Demand driven: Capacity shortages are prompting the need for a new refinery

Oil refining has a long history in Gabon. Société Raffinage du Gabon (SOGARA) was the first refinery in Central Africa and has been in production for nearly half a century. In recent years, however, SOGARA has struggled with outdated equipment, limited capacity and an output that is not suited to local demand. Gabon’s refinery has not been able to turn a profit since it was required to pay market prices for crude in the early 1990s. Faced with growing demand and a desire to increase exports, the government is looking into the construction of a new refinery.

SOGARA: In 1963 the Economic and Monetary Community of the Central African States (Communauté Économique et Monétaire des Etats de l'Afrique Centrale, CEMAC) decided to jointly fund the construction of a refinery to serve the region. Having recently begun commercial production of crude oil, Gabon was chosen as the host state. Five years later, in 1967, the Société Equitoriale de Raffinage began production in Port-Gentil with a nameplate capacity of about 21,000 barrels per day (bpd) and a design capacity based on heavy Mandji crude, according to SOGARA.

A few years later, Cameroon began construction of a refinery to serve its own domestic market and the regional partnership disintegrated. Consequently, in 1973 the Gabonese state, in partnership with fuel marketing companies Total, Agip (ENI), PetroGabon and Portofino Assets Corporation, bought out the other CEMAC partners and renamed the refinery SOGARA. In 1975, Elf Gabon constructed a second refinery on the same site, known as Compagnie Gabonaise de Raffinage (COGER), with a 50,000-bpd distillation column designed to process Mandji crude into fuel oil and naphtha, primarily for export to markets abroad. The facility was closed in 1985 and its vacuum unit was integrated into SOGARA’s refinery.

As Gabon experienced financial difficulties due to declining oil prices in the early 1990s, the World Bank pressured the state to apply import parity ex-refinery prices to the refinery, essentially forcing SOGARA to pay world market prices for its crude. As a small, inefficient refinery with ageing technology, SOGARA was not able to compete effectively on the international market, despite its monopoly on liquid fuels at home. Even with the implementation of drastic cost-cutting measures suggested by the World Bank, including reducing the workforce by half, the refinery continued to experience significant financial problems.

In 2007 a new action plan was implemented, which involved replacing the management team, investing in new technology to increase output and retiring some of the company’s debt. These improvements lead to promising increases in production. Output increased from 650,000 tonnes in 2006 to 983,000 tonnes in 2011. In 2012 management has set a slightly lower target of 900,000 tonnes, as scheduled maintenance will require the refinery to stop production for six weeks. Despite the increases in production, the refinery has yet to break even and still benefits from a per-tonne subsidy of CFA35,000 (€52.5), or about €50m a year, depending on the production level.

LOCAL DEMAND: Demand for liquid fuels in Gabon is growing fast. In 2011, it was 655,829 tonnes, up from 585,596 tonnes in 2010, a growth of about 12%. Demand for diesel fuel, which represents about 60% of total sales at 457,577 tonnes, has been growing at an even higher rate of about 18% a year. Demand for super gasoline is second highest, with 62,323 tonnes sold in 2011, with this representing growth of about 10% over figures from the previous year.

These high rates of growth look set to continue over the short term. Demand growth in 2011 was driven principally by construction in preparation for the African Cup of Nations 2012 football tournament, but continued construction and growth in the mining and industrial sectors should sustain demand, especially for diesel fuel over the next few years. Government subsidies on fuel, which maintain a fixed price for both industrial users and consumers, also encourage consumption by insulating consumers from the real market cost.

A QUESTION OF SCALE: Successful refineries in North America, Europe, and Asia are highly efficient, can process both heavy and light crude feedstocks, and benefit from economies of scale. A baseline size for modern, economic refineries in a liberalised market environment is about 100,000 bpd or about 5m tonnes a year. With a maximum production capacity of 1.1m tonnes a year, SOGARA is simply too small to compete on the world market.

Faced with both demand and scale challenges, the Gabonese government has decided to investigate building a new refinery with greater scale and more efficient processing capacity. While retrofitting the existing refinery is possible, to be able to produce the required fuels it would be necessary to install a hydrotreater (HDS) and a hydrocracker. These upgrades would cost at least CFA100bn (€150m) according to the Ministry of Mines, Oil and Hydrocarbons. The total capacity of the refinery would remain unchanged, however.

The government has decided to pursue feasibility studies with regard to the construction of a modern refinery with a capacity between 3m and 5m tonnes and an ability to refine both heavy and light crude. The refinery would be located near SOGARA in the special economic zone at Mandji and would aim to export about half of production, most likely to Europe.

After looking at initial bids from Japanese, Chinese, and European conglomerates, President Ali Bongo Ondimba signed an agreement with SK Energy, a Korean conglomerate that includes the industrial giant Samsung, in January 2012. The cost of the refinery is estimated to be around $1bn and would be shared between Gabon and SK Energy, with support from the Korean International Cooperation Agency.

A prefeasibility study has already been completed by SK Energy and a feasibility study is awaiting approval by the Ministry of Economy and the Ministry of Mines, Oil and Hydrocarbons. According to the presidency, the project should be completed by 2016.

ON THE HORIZON: Even with upgrades, SOGARA in its existing form will remain too small to compete on the international market and will consequently continue to struggle with profitability and efficiency issues. The economic case for the construction of a new refinery, however, must be viewed in a context of increasing global demand, along with higher global and regional capacity and declining yields. Ultimately, the decision to invest in a new refinery will be a political one.

The construction of a new refinery fits well with the government’s policy of increasing the quantity and value of goods processed in Gabon before export. Furthermore, given the country’s long history of refining, it is unlikely that the government will abandon domestic refining capacity—and the workers that earn their livelihood in the industry. Consequently, it is likely that as long as the government is able to secure the necessary financing for the project, Port-Gentil will be able to add a new refinery to its skyline in the near future.