Africa’s Soaring Demand for Energy Creates Oil Storage Opportunities for Investors

Africa’s annual appetite for gasoil and gasoline is expected to climb by as much as 8 percent this year, while demand for liquefied petroleum gas (LPG) has hit double digits

By Thangapandian Srinivasalu, Executive Director of Gulf Petrochem 

Africa’s annual appetite for gasoil and gasoline is expected to climb by as much as 8 percent this year, while demand for liquefied petroleum gas (LPG) has hit double digits. The continent’s growing home-grown energy supply will help satisfy some of the burgeoning demand.

Africa produced 8.2m b/d of crude last year – 76 percent came from Nigeria, Algeria, Egypt and Angola, according to PWC’s 2015 Africa Oil & Gas Review. But East Africa is elbowing its way under the spotlight and changing Africa’s energy map – a move easily justified by its wealth of oil & gas assets. For example, Tanzania hopes to use its 55tcf of natural gas reserves to become a liquefied natural gas (LNG) exporter by 2025, while Tullow and Canada’s Africa Oil have identified 600 million bls of oil reserves in Kenya’s South Lokichar basin. Many projects are still in the exploratory stage, but investors’ appetite has strengthened East Africa’s position in the global energy arena.  

Tanzania, Kenya and Uganda are amongst several East African countries addressing wobbly regulatory frameworks by establishing bidding rounds – a more transparent way to allocate resources. Plus, the East African Community (EAC) hopes to invest around $1.5 billion to build 1,454 kilometres of intraregional and domestic pipelines over the next few years. The longest pipeline will be the 784 kilometre route through Kenya – Uganda – Rwanda, which should significantly bolster fuel trade between the three countries.

East Africa must react quickly to satisfy the demand of its thriving middle-class. Such households in eleven sub-Saharan African countries - including Tanzania, Kenya and Uganda - are expected to more than double from 15 million people to more than 40 million by 2030, according to Standard Bank’s 2014 research. The subsequent appetite for oil products is vast, with a large portion earmarked to powering personal cars on newly paved roads. Most of the liquefied petroleum gas (LPG) demand will be soaked up for cooking to support the rapidly growing populations in Africa’s cities, which will also help boost the region’s green credentials.

The time is right to explore African assets, but only the strongest players will survive in what is an increasingly competitive space. Tanzania, Kenya and Uganda are spearheading East Africa’s economic prowess, with the eastern region as a whole growing by 7.1 percent in 2014, with 5.6 percent and 6.7 percent growth forecast for 2015 and 2016, respectively. With many energy hubs in the Middle East and North Africa (MENA) beset by political strife, the largely stable democracies in the EAC offers investors respite; the EAC demands strong governance and human rights.

Plus, lower crude prices since June 2014 have triggered a rising oversupply and pushed the market into contango; where spot prices are lower than future prices. This has boosted investments in oil storage and traders that have access to physical oil and storage can significantly bolster their profit margins.

The outlook for higher future prices has become particularly striking in the past three months as the surplus of crude oil production has increased stockpiles worldwide, exceeding capacity in many trading ports and forcing traders to seek alternatives. The high rates for very large crude containers (VLCC) means floating storage is still an unpopular second choice. 

The changing market structure has presented a gateway for global trading and storage firms to enter and widen their footprint in new markets in Africa, building on already strong platforms in the Gulf, Asia and Europe. If the oversupply of oil persists, traders may become bolder and secure their own storage facilities. They may also need to incorporate more blending capabilities and roll out additional jetties to widen their mandates to help cater for future growth.

Governments and national oil companies are also joining the rush to Africa’s east coast. Oman is looking to build a foothold to promote trade of fuel and crude into the vast landlocked interior of Africa via Oman Trading International (OTI) with a $50 million investment in facilities to store fuel in Mozambique or Tanzania.

We do not see any new refineries coming in near future in Africa, but Africa’s economy is in a growth phase and we expect good demand; it presents a good opportunity for storage terminals to cater to that demand.