On annual basis, millions of dollars of tax-payers money are spent on oil refineries within sub-Saharan Africa (SSA), in the name of repairs and turn-around maintenance. Yet these refineries are unable to work close to installed capacities, forcing the region to continue importing almost all the refined oil products it consumes.

These refineries have failed to run efficiently and profitably to be able to meet the energy needs of its citizenry. For instance, records from the Nigeria National Petroleum Corporation (NNPC) shows that between 2017 and 2018, the country’s three refineries made a total loss of approximately $740 million. And in a related development, Ghana’s 45,000 barrel per day (bpd) refinery made a loss of over $20 million from a single transaction in November 2018 when it attempted to refine one million barrel of crude from Nigeria.

Lately, it is rare to find a domestic refinery in SSA reporting profits and sustainability, compared to their peers in more liberalized markets. This phenomenon has been blamed on corruption, mismanagement, ownership structure, bureaucracy, pricing regime, funding and technical factors et cetera.

But irrespective of the rationale, refineries basically make their profit from the difference between the price of crude refined and the sale price of the products produced, referred to as crack spread. The crack spread is a good approximation of the margin a refinery earns, reporting as negative if the price of refined products falls below that of crude oil.

And so to be internationally competitive, refineries leverage on their operational efficiency, since they have little or no control over the price of their input or their output.

Economies of Scale

Economies of scale and efficiency are important variables in refinery profitability. The facility size does matter, as it creates an opportunity to spread fixed costs (e.g.

maintenance, labour, insurance, administration, currency depreciation) over many barrels. And since the refining sector within the oil industry have the slimmest profit margins due to the expense of the refining process, and that they have little or no influence at all over the price of inputs or the outputs; refineries must rely on operational efficiency for their competitive edge through constant innovation, upgrading and optimization of capacity to produce more outputs from fewer inputs.

As a result, key factors such as refining capacity, capacity utilization rates, and complexity (configuration) have been identified as ultimately influencing the profitability of refineries, aside supply, demand, location and leadership et cetera.

Refining capacity refers to the given capacity of total crude charge input which a refinery is built to handle before the crude is converted into other consumable products. Utilization rates shows the extent to which the installed refining capacity is used to refine crude oil. It is the relationship between the actual output produced with the installed refining capacity, and the potential output which could be produced with it, if capacity was fully utilized. Complexity is a decisive factor in the type of crude oil a facility can refine and the quality of refined products produced. It literally refers to its ability to process a wider range of crude oils types into value-added products, and the flexibility to adjust to changing markets and local fuel specifications.

Refining Capacity: Facilities with larger refining capacity (size) are more efficient, better able to withstand cyclical swings in business activity and spreads fixed costs over a larger number of produced barrels.

Most refineries in the Middle East, Canada, Asia, Europe, and the United States are typically large in size, ranging from 100,000 bpd to 1.2 million bpd, and capable of producing high quality products at much lesser prices, relative to the refining capacities recorded in SSA which ranges between 10,000 bpd and 210,000 bpd.

Taking a refining capacity of 100,000 bpd as a leading-order benchmark for economic refineries in a liberalized market, it is obvious that a large number of existing and planned refineries in SSA cannot be economic and profitable. To the extent that while new refinery projects are pronounced each year as capacity addition, almost all fail to progress beyond the initial project announcement as they fail to attract the required investment from the private sector; thus leaving the huge finance cost solely on government to bear.

The unattractiveness in the smaller projects are due to the commissioning of several world-scale refineries in especially Asia and the Middle East which the smaller ones cannot favorably compete with; as the global refining sector trends towards fewer, but larger refineries.

Utilization Rate: Compared to refineries in Asia, Middle East, Europe, Canada, the United States, and North Africa that recorded a utilization rate of between 73% and 91% in 2017, Sub-Saharan Africa refinery throughput rates averaged 776,000 bpd through 2017, with a corresponding overall capacity utilization of 49.5%; down from 54.2% in 2016, as a result of erratic and unpredictable operations. Whereas refinery operation rates remain higher in Eastern and Southern Africa (ESA) and North Africa (NA), West and Central Africa (WCA) generally experienced much lower operation rates. Cote d’Ivoire, Chad, Niger, Gabon, Angola, Cameroun, and Congo refineries operated between 56% and 88% in 2017. The three State refineries in Nigeria utilized just between 14% and 24% of capacity; with Ghana operating under 2% of capacity.



The rationale for the unscheduled plant outages that have impacted refinery capacity utilization rates in SSA are familiar stories of mechanical problems, lack of feedstock, delays in delivery of feedstock, lack of ullage, delay in receiving spare parts for routine maintenance, and power supply failure. Subsidies on fuels have also contributed to the low capacity utilization at some refineries in the region, especially those in Nigeria. In its 2014 Africa Oil and Gas Report, KPMG noted that problems in the refining industry on the continent includes poor maintenance and operational problems, aside theft and corruption.

Higher refining capacity utilization rates are necessary because they results in higher production of refined products over a given period, and directly influences the revenues of refining segments. Since the refinery business involves high fixed costs, higher capacity utilization rates remains a key factor that drives profitability. Generally, a sustained 95% utilization rate is considered optimal as rates above that drives costs to rise due to process bottlenecks. A rate below 90% suggests either that some units are down for planned or unplanned repairs or that production was reduced following a drop in profit margins or demand.

Complexity: A simple refinery (“topping” refinery) is essentially limited to basic crude oil distillation; for separating the crude oils into refined products, but not meant to modify its natural yield patterns. A hydro-skimming refinery is also quite simple, and is mostly limited to processing light sweet crude into gasoline, and not heavy oil. It allows for meeting Sulphur specifications, but unable to modify the natural yield patterns of the crudes. By contrast, a complex refinery entails expensive secondary upgrading units such as catalytic crackers, hydro-crackers and fluid cokers to modify and improve the natural yield patterns of crudes. These refineries are configured to process a wider range of crude oil types, treat residual oils and converts them to lighter products, process bitumen from oil sands, adjust to changing markets and local fuel specifications, have a high capacity to crack and coke crude ‘bottoms’ into high-value products, and removes Sulphur to meet environmental requirements.

The complexity influences the input cost, the unit output, and the revenue stream; thus impacting the profitability of a refinery, as a highly-complexed refinery is associated with lower costs than a low-complexity refinery because it can process cheaper crude oil. Additionally, highly complex facilities produces more of light fuels such as Naphtha, Jet fuel, Gasoline, and gases which are more expensive than heavier fuels. In other words, complex and flexible refineries generates cost savings by taking advantages of the price differences between heavy and light crude oils, and more valuable light products. And a refinery’s capability to adjust its product yields to meet changes in demand has a huge impact on its profitability.

Most U.S. refineries, just like the most recent refineries elsewhere (Asia, Middle East, South America) are already conversion or deep conversion refineries. However, this is not the case for existing refineries in SSA, which are mostly topping, and hydro-skimming types.

Conclusion

The global refining industry is witnessing a change in investment patterns, with a strong growth in investment for capacity expansion, and for the upgrading and modernization of facilities to produce more outputs from fewer inputs, aside meeting strict environmental requirement.

Serious refiners are relying on operational efficiency to gain competitive edge since they have little or no control over the price of their input or their output. They have understood that profitable operations that deliver adequate returns on investment and ensures sustainability are a function of a complex set of variables such as refining capacity, capacity utilization rates, and complexity (configuration).