REFILE-East Africa oil product market draws fierce competition

Humeyra Pamuk and Emma Farge

* Oil products supply market worth $15 billion a year

* SOCAR, Phillips 66 eye stepping up sales to region

* Region has only one functioning refinery

* Trafigura, BP, Reliance already well established

DUBAI/GENEVA, Feb 21 (Reuters) - East Africa's emerging oil

products market has sparked intense competition between traders

hunting for better profits to bolster tight margins in Europe

and the Middle East.

Oil traders with Gulf operations based in Dubai are looking

to sell into an East African market now worth $15 billion a year

to supply oil products to power emerging economies growing on

the back of a rising population and robust mining activity.

"It is no secret that competition in African trading

markets is increasing," says Gary Still, executive director at

CITAC Africa Ltd, a UK-based consultancy focused on the African

downstream energy market.

With only one functioning oil refinery in the 11 countries

that make up the region, it has always had to import fuel.

Kuwait's International Petroleum Group (IPG) has shipped

fuel to ports dotted along the coast for more than a decade,

fighting alongside established suppliers like trader Trafigura

and local companies like Gapco Kenya.

With profits from selling to the moribund European or

isolated Iranian markets drying up, Middle East fuel shippers

are increasingly prepared to risk sailing cargoes through the

pirate infested waters off Somalia to quench the growing thirst

for fuel in ports further south.

Among those attracted to the trade are SOCAR Trading, a unit

of Azeri-state oil firm SOCAR and U.S. refiner Phillips 66

, which have offices in Dubai and are betting the region

will remain dependant on fuel imports, particularly diesel, as

their planned refining capacity will take longer to come online.

Apart from IPG and Trafigura, which operates in Africa

through its subsidiary Puma, the newcomers will also be

competing with Dubai-based Galana Petroleum, BP, Shell

, Swiss-based traders Augusta Energy and Addax

Petroleum, Indian refiner Reliance, Glencore and Vitol which

have all boosted their presence in the region.

In January Vivo Energy, a joint venture of Shell, Vitol and

Helios, was set to win its first Kenyan tender.

Gloomy margins and growth prospects elsewhere help traders

pursue profits in the African market, once deemed too risky.

"With the global economic slowdown market players see a

growth rate several times that of Europe and are interested,"

Still said. "The growth was there before of course but people

looked at all the other problems and risks and didn't pursue it

- now they see mature markets as being risky too," he added.

Brent refining margins have slumped to just over $4 a barrel

so far this year compared to an average of nearly $8 a barrel in

the second half of 2012, according to Reuters data.

Depressed margins in Europe weigh on the Middle East as

well, especially as the regional market is also stagnant.

"Arabian Gulf business is non-existent," a middle

distillates trader said. "Iran is no longer there as a buyer.

They used to buy like 10-12 cargoes of gasoline per month.

Aramco is the big short but they buy quite a lot of their

supplies directly from India's Reliance."

Iran, once a major gasoline and gasoil buyer, is no longer

in the market as Western sanctions banning the supply of oil

products to the Islamic Republic make it almost impossible for

international oil traders to do business with Tehran.

The other big fuel importer Saudi Aramco set up its own

trading company last year and is handling most of its cargoes

through its own shop. Saudi Arabia will also reduce its import

dependency by 2015 with new refineries coming onstream.


In contrast, in East Africa refining projects are delayed or

shelved due to financing difficulties and ports act as a gateway

to other landlocked nations fully dependant on imported fuels.

"Part of the attraction of East Africa is that it opens up

to the interior, into Zambia and Uganda. There're lots of

companies interested in placing product into these markets if

they can optimise the logistics," Still said.

Togo-based pan-African bank Ecobank estimates oil products

demand for the 11 countries in the region including Kenya,

Tanzania, Rwanda and Mozambique at about 330,000 barrels per day

(bpd). That means a supply gap of around 295,000 bpd once output

from the region's only functioning refinery in Kenya is counted.

At current gasoline prices this amounts to $15 billion a year.

The bank estimates that demand will jump by 57 percent by

2020 to just over half a million bpd.

"Over the next few years, new refineries are expected to be

constructed in Mozambique, Uganda and Kenya," Ecobank energy

analyst Rolake Akinkugbe said in a research note.

"However, over the last decade, only 7 of the 90 new

refinery and major expansion projects announced in Africa were

completed or even started. Furthermore, some completed

refineries have been shut down following disagreements over

product prices between investors and government," she added.

Currently, Kenya's Mombasa refinery, owned jointly by the

Kenyan government and India's Essar Energy is the only

functioning plant in East Africa and it operated with a 50

percent capacity usage rate in 2012, boosting import needs.

Essar said early last year it planned to invest $1 billion

to raise refinery capacity by adding secondary units that could

help the refinery use more of its available capacity, although

it was not clear if the project would proceed.

Among the projects in the pipeline is the establishment of a

100,000 bpd refinery in Kenya's northeastern town of Isiolo that

would refine crude from Turkana, Uganda's first refinery

estimated to cost up to $2.5 billion and a proposed $12 billion

refinery from Mozambique with a planned capacity of 350,000


All have challenges ranging from securing financing to

disagreements over plant sizes, signalling potential delays on

the way and leaving the region import-hungry for years to come.

Traders say this robust demand does not mean everyone can

turn it into profitable business. Logistical network and

financial strength are key, and players that already have an

established downstream supply chain have a head start.

"Trafigura is pretty big here and so is Vitol. Others are

still working to get more market share," one trader said.

The Swiss commodities giant Trafigura revealed that Africa

generated $29 billion worth of revenues in 2012, almost a

quarter of its revenues, highlighting the big growth story

albeit high risks.

Its Africa-focused subsidiary Puma, which is considering a

float, has shown strong interest in buying downstream assets in

Africa and last year started talks to acquire majority stake in

Kenyan fuel marketer KenolKobil but the outcome is not clear.

Getting in the downstream infrastructure would certainly

give companies a strong foothold.

"It is getting crowded indeed. But the demand is rising

faster than before. So the market is still very much there," a

Dubai-based trader who sells into East Africa said.

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