Fuel prices soar in Africa due to shortage of oil refineries

A scarcity of oil refineries in Sub-Saharan Africa, along with rising crude costs as a result of the Ukraine conflict, has placed countries in danger of running out of gasoline, interrupting flights and generating long lineups at gas stations.

The increase in pricing coincides with a rise in the cost of food following Russia’s invasion of Ukraine, which has impacted tens of millions of people already living in poverty, as well as government and relief agency budgets.

According to independent consultant CITAC, refineries in Sub-Saharan Africa can handle 1.36 million barrels of oil per day (bpd) in principle, but with many out of service, barely 30% of that capacity was employed last year.

Cameroon, Ghana, and Senegal have all shut down refineries, as have four South African refineries. Nigeria, Africa’s largest oil producer, produces almost 1.3 million barrels per day, but the two privately owned refineries that remain operational can barely handle 1% of that.

In May, the African Export-Import Bank and the African Petroleum Producers’ Organization agreed to form a multibillion-dollar “energy bank” to stimulate private investment in the industry, but analysts believe there are a few fast remedies on the way.

Petroleum shortages are also affecting Western countries, but the impact in Africa is predicted to be more long-lasting, as governments and businesses are less able to finance the exorbitant costs of imported fuel or come up with the millions of dollars required to get refineries back up and operating.

“The situation is expected to grow significantly worse in the immediate future,” said Anibor Kragha, president of the African Refiners & Distributors Association (ARDA).

In recent years, major Western oil firms have backed out of refinery projects in Africa, and local investors and governments have mostly failed to fill the void, resulting in a chronic lack of investment in modernizing facilities.

As a result, African countries rely nearly entirely on imported petroleum products to fuel their economy, despite the continent’s estimated 125 billion barrels of oil reserves and 600 trillion cubic feet of natural gas.

According to government experts, even big crude oil producers like Nigeria and Angola rely on imports for about 80% of their domestic gasoline needs.

In the face of mounting public outrage over price hikes, governments are hurrying to get refineries up and running.

The Tema refinery in Ghana, for example, has been shut down since an explosion in January 2017. President Nana Akufo-Addo of Ghana said “intense efforts” are now being undertaken to restore the refinery in order to assist alleviate rising gasoline prices.

However, according to industry insiders, bringing the refinery online would need $40 million in fresh investment, which the government cannot afford given its mounting debt and double-digit budget deficit.

Cameroon has a similar situation.

The 42,000 bpd Limbe refinery has been closed since a fire in 2019, but an order from the president’s office obtained by the media on April 22 directed the finance minister to put measures in place as soon as possible to rehabilitate the deeply indebted operation.

Aliko Dangote, Africa’s richest man and a cement magnate, is developing a massive refinery in Nigeria with a capacity of 650,000 barrels per day, placing it just outside the top five refineries in the world.

However, its much-anticipated inauguration has been postponed until next year, while the long-awaited revamp of Nigeria’s Port Harcourt refinery has only recently begun after two decades of planning.

In addition to its single 65,000 bpd refinery in Luanda, Angola, Africa’s second-largest oil producer with roughly 1.1 million bpd, aims to develop new refineries.

Diesel and aviation fuel have been in limited supply due to refiners substantially reducing output during the epidemic, when travel restrictions grounded flights, and Russian diesel volumes have decreased since the Ukraine crisis began.

Nigerian airlines threatened to cancel domestic flights owing to rising jet fuel prices, but then reversed their decision. The country provides a high-cost gasoline subsidy, but not diesel or jet fuel. Supply shortages are also a result of scheduled maintenance.

Senegal’s 27,000 bpd SAR refinery in Dakar has been closed for renovations since November, and the country’s gasoil supplies were down to three days at the end of April, causing lengthy lines at the pumps.

Due to jet fuel shortages, several aircraft were compelled to reroute away from one of Africa’s busiest airports in South Africa, where four refineries are offline, including one of the region’s largest, the 180,000 bpd Sapref facility in Durban.

While certain nations in North Africa are particularly vulnerable to a drop in grain exports from Ukraine, refineries in the region are in better form than those south of the Sahara, according to CITAC statistics, with refineries operating at 80 percent capacity last year.

Oil companies and commodities trading organizations have been sending oil products from the Middle East and Far East to float in giant tankers off the coast of Togo in West Africa, where they may be divided up into smaller amounts for last-minute delivery, due to a lack of processing capacity.

However, with rapid delivery rates so expensive and the market so unpredictable, significant players have backed off. The situation is being exacerbated by higher trade expenses and additional outlays owing to credit worries with small, independent African importers.

Traders claimed just two or three businesses answered to recent tenders for diesel or jet fuel, compared to six or more before Russia’s invasion of Ukraine, which Moscow describes as a “special military operation.”

Ghana has escaped shortages so far, but importers claim that daily price hikes mean that each purchase is more expensive than the one before it. According to Ghana’s statistics office, retail fuel prices increased by more than 90% year on year in April.

“These conditions mean you’ll need twice as much credit as you did last year,” Senyo Hosi, president of the Ghana Chamber of Bulk Oil Distributors, said.

There is no incentive to keep things for future sale when prices for immediate delivery are so high relative to future months – a market phenomenon known as backwardation.

“High outright prices and strong backwardation limit the incentives to store discretionary or unsold inventories, leaving spot or short-notice customers exposed to shortages,” said Jamie Torrance, Trafigura’s head of distillates and biofuels.

In the week leading up to May 12, physical jet fuel prices in Europe and the United States reached new highs, while stock levels at Europe’s important ARA oil hub plummeted to their lowest level in two years.

Previously, Russian diesel, fuel oil, and other goods were kept and re-blended at ARA (Amsterdam-Rotterdam-Antwerp) for shipping to Africa, but Russian crude and products may now only be supplied to European clients in limited circumstances.

“Unfortunately, this is likely to worsen the present shortages,” warned Trafigura’s Torrance.

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