North Africa to Play an Increasing Role in Mediterranean Downstream
PFC Energy: The Mediterranean oil product markets have historically been dominated by the Western European Med markets (France, Italy and Spain), both in terms of demand (47% of demand in 2008) and in terms of refining production (48% of supply in 2008). Going forward, however, Western European markets will see their weight progressively decline, due to a decline in demand and to challenges for some of its refineries.
The situation is quite different in the other side of the Med, where demand growth is expected and a few select refinery projects are likely to materialize in the next five to ten years. This is particularly true for North Africa, where the potential for medium to long-run demand growth remains substantial and several refinery projects are mooted. In the short run, the economic crisis is of course impacting demand in all the Mediterranean countries, but not all of them to the same extent; demand remains more robust in developing countries, where prices are subsidized, while it has been severely impacted in OECD countries, where demand is forecast to remain flat at best in the longer run. In these conditions, the most likely greenfield refining projects to come onstream will be concentrated in countries enjoying sustained demand growth, crude oil production and/or new pipeline transit; in a word, North Africa and Turkey. The crisis will thus deepen the structural shifts among the different parts of the Mediterranean Basin, with the Basin’s epicenter moving toward the South and East.
North Africa will occupy a place of growing importance, both in terms of demand and refining: according to PFC Energy’s recently launched study, Downstream Mediterranean Basin Outlook, the region will experience the largest incremental demand and refining capacity additions by 2020. Strong structural factors are behind this expected increase in North Africa’s demand for oil products, notably a rapidly growing population compared to other Med regions, sustained economic development and investments (boosted by both public and private sectors), increasing revenues from hydrocarbons and, most notably, the further opening of regional economies, with the hope of regional integration and the end of the politically driven inefficiency of the Arab Maghreb Union. Moreover, the refining situation is forecast to change, with the upgrading of a number of plants combined with greenfield refineries forecast to come onstream, notably in Libya and Egypt.
While a very large number of projects have been announced in all the countries of the region, not all of them will come onstream, particularly in a global context of depressed demand, credit crunch and lower refining margins for the coming years. Some greenfield refining projects will nevertheless come to fruition, notably fueled by the growing inability of the existing local refining industry to meet the increasing demand, and the overall lack of complexity of the North African refineries. North Africa, in a context of economic operning, is thus a region of key interest.
Companies operating in the Mediterranean Basin will have to carefully assess and understand the impact of the North African situation on their activities, either because it opens trading opportunities or threats for them, or because the integration of North Africa in the region also increases the rationale for developing or establishing activities there. Neverthelss, except for Morocco, the downstrem oil industry in all North African countries is dominated by National Oil Companies, which currently control virtually 100% of refining capacities, almost all oil products transportation infrastructure and at least 50% of fuel retail sales.
All the North African countries have however undergone some de-nationalization of their downstream oil industry: Tunisia signed a BOO agreement with Qatar Petroleum for its greenfield Skhira refinery; Libya is considering selling part of the shares in its refineries to finance their upgrade and privatizing some of its network of service stations, selling to local companies; Algeria has tried, though unsuccessfully for now, to open its retail market to foreign investors; and Egypt is promoting several foreign refining projects. Thus North Africa is due to play an increasing role as a producer, consumer and trader of oil products within the Mediterranean and if the right incentives are provided should be able to attract sizeable foreign investment in downstream oil infrastructure in the next ten years.
* Stanislas Drochon is a lead analyst in PFC Energy's Downstream and Petrochemicals Group. Primarily involved in consulting for the Downstream Group, he focuses on Africa and competitive strategy analysis. Stanislas has developed expertise particularly in African downstream and midstream.