Refining Hopes Could Face Tough Regional Competition


BMI View: Zambia's hope for a new refinery has taken a step forward, with Maysen and Borowski Claymont Joint Venture and Phoenix Materials and Constructing Company signing an agreement to jointly build a greenfield plant in the country. This will boost Zambia's fuel self-sufficiency in oil products in view of an expected growth in oil consumption, thus allowing the country to better control price inflation. We note that the large project, which will provide more capacity than the country's demand even by 2023, faces risk to its materialisation. Namely, its profitability will require access to other markets in the region, which could be restricted not only by a newbuild refinery planned in Uganda which could have cheaper operating costs, but also from Middle Eastern imports that would also likely be able to compete on costs for market share in the wider East and South African region.

Zambia could see a new refinery if a feasibility study, which is due to be completed this year, supports the project. Maysen and Borowski Claymont Joint Venture (MBCJV) - an Australian joint venture with an African focus - and Phoenix Materials and Constructing Company signed an agreement to jointly set up an oil refinery in the country. The 5mn tonnes per annum - or about 100,411 barrels per day (b/d) - newbuild refinery - tentatively named Bwana Mkubwa - is to be based in the Sub-Saharan Gemstone Exchange Industrial Park, in Ndola, Copperbelt.

This comes on the back of fuel shortages in Zambia for the land-locked country, which access to oil products was restricted mainly to domestic production from the 23,750b/d Indeni refinery and imports via Tanzania. The Indeni plant has been operating at about half of its designed capacity, according to Bloomberg, even as total petroleum consumption in Zambia hit 20,210b/d in 2012 as estimated by the US Energy Information Administration (EIA).

Falling Short Of Domestic Needs
Zambia Total Petroleum Consumption & Crude Oil Distillation Capacity ('000b/d)

Dependence on oil imports threaten to push prices higher, given the dollar-denominated nature of oil products and the 5% depreciation of the kwacha against the US$ seen in 2013. Further price hikes could increase the political risk to the government, given that fuel costs to the consumer have risen considerably since the removal of fuel subsidies in 2012. The high-profile protests and campaigns staged to reverse the government's scrapping of fuel subsidies - among others - demonstrate the politically-charged nature of prices in the country.

Our Country Risk team expects a surging public sector wage bill to push Zambia's fiscal deficit to 7.9% of GDP in 2014, up from a previous forecast of 4.7% ( see 'Macroeconomic Forecasts - Zambia, December 20 2013'). In light of this, there is little fiscal room available for the government to reintroduce subsidies.

The need to boost domestic refining capacity and to reduce import dependency at a time of rising domestic consumption has led Zambia's Mines and Energy Minister Christopher Yaluma to announce plans for a US$410mn greenfield refinery project in July 2013. Yamula stated that the government would be 'negligent' if it delayed the construction of a new refinery, which could help support domestic fuel consumption growth while limiting the inflationary impact of rising demand that can be expected from a growing population and economy.

Economic & Population Growth To Drive Fuel Consumption
Zambia Real GDP Growth (%) & Population (mn)

Raising Capacity

According to MBCJV and Phoenix, the project is estimated to cost US$1.6bn - nearly four times the original estimate by Mines and Energy Minister Christopher Yaluma in July 2013. This is because the refinery will also be accompanied by the construction of other facilities, including warehouses, dry ports, container depot a new crude oil pipeline to deliver feedstock to the plant among other facilities. It is unclear how the project would be financed, though Minister Yaluma had suggested that it could take place in the form of a private-public partnership (PPP).

An investment decision on the Bwana Mkubwa refinery could significantly boost Zambia's fuel security. At an average GDP growth of 6.8% per annum between 2013 and 2023 as projected by our Country Risk team, a modest forecast of 50% growth in total oil consumption over the same period suggest that Zambia could demand 30,315b/d of oil by 2023. Even if the Indeni refinery is shut down for good, MBCJV and Phoenix' 100,411b/d project in Ndola, Copperbelt has the capacity to meet more than three times of Zambia's domestic consumption in 2023 according to these assumptions. However, the excess production capacity also means that the profitability of the refinery will be highly dependent on the owners' ability to market excess output to other markets in the region.

Strong Competition

The current project proposal envisions two new fuels export pipelines to the Democratic Republic of Congo (DRC) and to Tanzania. While the refining capacity of the two countries is currently below their rising consumption needs, a 60,000b/d refinery planned in Uganda could compete with the Zambian project for some of the market share particularly in Tanzania. The Ugandan project is already putting out tender offers for its construction.

Another advantage the Ugandan project could have over the Zambian plant is access to crude feedstock. The refinery in Uganda will be linked via pipeline to the country's new oil developments in the Lake Albertine Basin, which the upstream firms behind the development is targeting to begin production from 2017 ( see 'Licence Approval Brightens Oil Future', January 28). The Bwana Mkubwa refinery in Zambia will most likely look to crude oil from foreign seaborne sources via the Tanzania-Zambia-Mafuta pipeline for its feedstock needs. This could raise the cost of its operations relative to the Ugandan project, and decrease its ability to compete on costs in the region.

Therefore, the profitability of the proposed Bwana Mkunwa refinery is highly dependent on the demand growth prospects of the South and East African region, as high consumption growth could allow for the newbuild plants in Zambia and Uganda to complement each other in providing for the region's needs. Even so, we highlight that Zambia faces stiff competition from Middle Eastern refined oil exports to East Africa as well, particularly from the Saudi market where two newbuild 300,000b/d refineries are expected to come online by 2016. Given the proximity of these Saudi refineries to East Africa and Saudi's access to cheap crude feedstock, they possess considerable cost advantages. This could give them market share in East Africa at the expense of other smaller, greenfield refining projects planned in the wider East and South Africa region ( see, 'Aramco's Advance Could Shake Up Downstream Market', October 25 2013).

This article is tagged to:
Sector: Oil & Gas, Infrastructure, Petrochemicals
Geography: Zambia

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