By George Wachira –
Oil and Gas discoveries in the region are happening at a very fast pace , perhaps denying us enough time to collectively as a region think through implications on regional petroleum infrastructure requirements, especially refineries and pipelines. Opportunities for synergy and economies of scale in regional petroleum infrastructure will need to be actively pursued.
In 2008, the East African Community (EAC) commissioned a regional refineries study to explore refining options for the region. This was immediately after discoveries of oil in Uganda a couple of years earlier. The report recommended that a refinery be put up in Uganda and that the Mombasa refinery be immediately upgraded. Since the adoption of the refinery study report by the EAC summit, Uganda has progressed their plans to build a refinery, thought to be of 60,000 barrels per day (bpd) capacity.
In 2011, a study commissioned by the government of Kenya on the infrastructure for the Lamu (LAPSSET) corridor recommended establishment of a 120,000 bpd export processing refinery at Lamu to refine mainly crude oil from South Sudan. With the possibility of a crude oil export transit agreement being implemented between Juba and Khartoum, it can correctly be assumed that in the near future no crude oil will be flowing to Lamu from South Sudan. This then implies that a refinery at Lamu can only be justified by crude oil from other sources.
In 2012, Kenya announced discoveries of oil near Lake Turkana, quantities of which are awaiting commercial confirmation in the course of 2013. Discoveries of own oil prompted the government to announce that the proposed LAPSSET refinery shall now be located at Isiolo (a junction location along the corridor) to process crude oil from Turkana reservoirs should oil there be confirmed commercial.
Further, all along South Sudan has been planning to put up a refinery north of Juba and it appears that these plans are still on course. There is already a refinery in Khartoum.
When an oil importing country discovers its own crude oil, its immediate reaction is to meet its local products demands from locally produced crude oil, justified mainly on perceived lower costs; added security of supply; and other socioeconomic benefits.
Landlocked counties with own crude oil will normally find it easier to justify refineries as long as their projected market demands are robust enough. Uganda has said that they can easily justify a 60,000 bpd refinery based chiefly on captive demands for Uganda, eastern DRC, Rwanda and Burundi. South Sudan on its own may find it difficult during the initial years to justify a refinery to meet its low demands unless they clinch regional exports.
The Mombasa refinery modernization involves chiefly the upgrade of processing units, and is not planned to increase crude distilling capacity beyond the design 70,000 bpd. Assuming that crude oil from Turkana or from Uganda will finally access export markets through a port along our coastline, then the Mombasa refinery can easily uptake crude oil from either Kenyan or Ugandan sources , provided that the refinery can cope with qualities of those crude oils .
The products from the Mombasa refinery can either be pumped upcountry, meet coastal demands, or exported to locations along the coast. This would leave the proposed refinery at Isiolo meeting most of the balance of products for inland Kenyan market while exporting to the southern parts of Ethiopia and Somalia.
Tanzania has so far discovered only natural gas, a fact that could change as they move their exploration attention further inland especially in their Rift Valley sections which are prone to presence of oil. For now, Tanzania cannot talk of a local refinery, but this could be a different story if they discover oil.
Having four refineries (Mombasa, Uganda, Isiolo, and South Sudan) in the EAC would look quite negligent on the part of regional energy planners. This is where it would be useful to re-visit the regional petroleum supply and demand study and determine which refineries in EAC will be keepers. Most probably the region may require only two refineries interconnected by a matrix of reverse flow pipelines.
Although most Production Sharing Agreements (PSA) provide for meeting local products demands from locally produced crude oil, investors will always push to export crude oil production to mitigate pressure from shareholders who wish to see quicker dividends through crude oil exports. This appears to be the situation in Uganda where the government is proceeding to commit investment in a refinery, while exploration and production investors are pushing for pipelines to export the oil. The government stand appears to prevail for now.
Here in Kenya, we can only at this early time speculate about a refinery at Isiolo, since there is no oil flowing from South Sudan nor have we confirmed commercial quantities of oil in Turkana/Marsabit counties. A refinery at any location along the LAPSSET corridor (Isiolo or Lamu) will require to be connected to local and export (Ethiopia) demand centers with products pipelines.
The Mombasa refinery will definitely need to modernize to improve its refining economics so that it can match competition from potential inland refineries, while maintaining its logistics advantage of a coastal location.
Any investor in midstream and downstream infrastructure (refineries, pipelines, depots) in the region cannot ignore what is happening in the wider region when planning or committing new investments.
George Wachira is the Director of Petroleum Focus Consultants based in Nairobi, Kenya. Reach him at Wachira@petroleumfocus.com