* 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.
LACK OF REFINERIES
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
bpd.
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.