At the same time, there appears to be an appetite for non-traditional and mid-size players to take on these markets and for governments and national oil companies to take on increasingly significant roles in the industry.
All oil majors regularly re-appraise their global business models and investment decision criteria. These decisions are based on, among other things, domestication of oil supply control by national oil companies, the impact of volatile oil prices that leave them vulnerable to unpredictable cash flows and the profitability of individual businesses or geographic locations.
Most of the large multi-nationals have restructured to focus on regions and business segments with the highest market growth, where returns on investment are higher and where political and business risks are lower. As a result, there has been a swing towards upstream oil and gas exploration and production, and a shift in downstream investment from West to East.
The collapse of oil prices to about US$40 per barrel in early 2009 after the prices peaked at over US$140 per barrel in middle 2008 is one factor that has driven restructuring decisions over the last two years.
With a weakened global economy, volatile oil prices and globally reducing margins in downstream business, multinationals are reconsolidating their balance sheets to maintain shareholder value by shedding assets that are marginal and where costs and operating risks are high.
African downstream operations have suffered because of this strategy.
Recent data from downstream consultants CITAC paints a dramatic picture of the future of Africa’s energy demand. Regional growth forecasts reflect an increase in demand of 4.9% for West and Central Africa and 4.4% for East and Southern Africa. For sub-Saharan Africa as a whole, the growth rate comes out at 4.6% per year - compared with an overall global growth rate of around 1% per year.
With such exciting growth prospects, why would oil majors divest from this market?
Despite over 60 announcements in the past 10 years of plans for new refineries on the African continent, only one was built. In fact, 90% of proposed refinery investment in sub-Saharan Africa rarely progresses beyond initial concept stage.
Industry experts have declared that the ‘Golden Age’ of refining is over as global refining margins are weak and volatile, and likely to remain so for many years.
New projects have to compete with marginal volume from other refining centres, particularly in Asia. Despite local demand, it is difficult for multi-nationals to justify the huge sums of capital required to develop refinery infrastructure.
Capital is diverted instead to exploration and production projects where returns are significantly more favourable.
Almost without exception, downstream markets in Africa are price regulated to some extent. The often high costs of doing business in the region cannot be fully passed on through higher pump prices. Furthermore, the regulatory frameworks frequently operate inefficiently, with margin increases being adjusted for slowly, or not at all.
Inadequate infrastructure and inefficient regulatory processes are also major constraints to the efficient and economical transportation of refined products within the African market.
Underdeveloped and neglected road, rail and pipeline infrastructure leads to an unreliable supply of product, increasing the retail cost of fuel and resulting in fuel shortages across countries. Old infrastructure significantly affects oil companies’ abilities to operate within their strict environmental and governance constraints and drives up delivery and logistics costs, which cannot be recovered under regulated margins.
Experience has shown that in evaluating investment opportunities in Africa, multi-nationals will selectively maintain their downstream presence in countries like Egypt and South Africa, where regulatory regimes are more effective and where business/political risks are lower.
The future will depend on how effectively the various petroleum regulatory agencies across Africa manage the sector. In many cases, a significantly enhanced regulatory framework must be established to ensure the highest petroleum standards and practices are in place and enforced, and that fair competition is protected.