Refining the idea of a refinery
Last week, Zemedeneh Nigatu, Fairfax Africa Fund Global chairman, blast on the local and international media outlets with his USD 4 billion oil refinery project planned to be located in the central Ethiopia (Awash area), in Afar Regional State. Initial plan of the project indicates that the envisaged facility would have the capacity of 120,000 barrel/day which is equivalent to a processing capacity of 6 million metric tons of crude oil per year. Although pundits are in agreement as to strategic nature of this project, they have a lot to say about its feasibility, ability to stay competitive and sustainability of the project in general, Write Asrat Seyoum.
Starting from Ethiopia’s neighbors Sudan and South Sudan, a number of countries in the world are finding themselves consumed in energy-related conflicts. According to geopolitical analysts who are bent on embracing conspiracy theories, the entire war on terror waged by the world’s superpowers is actually a veiled conflict for the control of the world’s richest hydrocarbon region—the Middle East.
The unbecoming patronage the US affords to countries like Saudi Arabia, which stands accused of wide range of atrocities in Yemen and of human right abuses in their home turf, is believed to be about oil and hydrocarbon deposits. The cartel like arrangement formed by oil rich countries—Organizations of Petroleum Exporting Countries (OPEC)—and its projected influence on the world’s economy was rather undeniable. The oil supply embargo of the 70s and its impact on price of oil in US and worldwide was tremendous.
But that is just crude oil and what we call oil rich nations market crude oil.
To that, the final consumable petroleum product is not in its crude state. In fact, Petroleum products like Gasoline and Diesel are a completely transformed descendent of crude oil. What makes the difference between crude and petroleum product is the refinery process and the additives.
This difference is better captured in the market price of the two products. For instance, Gasoline and Diesel prices on January 15, 2018, as indicated by the US Energy Information Administration, are around USD 2.55/gallon (USD 107.1/ barrel) and USD 3.03/gallon (USD 127.2/barrel) at retail end of the US market. This stands in stark contrast to the USD 70/ barrel crude price registered in the same day by the London Brent (Crude oil price used as reference globally).
This price differential is accounted for by the so called oil refinery facilities and the process they employ to make the crude oil more suitable to vehicles’ exhaust pipe systems, airplanes, heaters, generators and anything that uses internal combustion engines. What is apparent is that even oil rich nations which did not have refineries are still exposed to pretty steep petrol price and ultimately they will be net importers of petroleum.
According to the sectors operators, the process of refining crude oil is something that involves extreme heat and distillation of the individual components in the crude oil input. In its natural state, save some variations, crude oil contains gasoline (colloquially named benzene after a compound it contains), Diesel, Jet Fuel heavy fuel, petrochemicals, Asphalt and residue. In a nutshell, given right amount of temperature, required compounds will be vaporized; then cools and liquidify to yield the needed products.
As a nation without proven oil reserve and refineries, Ethiopia has been net importer of petroleum and related products for years. In fact, its oil refining facility built in Assaab Port in 1967 is now out of use and in the territory of an independent Eritrea. But, the Assaab refinery as well was not adequate to satiate the demand of Ethiopia for years and even with facility the country imported considerable portion of its petrol products from abroad.
As can be imagined, with the departure of Eritrea, the nation has shifted the nation towards the importation of purely refined petroleum from its traditional suppliers in the Middle East (Kuwait and Saudi Arabia) and East Africa (Sudan). Well, almost quarter of a century later, there is a move to see another oil refinery operate in Ethiopia: and the man behind it is Zemedeneh Nigatu, former managing partner of Earnest and Young Ethiopia and currently Global Chairman of Fairfax Africa Funds.
Last week, Zemedeneh blast on the local and international media outlets with his USD 4 billion oil refinery project planned to be located in the central Ethiopia (Awash area), in Afar Regional State. Initial plan of the project indicates that the envisaged facility would have the capacity of 120,000 barrel/day which is equivalent to a processing capacity of 6 million metric tons of crude oil per year. Zemedeneh is very confident about the possibilities of securing funding for this project with what he claims to be an available close to USD 8 trillion funds laying idle in banks earning negative interest rate.
Although initial plans for the project was to secure critical financing from Asian investors, Zemedeneh told The Reporter that he has been approached by US financiers and he might be considering widening the stakeholder’s base.
However, the last time Ethiopia operated a refinery was 50 years back and, according to commentators, a lot has changed in the business in these years. And with that, the debate is now about the feasibility and competitiveness of a refinery in Ethiopia at this time.
Most commentators agree as much as a refinery is a strategic industry. Costentinos Berhe (PhD), lecturer at AAU graduate school, generally welcomes the initiative on basis that refineries are dominating entities in global petroleum pricing game. “The level of influence that they have on petroleum price is very staggering,” he exclaims.
In this regard, he remembers how airline operators in the US went out of their way to appeal for a global regulatory framework for oil refineries since they silently hold the power to shake global fuel prices. “There were also accusation of refineries covertly colluding to determine global fuel price,” and there is no doubt that it will be a strategic industry for Ethiopia and east African region as whole, he views.
Apart from that, he is convinced that a refinery is highly strategic since the current Red Sea access and access to the global fuel supply is not secured. “It could be closed down anytime; at any moment. Strategic reserve and refinery capacity is a necessity. Plus, most of refineries we are buying from currently are also located in this region of the Middle East,” he argues.
For zemedeneh, energy security is the biggest factor that indicates the strategic nature of the refinery project. “Energy security is going to be a key factor if Ethiopia is to become an industrialized nation. That is what the Asian countries have been doing,” he argues.
Not only strategic, but a refinery is also sustainable business venture, says Semere Bekele, general manager and Co-founder of Baros Petroleum. “It is a sustainable project since we are sure to be fossil fuel dependent for many years. Especially for Ethiopian, the technology at our disposal will not change anytime sooner. This is the case even for the developed world,” he added.
Nevertheless, both Costentinos and Semere stress that the planned refinery should crunch the numbers well and make sure that it could stay competitive with regard to price and quality of the petroleum products. The overwhelming body of literature supports this concern and indicates that the global oil refinery venture is constantly evolving and becoming highly capital and technologically intensive.
As of late, oil refineries around the world are undergoing a discernable trend of consolidation and amalgamation, according to Abreham Zegeye, general manager of Zeab Petroleum Engineering, a local consulting firm on petroleum engineering. “Refineries these days are moving towards more complex and huge facilities. The investment cost is astronomical apart from massive operational expenses and requirement of engineering capacity,” Abreham notes.
Indeed the nature of oil refineries is basically understood as any manufacturing facility. Their competitiveness and efficiency depend on their capacity to process different types of crude oil raw materials and producing quality petroleum products. In fact, this capacity is distinctly measured by various complexity measuring indices including the one and well recognized: the Nilson Complexity Index.
The more complex the refinery facility is, the greater the capacity to process heavy grade crude oil with high sulfur content and this, according to experts, is quiet expensive to refine although it is a relatively cheaper and easily available raw material.
Refineries are quite idle everywhere; and with the exception of China and India, nobody is investing on refineries these days, Abreham says. “You have to know that in the past 30 years nearly 20 refineries have closed down their doors because they could not continue being competitive,” he argues further.
Abreham cites the mammoth Nigerian Refinery planned by Africa’s richest man Aliko Dangote (USD 12 billion) to this end, “although it would alleviate crude oil producer Nigeria from importing the majority of its petroleum needs from abroad it is less likely to succeed because of the current difficult refiner business environment in the world”.
This does not settle well with Zemedeneh; “We run our numbers actually and our products are going to be extremely competitive. There is tiny refinery in Mombasa and it produced 60,000 barrel per day in its heyday. So, we are looking at a potential market of Easter Africa with 240 million people.
If the trend in the industry has something to say it is that refineries which seems to be winning the cut-throat competition are the ones with size and scale of operation. According to Zemedeneh, it is only phase one of the project which has been unveiled, so far. Ultimately, the project will boost the 120,000 barrel/per day capacity up to 240,000 barrel per day and this will push the annual capacity to 12 million, he says.
“The 120,000 barrel capacity is pretty sizable in itself and once we go to 240,000 barrel per day (within eight to ten years), we are going to be in major league category,” he counters.
Nevertheless, what is important to note, according to Zemedeneh, is the fact that the oil refinery is part of an elaborate petrochemical complex which will be implemented in the coming years and would contribute to maximize the competitiveness of the project greatly.
On the other hand, Zemedeneh is of the view that refineries shutting down in Europe and elsewhere are old ones which could not meet European and US standards. This, he says, could not be indicative of less favorable prospects in the industry. “There are new refineries emerging in recent times. There is one in Saudi Arabia and the biggest one in the world which is located in India is inaugurated by Prime Minister Narendra Modi recently,” Zemedeneh argues.
Although not as gloomy, Constentinos also argues that the project would not get off the ground unless and otherwise it will be able to secure a firm commitment from the government of Ethiopia. By Zemedeneh’s own admission, the refinery has not yet secured a firm commitment from the Ethiopian government.
“So far, we have met with the Ministry of Mines, Petroleum and Natural Gas and Ethiopian Petroleum Supply Enterprise three times each,” he told The Reporter in a telephone Interview. He also says that he has received a letter from the Ministry and that they were asked to present detail plan of action for review. Taddesse Hailemariam, CEO of the Enterprise, in a recent interview with The Reporter, reflected his cautious optimism with the project. He was largely careful to note that the government would not be tied down and would resort to whichever market option is competitive to meet the nation’s close to 3.8 million metric tons annual petroleum import.
On the other end, the possibility of finding sustainable crude supply without transportation cost putting a dent on competiveness is something that has drawn commentators. Perhaps, far more critical of the project, Tadesse Tilahun, CEO of NOC Ethiopia, in his op-ed piece he wrote on The Reporter, argued that among other things the proximity of refinery facilities to possible crude oil extraction wells and proven reserves is the most cost effective site for refineries in Sub-Sahara Africa. Tadesse reasoning rests on an overwhelming cost implication of transporting crude oil for processing and then again to demand areas of finished products. In the process, he pointed out the dangers of conceiving refinery in country where there is no proven oil reserve.
For Zemedeneh it is completely irrelevant whether Ethiopia has a proven crude oil reserve or not. “If you look at South Korea, Japan and Singapore they don’t produce a single barrel of crude oil but they have one of the biggest petrochemical industries in the world,” he argues.
Yet again, a far more undercutting criticism leveled by Tadesse is about projected cost of the undertaking. In Tadesse’s view there is no way that a project of this size costs USD 4billion; in fact base on his estimation it is at least as high as USD 7 to 10 billion. “Refinery is a capital intensive business. Planning, designing, permitting and building new medium-sized refinery at a preferred location could also take 5 to 7 years,” he added.
“By 2018, we have to finalize the financing; our anchor investors have availed the financing but it is USD 4 billion project; and we have to raise further financing. However, USD 4 billion these days is not a big deal. I spoke at G7 submit in July and found out that there is eight trillion dollars setting idle in banks and earning negative interest rate; looking for opportunities,” Zemedeneh concludes.