Saudi Pumps Life Into Nacala Refinery

Saudi Arabia's Radyolla Group is showing interest for the long-stalled Nacala oil refinery in Mozambique. The initial project, buried in the ravels of the financial crisis in 2008, is now growing bigger, with the Saudi group also looking to build a new pipeline to carry fuel to landlocked, and fuel import-bound, countries such as Zambia, Malawi and the Democratic Republic of Congo.

A memorandum of understanding (MoU) has been signed between the two parties - the Radyolla Group and the Mozambican government's Institute for the Management of State Holdings (IGEPE). In addition to the refinery and the pipeline, Radyollah could also become the partner of future projects in the country that are still on the drawing board, according to the IGEPE's chair person Apolinario Panguene.

Total Petroleum Consumption (Thousand Barrels Per Day)
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: IEA
Congo 9.5 8.1 8.1 11.3 11.6 11.3 13.0 11.5 11.5 14.7 12
Malawi 5.3 5.4 5.4 6.3 6.8 7.0 7.2 7.2 6.1 6.1 6
Mozambique 9.4 10.6 11.2 13.3 13.4 13.6 14.4 13.2 15.0 16.1 17
Zambia 11.8 12.2 12.7 13.3 14.1 14.5 14.8 15.6 13.0 14.4 17
Crude Oil Distillation Capacity (Thousand Barrels Per Cal Day)
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: IEA
Congo 15 15 15 0 0 0 0 0 0 0 0 0
Malawi 0 0 0 0 0 0 0 0 0 0 0 0
Mozambique 0 0 0 0 0 0 0 0 0 0 0 0
Zambia 24 24 24 24 24 24 24 24 24 24 24 24

An Attractive Growth Story

Not only Mozambique, but the region as a whole, is a significant fuel importer and in need of extensive downstream capacity. Like so many of its neighbours, Mozambique buys all of its refined products, resulting in a hefty annual import bill of US$700mn - a heavy burden likely to increase without the necessary investment. In fact, Africa's refined product consumption is set to soar for the rest of the decade as population and GDP growth accelerate. We forecast that refining capacity on the continent will fail to match this increase, forcing countries to re-import their crude production once refined.

Consumption Far Exceeding Capacity
Africa's Total Oil Refinery Capacity & Oil Consumption (000 b/d)

The downstream sector is unable keep up with increasing demand as a consequence of the respective government's failure to attract the necessary investment (due to a combination of fuel subsidies and an uncertain political environment) in a market that is otherwise promising - an avenue that the Saudis are now exploring. We believe they are likely to pursue as similar strategy as the one often applied in their Asian markets, 'offering' to build the refineries and pipelines, and then supplying the crude from their own fields at home.

First Come First Serve

As previously stated the need for downstream capacity is massive. As a result, many commercial initiatives, drummed up by governments, have started to take shape on the drawing boards.

However, we argue that the regional demand is significant, yet not sufficient to warrant the number of refineries that have been proposed. Hence, we highlight that whichever country is first to build a refinery and have links to other parts of the region (like the Radyollah - IGEPE venture ) stand to have an important first-mover advantage.

The Subsidy Dilemma

That said, even if one arrives first to the party, one major obstacle remains to this attractive growth story, namely the subsidies dilemma. Many of the countries on the continent have hitherto failed (due to unfulfilled pledges, or a dysfunctional system) to pass on the significant subsidy payments to downstream players who instead charge consumers at the agreed discounted price.

Such an industry environment results in much uncertainty and disincentivises foreign investors. Instead the countries are forced to rely on downstream state-owned companies, which thus worsens the business environment.

However, the problem is not solved by simply cutting the subsidies. For many they are crucial (otherwise unaffordable) for the running of their daily businesses if not basic existence. Therefore, slashing subsidies would also result in demand contracting - this would again discourage private investment, and instead concentrate downstream activities in the hands of national companies.


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