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African Energy Outlook

Angola shelves plans for new oil refinery

September 1, 2016 - By Eklavya Gupte, George Shaw in London


* Reliance on product imports to continue
* Overhaul at Sonangol after Santos takes reins

Angola's state-owned Sonangol has had to shelve plans for its much touted Lobito refinery due to sustained low oil prices, leaving it no option but toremain reliant on refined product imports and crude exports.

Sonangol announced the suspension of building work at the Lobito refinery and the Barra Do Dande shipping terminal on August 19, in order "to reassess the strategic vision and implementation of the projects."

The cash-strapped company said the measure was necessary because of "the new economic reality" of low oil prices, as the country was in "a situation that involves a careful review [of the projects'] design, phasing and financing."

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The decision comes almost two months after the company saw a major overhaul after President Jose Eduardo dos Santos' daughter, Isabel dos Santos, took over as its head.

Sonangol on August 19, however, said the company "will continue to fulfill its incurred contractual obligations to date," and will "make every effort to maintain the supply [of] fuel to the Angolan market, bearing in mind improving the efficiency and the company's cost structure."

Angola's economy, which depends on oil for about 98% of its export revenues, has been fragile due to the significant fall in oil prices since mid-2014, and this situation has been exacerbated by the recent yellow fever epidemic.

Reliance on refined product imports

The Lobito refinery was expected to be fully operational by 2019, and there were hopes the facility would make the country and the surrounding region less dependent on refined product imports.

In its recent annual report, Sonangol said it hoped to complete construction of the project by 2018 and that construction of some public infrastructure like roads had already been completed.

Sonangol teamed up with Italy's Eni on the project, which was originally set to have a capacity of 400,000 b/d but later downsized it to around 200,000 b/d-250,000 b/d.

In 2014, China's export investment bank provided a $2 billion loan to Sonangol for the project. But the latest twist in its development means the region will continue to be reliant on imports.

Angola's main refined product imports include gasoline and gasoil, most of which are from Asia and Europe, with most cargoes coming from Singapore, South Korea and Northwest Europe. The main suppliers of these products are trading houses, especially Trafigura.

In 2015, Angola imported 3,519,894 mt of gasoil, almost 70% of its overall demand, while its gasoline imports totaled 1,237,477 mt, 47% of its requirements, according to official figures.

Angola's sole refinery is a 65,000 b/d facility in the capital Luanda. The Luanda refinery ran at a utilization rate of 81% or 52,796 b/d in 2015, according to the company's recent annual report. The refinery mainly runs Angolan crudes such as Plutonio and Palanca, according to trading sources.

Warning signs

Sonangol issued a warning earlier this year, saying 2016 was likely to be a bleak year, with "heavy pressure" ahead, which also led the government to slash its 2016 economic growth forecast.

The company said 2016 would be a tough year, with the current low oil price environment persisting, but said it was hopeful of a rise in oil production. Angola has recently emerged as Africa's largest oil producer as Nigeria has seen its output fall sharply this year due to renewed militancy.

But this has not really helped the country, as the fall in prices earlier this year saw the finance ministry cut its GDP growth forecast to 1.3% from a previous estimate of 3.3%, compared with GDP growth of 4% in 2015.

An OPEC member, Angola's oil output has also not grown as expected in the last two years, due to technical and operational issues, especially at its offshore fields, as well as a lack of upstream investment. Angola's oil output rose 6% last year to 1.78 million b/d, with production rising for the first time since 2012. However, it had a target of 1.8 million b/d.

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