East Africa’s potential whets energy investors’ appetites

The time is right to explore African assets, but only the strongest players will survive in what is an increasingly competitive space, writes Thangapandian Srinivasalu.

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Africa’s appetite for gasoil and petrol is expected to climb by as much as 8 per cent, while demand for liquefied petroleum gas (LPG) has hit double digits. The continent’s expanding home-grown energy supply will help to satisfy some of the burgeoning demand, in a process that is creating opportunities for investors, especially in East Africa.

Africa produced 8.2 million barrels per day of crude last year, with 76 per cent coming from Nigeria, Algeria, Egypt and Angola, according to PricewaterhouseCoopers. But East Africa is starting to change Africa’s energy map. Tanzania hopes to use its 55 trillion cubic feet 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 barrels 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.

The East African Community (EAC) hopes to invest about $1.5 billion to build 1,454 kilometres of regional and domestic pipelines over the next few years. The longest pipeline will be the 784km Kenya-Uganda-Rwanda route.

East Africa must react quickly to satisfy the demand of its thriving middle class. Such households in 11 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 research from last year. The appetite for oil products will be vast, with a large portion powering personal cars on newly paved roads. Most of the LPG demand will be soaked up for cooking to support rapidly growing populations in Africa’s cities, which would also boost the region’s green credentials.

Robust growth wherever it is always attracts global investors’ attention.

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 leading East Africa’s economic prowess, with the region as a whole growing by 7.1 per cent last year, with 5.6 and 6.7 per cent growth forecast for this year and next, according to a report by multilateral agencies including the OECD and the African Development Bank.

With many energy hubs in the Mena region beset by political strife, the largely stable democracies in the EAC offers investors respite.

Plus, lower crude prices since June last year have triggered a rising oversupply and pushed the market into a position where spot prices are lower than future prices. This has boosted investments in oil storage and traders who 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 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 with a $50 million investment in facilities to store fuel in Mozambique or Tanzania.

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

Thangapandian Srinivasalu is an executive board member of Sharjah-based Gulf Petrochem