Despite substantial and well publicised growth in oil demand
across Africa, a trend of divestment in downstream operations by
oil companies has been experienced over the last three to five
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.
Strategic decision-making criteria
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
The current realities
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%
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.
Infrastructure, pricing and regulation
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
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.
What does the future hold?
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.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The Honourable Minister of Mineral Resources, Ms Susan Shabangu, reinforced during her 2012 budget speech on 10 May 2012, amongst other things, that the Department of Mineral Resources (DMR) remains determined to continue issuing stoppage notices in terms of section 54 of the Mine Health and Safety Act, No. 29 of 1996 (MHSA) to ensure compliance with the MHSA.
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