ANDREW BAHLMANN: African free-trade pact hinges on adequate crude refining capacity

An adequate supply of energy — oil, gas and electricity — is what drives Africa’s economy. While the rest of the world has transitioned through the first, second, third, fourth, and even the fifth industrial revolution, Africa is still rooted in the second. Those further economic revolutions can occur only amid an adequate energy supply, which 50% of the people of Africa lack.

Some people on this continent lack access to energy, electricity as well as data, and haven’t yet even switched on a light. Yet 8% of global oil is domiciled in Africa, though it only produces about 7-million refined barrels a day. Almost all the refining capacity on the continent is near the Mediterranean coastline, while SA, by far the biggest refiner in Sub-Saharan Africa, has closed all but one of its refineries, turning the rest simply into storage facilities. Meanwhile, we import 4.5-million barrels a day of refined oil products at far higher cost.

Last year SA signed the African Continental Free Trade Agreement with the laudable aim of increasing trade among ourselves. It will only be of value if we have the oil to drive trade among each other, and we can only do so if we have adequate refining capacity to convert the crude into products that can be used. In the journey to renewable energy we have to be realistic in Africa, and cognisant that many people just want electricity — not specifically renewable energy.

There’s a major international drive to divest out of “dirty” energy such as oil and coal and into clean energy — including by international oil companies. As they divest, Africa’s national oil companies are keen to acquire such assets for the sake of their national energy security and socioeconomic sustainability, with jobs, income and tax revenue. This also comes in the context of the need for lower CO₂ clean fuels, with the requirement to convert existing refineries to a production specification aligned with the environmental standards of low sulphur content. That gives an environmental rather than economic return, which often runs contrary to what profit-focused investors want.

This sets the tone for merger and acquisition (M&A) activity in the oil sector. Given the paucity of refining capacity on the continent consolidation of refining capacity into one makes sense, as it reduces the necessary investment in clean fuels that would otherwise be required for multiple refineries. This would enable investment in upgrading and upscaling compliant production capacity — without having to repeat the investment on many other refineries.

Tipping point

The major oil operators remain international companies, and given the global pressures in terms of environmental, social & governance standard compliance, they are open to selling their Africa-based operations in the context of the energy just transition. Their future is renewable energy, but that debate is still wide open in Africa.

Regarding the will to still do oil deals, it is no exaggeration to say almost the entire economy depends on oil, and uncomfortable though it may be, survival has to come before transitioning to clean energy. While the tipping point has been reached in Europe and for the first time more than 50% of car buyers are looking at electric vehicles, we are far short of that even in SA, never mind the rest of the continent.

For a long time we will still have petrol-driven vehicles, and entire sectors of the economy dependent on oil. Examples are all our roads that are constructed with bitumen, a by-product of oil; fertilisers, and other blended petrochemicals that stem from the refining process. So is there an appetite locally? While the answer is yes, it is not the case for everyone.

In Africa, different businesses are in different stages of their maturity profile. As demand drives activity there will still be a demand for oil and even coal for quite some time, and I predict a considerable amount of M&A activity in this sector in the coming years. This stems from reputational issues from asset owners based abroad, and business demand issues from local businesspeople.

Out of this debate will come the answer to how best the continent should embrace its resources to ensure they’re best employed for the benefit of its people. Except to the extent that foreign direct investment is required into the continent, it is for African businesspeople to ensure that the maximum value of its resources is extracted for the benefit of the continent.

• Bahlmann is CEO: corporate and advisory at Deal Leaders International.