting African refining projects are global. “Big international companies don’t see the refining sector as a viable long term part of their business, except in strategic areas,” Jordan said. “Those going in are independents… and even they are running into problems.”

Viewed from this perspective, with economic pressures running strongly against them, the only projects to succeed may be those that are backed for non-commercial reasons. “There are certain export refineries that will go ahead around the world because they are strategic investments backed by the government or a national company,” Jordan said. But, he added, “further into the future, having access to crude supply is going to be critical, which comes back to the fact that national oil companies will have the advantage.”

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