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Petroleum hub of West Africa • How competitive is Ghana’s bid?

By: Kwasi Zigah
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Tema Oil Refinery (TOR) Limited is Ghana's only refinery established in 1963 to enhance the country's economic, investment and development programs.
Tema Oil Refinery (TOR) Limited is Ghana's only refinery established in 1963 to enhance the country's economic, investment and development programs.

The government has outlined a bold vision to make Ghana a hub for refined petroleum products of West Africa. The hub will be built in three phases over a 13-year period, starting from 2018 and to be completed by 2030.

It is anticipated that the petroleum hub will be built in the Western Region at a location that has the ideal environment and a single candidate land that can hold the planned infrastructure and activities, estimated to cover 20,000 acres.

The hub is to house four refineries with a total capacity of 600,000 barrels per stream day (bpsd), and will ultimately hold and redistribute 50 per cent of the West African consumption of petroleum products which is about 30 million metric tonnes per annum.

When completed, it will have storage infrastructure with capacity of up to 10 million cubic meters, port facility with multiple berths; refineries, petrochemical plants to process petroleum by-products, industrial park with related facilities s

According to the Ministry of Energy, the hub is a strategic anchor initiative which will grow Ghana’s gross domestic products (GDP) by 70 per cent by the year 2038 and provide nearly a million jobs. The project is estimated to cost about $50 billion.

There is a market opportunity for a petroleum hub in the West African sub-region; an area comprising 16 countries. According to the Ministry of Energy’s Petroleum Hub Task Force, the West African sub-region requires about 850,000 barrels of refined fuels per day to meet its needs.

This translates into a yearly consumption of about 30 million metric tonnes. West Africa’s fuel market growth rate is estimated at four per cent yearly.

Currently, the total refinery capacity (four refineries) in the region is estimated at 500,000 barrels per day, leaving a shortfall gap of 350,000 barrels which is closed by import of refined products from Antwerp-Rotterdam-Amsterdam (ARA) region by oil trading majors such as Trafigura, Glencore and Vitol. The proposed petroleum hub is meant to close this importation gap.

This article aims to discuss the competitiveness of Ghana as a hub for petrochemical and petroleum industry in West Africa. It will discuss key determinants of Ghana’s competitiveness in becoming a centre of petrochemical industry of the sub-region. Michael Porter’s (1985) work on competitive advantage of nations is used as a conceptual framework. The following five key determinants of Ghana’s competitiveness to host a petroleum hub are:

Domestic demand
•    Natural and man-made resources
•    Supporting industries
•    Competitiveness of neighbouring countries
•    Policy framework.

Domestic demand
The demand for refined fuel in Ghana is put at 4.2 billion litres (85,000 b/d) according to the National Petroleum Authority (NPA).This demand is growing consistently at five per cent and seven per cent annually and it is consistent with regional demand growth rate.

Ghana’s fuel consumption represents eight per cent of total West Africa’s fuel demand. According to the NPA, Ghana’s domestic projected fuel consumption will reach 10 billion litres (45,000,000 barrels) by the year 2030.

Since the country’s utilised refining capacity is barely 35000 b/d, Ghana relies heavily on importation of refined fuels. Strong retail and mining sectors are driving growth in demand. It is anticipated that the hub will supply petroleum products to the neighbouring countries through major trading partners.

With the harmonisation of fuel standards in the region (50ppm for gasoil and RON 91 for gasoline), it is expected that the hub’s refineries should be able to meet fuel quality specifications in the region. In a situation where the hub cannot export its entire output to the neighbouring countries through traders because of cheaper source elsewhere, there is a ready domestic market to supply.

Resources
Ghana has natural and man-made resources that support the petroleum hub concept. Ghana is strategically located on a major international shipping route. The country has relatively safe maritime infrastructure and coastline with water depth capable of receiving large ocean vessels. This puts Ghana at competitive edge over other regional countries.

Ghana has growing upstream oil industry whose crude oil output provides main ingredient for the hub project. Ghana produces medium-light sweet crude with 36.4 API gravity and 0.25 per cent sulphur content oil which when refined locally, yields ultra-low sulphur fuel output as required by the sub-regional standards authorities.

In addition, the proximity of Ghana’s upstream crude oil to the proposed location for the hub should yield production cost advantage. Ghana has built relevant petrochemical skills over the years when the Tema Oil Refinery (TOR) was producing at full capacity. These engineers have gone to Gulf States where their skills are in demand. Ghana is in a pole position to attract these engineers back home to man the newly constructed hub refineries.

However, it remains a challenge to attract these skilled engineers back home in a short time. Equally, it will take some years to train newly graduated engineers with the skills set to man the refineries. At best, Ghana may have to go to the international market for skilled engineers. The DPI assessment is that Ghana is competing fiercely with Nigeria on this key determinant of competitiveness and has no advantage in this determinant of competitiveness.

Related and supporting industries
Ghana can count on few industries to support its business case for the petroleum hub project. There is fairly good road network that links the coastal region with the Sahelian and neighbouring coastal countries.

The rail lines are currently being revamped to cart heavy cargo to the northern parts of the country.

We have a very competitive downstream sector where indigenous players command over 75 per cent of the market volume share. It is expected that this competitive downstream sector will play a critical role to market products refined at the hub.

In the Western Region, there is a technical university, the George Grant University of Mines and Technology, that trains petrochemical engineers. The proximity of the university to the proposed hub site is an advantage.

Competitive rivalry among neighbouring countries
There is fierce competition among countries along the Gulf of Guinea to attract large and long-range oil cargo vessels to their harbours. Currently, Lomé Offshore is more competitive to large cargos bringing refined fuel from ARA region due to relatively low anchorage charges and offshore security there.

The domestic fuel demand in Nigeria is very huge. They consume 600,000 b/d of fuel. This represents 70 per cent of regional market consumption. With a huge domestic market, Nigeria stands in a good stead to attract the necessary funding for the proposed petroleum hub as compared to Ghana.

The Nigerian government-owned refineries are struggling to produce to meet even half of the country’s demand, making Nigeria rely on imported fuel. Indeed, Dangote Industries identified the viability of a large-scale refinery and has invested USD12 billion in a brand new refinery to produce 650,000 b/d. The new refinery is estimated to be completed by late 2019.

It is expected that this new refinery will supply domestic market and export the surplus to other regional markets at competitive FOB prices compared to imports from the ARA region. If it becomes operational, this will jeopardise Ghana’s vision of becoming a petroleum hub due to the competitive price advantage Dangote Refinery is expected to command due to economies of scale.

However, given Ghana’s political and business-friendly environment, investors could still choose to put their money in the project in spite of the promise Nigeria holds.

Policy framework
Ghana needs a coherent and clearly defined policy to govern the petroleum hub vision. This policy framework should clearly lay out the role of both the government and private sector in achieving the hub vision. This hub policy should be comprehensive to cover the entire mid-downstream industry.

The new policy should provide enabling fiscal and regulatory regimes. In this vein, a new regulatory authority is needed with the mandate to provide one-stop service to all the project stakeholders. The roles of various regulatory agencies should be earmarked in such a way that all the agencies work towards the common vision of the government.

Since the private sector is expected to commit 90 per cent of the total $50 billion project cost, the government should make clear the roles of the private sector and consequently take steps to enact relevant legislations to make it easier for the private sector-led petroleum hub concept a reality.

Conclusion
I have analysed the five key determinants of Ghana’s competitiveness as a hub for petroleum industry in West Africa. The following key points should be taken note of:

1 There is an opportunity for a petroleum hub in the region since the region currently meets its domestic petroleum products shortfall through importation from the Netherlands, France, UAE, etc.

2 It is cost-efficient to refine crude produced in the region in refineries located in the region since regional market demand is sizeable to justify setting up large-scale refinery capacities.

3 The location of the hub in a specific country depends on several factors and the principal thing is the competitive advantage of the country.

4 Ghana fares averagely well on key determinants of the country’s competitiveness as a petroleum hub in the West African region.

5 Nigeria remains the main challenger to Ghana on country competitiveness given natural and man-made resources, domestic demand condition and supporting industries.

It is my overall assessment that Nigeria has an edge over Ghana in respect of a petroleum hub since the upcoming Dangote Refinery has tilted the tide in favour of Nigeria with their brand new refinery commencing in 2019.

However, Ghana should still keep the hub vision alive. In the meantime, the Ministry of Energy may consider retooling TOR to up its current refinery capacity to 85,000 barrels per day to meet domestic demand.

Alternatively, TOR could be tasked to find a strategic partner to construct new refinery with at least 100,000 bpsd capacity as the ministry assesses the impact of Dangote Refinery’s commencement of operation on refined fuel FOB prices in the sub-region. — GB

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Disclaimer: The views expressed in this article are personal views of the author and do not represent views of PETROSOL