UNCTAD OGTF Conference Nairobi, Kenya, 23-25 May 2007 AFRICAN REFINERS ASSOCIATION NOT AN OFFICIAL UNCTAD RECORD.

UNCTAD OGTF ConferenceNairobi, Kenya, 23-25 May 2007

AFRICAN REFINERS ASSOCIATIONAFRICAN REFINERS ASSOCIATIONNOT AN OFFICIAL UNCTAD RECORD

Introduction to the ARA

50 refineries built in Africa over past 50 years 39 currently operating 12 closed in past 40 years Out of 17 countries with refineries, 12 have only

one refinery Total refining capacity in Sub-Saharan Africa

<1.4 million b/d (<70 million MT); Secondary refining capacity only 20% of total

nameplate crude distillation capacity

Introduction to the ARA

Introduction to the ARA

ARA provides a voice for Africa’s 39 refineries; NGO funded by its members, associate members

and sponsors; Second AGM – March’07 in Cape Town Third AGM – 10-15 March’08 in Cape Town

ARA’s Aims and Objectives

Create a voice for African downstream;

Take ownership of and address common issues (economic, environmental, social);

Promote communication, co-operation and exchange of experience;

Defend the interests of the African oil industry.

ARA Structure

AGM Executive Committee:

organise AGM ARA budget Monitor Workgroups Manage ARA membership

4 Executive Committee meetings/yr

ARA Structure

WORKGROUPS

Specifications Database StrategyHealth & Safety

1. Threats to African Refiners

Planned New Refinery Construction and Upgrade Projects

Gasoline:Gasoil:

Possible Impact on African Markets

New projects in Persian Gulf will result in estimated: 5 million MT of gasoline, 5 million MT of jet/kerosene, 9 million MT of gasoil;

New projects in India (west coast): 6.5 million MT of gasoline, 9.5 million MT of jet/kerosene, 15 million MT of gasoil.

A large portion of these are for export and will impact on African markets.

Possible Impact on African Markets

A key issue is whether or not Middle East and Indian refineries (and European/Russian?) play by international trade rules?

Exports subsidised by domestic sales? Low cost feedstock (ME/Russian)? Low cost/free power? Disposal of low quality by product at below cost?

Are WTO rules applied?

Does Africa need refineries?

2. Tightening product Tightening product specificationsspecifications

Product Specifications: AFRI Specs

AFRI -1 AFRI -2 AFRI -3 AFRI -4RON, min* 91 91 91 91MON, min 81 81 81 81Lead content** Unleaded Unlleaded Unleaded UnleadedSulphur content, mass %, max 0.1 0.05 0.03 0.015Benzene content, vol %, max to be reported to be reported 5 1

AFRI -1 AFRI -2 AFRI -3 AFRI -4Sulphur content, mass %, max 0.8 0.35 0.05 0.005Density at 20ºC, kg/ litre (min/max) 800/890 800/890 800/890 820/880Cetane index (calculated), min 42 45 45 45Lubricity (HFRR @ 60ºC), micron, min to be reported to be reported 460 460

*A higher grade of gasoline may be marketed if required

** 'Unleaded' means <0.013g of lead per litre

GASOLI NE

DI ESEL

Product Specifications

ARA members have committed to meeting AFRI spec targets

Meeting the higher levels will require investment that may not be achievable

Refiners need a fair, consistent “playing field” to attract investment

3. Regional Price Alignment

Gasoil: 103 Gasoline: 112

Gasoil: 89 Gasoline: 93

Gasoil: 63 Gasoline: 49

Gasoil:109 Gasoline: 113 Prices in US cents per litre

Gasoil:119 Gasoline: 125+16%

+12%

+63% +129%

+90%

+41%

+73%

+131%

+11%

Pump Prices in Africa: Regional Imbalances

+16% +20%

Market Structure

Wide variations in pump prices within the same region

Wide differences in ex-refinery/depot and distribution price structures

Harmonisation could lead to: Reduction in smuggling Facilitation of trade Market transparency, less market distortion

4. What is the value of having a refinery

Value of a Refinery: Do we need them?

Would it matter if all African refineries close in the next 20 years and Africa buys all its products from the ME, India, and Europe/Russia?

Value of a refinery: Traditional arguments

Traditional arguments to allow refinery subsidisation (e.g. by K-factor):

Employment Technology Domestic crude Supply security ( no longer an issue?)

All valuable but worth $millions not $100’s of millions (subsidy cost?)

Value of a refinery: Additional Arguments 1

Tax collection: Refineries are good tax collectors Private importers (especially at small import

points) may not be Smugglers (who operate when cross-border

prices are different) do not pay taxes

Quality Control: Product quality fraud (off-spec imports)

Can be worth $10’s of millions

Value of a refinery: Additional Arguments 2

Product Import Pricing: Many questionable practices exist for ‘adjusting’

prices on product cargoes; more difficult to do on crude oil cargoes

Privatisation: Refineries are difficult to sell as investors averse

to market regulation Limited competition (difficult for a refinery to

compete against imported products)

Can be worth $10’s of millions

Subsidies

K-Factors extremely important to a refiner (10% on 1

million mt/yr = ~$60 million) Blunt instrument Inconsistent application

Import taxes on products are an alternative

Refiners need a consistent level playing field

5. Efficiency Improvement

Efficiency Improvement…

Enormous improvement achieved in Africa over past 20 years

To go further need a clear consistent playing field particularly to attract much needed investment

Cooperation through the ARA can help with: Benchmarking, Training, Experience-sharing, Expanding supplier choice

Summary

African Refineries face serious threats Advantage of local refining vs. product imports

has been seriously undervalued in the past by economists

Constant pressure for closure and replacement by product imports may lead to wrong answer for Africa

African refineries can become much more efficient but need a consistent level playing field

ARA can help by encouraging cooperation among members