OPINION: Challenges to promoting intra-African trade in the petroleum industry in the wake of the AfCFTA Agreement: Africa’s insufficient petroleum refining capacity

Oil is still considered the lifeblood of the modern world, as economies tend to be overly reliant on the resource. It is often colloquially termed as “the Black Gold”, to emphasize its significance to global economies, particularly in the context of international trade. This article investigates how a lack of endemic refineries is a barrier to intra-African trade. 

In March 2018, African countries committed themselves to the landmark African Continental Free Trade Area (AfCFTA) Agreement, that could potentially be a gamechanger for the petroleum industry in the continent. This agreement is set to establish Africa as the largest free trade area in the world, by creating a single market for goods and services in the continent. Once the agreement is fully enforced, it is expected to boost intra-African trade exponentially. Intra-African trade currently stands at a meagre 3 per cent of overall global trade.

The poor rate of intra-African trade has means that countries have been unable to utilize the economies of scale and other benefits (e.g. income and employment generation) that market integration provides. Goods and services could have been procured competitively from other African countries, but have hitherto been sourced from outside the continent, often at very high costs, as is explored below.[1] Trade being the key driver of economic growth and development, the AfCFTA will enable African countries to trade with each other by incentivising them to reduce tariffs and other non-tariff barriers to trade between them, including protectionist policies. The African Union (AU) estimates that will result in approximately a 60 per cent boost in intra-African trade by 2022.

There are however a host of potential challenges, unique to the petroleum industry, that could derail the efforts of the AfCFTA in promoting intra-African trade. A notable challenge is the insufficient refining capacity for crude oil throughout the continent. Other challenges include the lack of investment in equipment, along with inadequate infrastructure, which forces the continent to rely on imports to satisfy the increasing fuel demand.[2] The majority of the oil extracted in Africa is exported, especially to the Middle East and Europe – because of their capacity to refine crude oil at cheaper costs.[3] For example, Equatorial Guinea exports all its oil because it does not have any refineries.

Today, Africa boasts a number of significant oil producing nations such as Nigeria, Angola, Algeria and Egypt. Moreover, other countries, like Kenya and Uganda, have recently discovered oil reserves. Ironically, these countries are also major importers of refined oil, that has either been converted into petrol, Liquified Petroleum Gas (LPG), or other useable petroleum products for their domestic markets.[4]

Although the crude oil produced in Africa is enough to meet the continent’s demand, the domestic refining capacity is too small. This forces these countries to export the bulk of their crude oil and import the refined petroleum, often at exorbitant prices, to satisfy the demand in their domestic economies. Therefore, countries are dependent on imported refined fuel products due to lack of domestic refining capacity, despite holding relatively large reserves of petroleum.

The circumstances above stifle the economic growth and development of resource-rich African countries and are major contributing factors for the resource curse. Evidently beneficiation and value addition in petroleum is lacking, thus affecting trade between African states. Crude oil must be transported to be refined outside of Africa and is then imported from refining countries, thus implying that African countries do not trade oil between them.

For these countries to reach their full production potential, it is imperative that they enhance investments in infrastructure, particularly for constructing refineries. It would require the states to mobilize the private sector to participate actively in enhancing development through financing infrastructure projects. The state can create an enabling environment through policies and other measures. Public-private partnerships are fundamental in this regard. 

For example, Kenya struck commercial oil deposits in 2012. In August 2019, it exported its first crude oil shipment of more than 200 000 barrels. These developments have sparked heated debate amongst the Kenyan public. What is the purpose of exporting crude oil and later importing the refined commodity at exorbitant prices? Is it not prudent for African states to repair their existing refineries (and construct new ones) to refine the crude oil for both local consumption and export? Should we not add value in Kenya and then export the refined product, which would have the effect of generating much better returns than the crude that is exported in its raw form? These are a few of the questions that could be asked, after the exportation of crude oil in August. 

Countries are losing billions of US Dollars annually as a result of exporting unrefined oil. This necessitates investment in refineries, to enable these countries to unlock their full commercial oil-producing potential. Apart from allowing countries to generate revenue, constructing the necessary infrastructure, including pipelines, would also go a long way in alleviating the unemployment menace facing these resource-rich countries. 

Amid all the gloom, there appears to be a silver lining. There is an increasing awareness of the need for refineries throughout the continent to reduce reliance on imports to meet domestic demand.[5] It is expected that refinery projects will be instituted in the coming years, as some have already been announced in countries like Angola, Ivory Coast, Uganda, among others. The private sector is expected to be at the forefront of such projects, since public sources of funding are hardly enough to achieve sustainable development in Africa.[6]There is currently an initiative by Nigerian billionaire Aliko Dangote to build an oil refinery in Nigeria that would refine approximately 650 000 litres of crude oil a day.[7] This refinery is expected to be completed by the end of 2020. A key reason for its construction is to reduce the amount of imports that Nigeria makes for most of its local oil consumption. 

With the presence of refineries around Africa, oil producing African countries would be motivated to export their crude oil for refining, even as they construct and renovate their existing refineries. This interaction promotes intra-African trade. Other resource-rich countries should follow Nigeria’s example because the ability to transform crude oil into a useable form would transform these countries from importers of petroleum to net exporters. This move from net importer to net exporter will lead to increased Foreign Direct Investments (FDI), economic growth and development. With the entry into force of the AfCFTA, the domestic consumption dynamic would change in the aforementioned manner. 

Countries like Kenya should accelerate efforts to renovate its only refinery in the coastal city of Mombasa, that has been decommissioned since 2013. Such renovations should commence as Kenya simultaneously attempts to unlock the requisite investment and finance from all sources of funding, including from the capital markets and from multinational finance institutions like the World Bank (and its various institutions, including the IBRD,[8] IDA,[9] IFC[10] and MIGA[11]- these institutions, in conjunction with the International Centre for Settlement of International Disputes, collectively comprise the World Bank), and the International Monetary Fund (IMF), to build new refineries. 

Written by Kennedy Chege.