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Monday, January 15, 2018

Fairfax plans to build USD 4 bln oil refinery in Ethiopia

(The reporter) -
Fairfax Africa Fund, a US-based investment firm, in collaboration with multiple partners from Asian countries is planning to build an oil refinery in Ethiopia with a total investment cost of four billion US dollars.

Zemedeneh Negatu, Global chairman of Fairfax Africa Fund, told The Reporter that his company has undertaken the feasibility study.

According to Zemedeneh, Fairfax Africa Fund is working on the project with Asian investors whose core business is oil trading and infrastructure development. “Our initial plan was for our investors to be from Asia but more recently, we were approached by American financiers who are interested in the project. So, we may end up with financiers both from Asia and the US,” he told The Reporter.


The investors have evaluated several places including Djibouti where the oil refinery will be built and finally selected Awash town, 221km east of Addis Ababa. Awash is found in the Afar Regional State in the Ethio-Djibouti corridor where the national fuel depot of the Ethiopian Petroleum Supply Enterprise is located. “Awash is selected as the ideal place by the authorities,” Zemedeneh said.
According to him, initially, the refinery will have the capacity of processing six million metric tons of crude oil, equal to approximately 120,000 barrels per day. Ethiopia currently uses three million metric tons of fuel annually. The refinery's capacity will eventually be expanded to 12 million metric tons per year. The total investment cost is estimated at four billion dollars.

The planned refinery will serve the East African market. “It will primarily serve Ethiopia. It is part of Ethiopia’s energy security program. The refinery will also cater the needs of other East African nations,” Zemedeneh said.

Fairfax held preliminary discussions with the Ministry of Mines, Petroleum and Natural Gas, the Ethiopian Petroleum Supply Enterprise (EPSE) and various other government organizations. The discussions are still at the early stages. But, based on these early discussions, we have already identified a couple of suitable locations within Ethiopia for the refinery. We plan to present a more detailed business proposal to the government authorities later this year,” Zemedeneh said.

Ethiopia built its first oil refinery in 1967 in the Port of Assab. The refinery built by Russian engineers during the Imperial regime had the capacity to produce 500,000MT of fuel per year. During the military regime it was upgraded to process 800,000MT of fuel. After the secession of Eritrea, Ethiopia has been using the refinery until 1997. However, the Assab refinery was ageing and it became too small to satisfy the needs of the two countries. As of May 1997, Ethiopia began importing refined petroleum products.


 

EPSE welcomes the new initiative. Tadesse Hailemariam, CEO of EPSE, told The Reporter that his enterprise has not yet started negotiations with Fairfax. However, he said, if the planned refinery project is properly planned and executed it could be useful for the country. “When you bring crude oil and process it you get by products like asphalt, LPG and petrochemicals to be used by various manufacturing industries. So the planned refinery would be useful,” Tadesse said.

However, he said, there are some critical issues that need to be considered. The oil refining industry is becoming very competitive. A giant oil refinery, which process two million barrels of fuel per day, was recently built in India. Petro China has built a new refinery which can produce 500,000 barrels per day in Saudi Arabia. The construction of giant and modern oil refineries is making the competition very intense. Due to the economies of scale the newly built giant refineries offer very competitive prices.  There are also stringent environmental regulations. Due to these challenges some European countries are abandoning their refineries and began using the newly built refineries.

“The question is can the planned refinery in Ethiopia be competitive in terms of cost and quality? If we can get better price from India we will import refined petroleum products from India,” Tadesse said.

Tadesse said that if the planned refinery can offer quality products with better price and meet the environmental regulations and standards it will benefit the country. “Considering the sideline business that comes with the refinery it will be advantageous. We are very happy about it.”

Zemedeneh said that Fairfax and its partners have undertaken all the studies and feel comfortable with the findings. “The refinery will be capable of processing high sulphur heavy crude and meet all the US and European standards,” he said.

The investors are planning to develop an entire petrochemical complex to serve Eastern Africa based in Ethiopia over the next 15 years. The refinery is the first phase of the entire investment project.

“We are planning to build and operate the refinery very efficiently. In fact, it will operate at a level comparable to the best in the world. Furthermore, the refinery will have significant local value-addition,” Zemedeneh told The Reporter.

He said that these factors, combined with their unique business model and proprietary technology and skills will allow the pricing of the refinery's products to be very competitive. “In fact, our financial model anticipates that most of the refinery’s products will be priced lower than the finished products currently imported from other countries.”

The refinery will produce LPG, Naphtha, Motor Gasoline, Diesel, Kerosene, Aviation Fuel, Petroleum Coke and Sulphur. 

Fairfax wants to partner with EPSE. The investors’ focus is on building the refinery and operating it. They are of the view that EPSE should do the sales and distribution. “Our plan is to partner with EPSE in two ways – they could have equity in the company that owns the refinery and EPSE will be the sole purchaser of the refined oil and other by-products and they will distribute it in the domestic market and for export.”

The refinery project will be launched in the third quarter of this year. “That is that what we are hoping for. Because of the very large size of the project and the numerous regulatory approvals required, we are expecting to launch the project late this year but more likely early in 2019 and complete construction in 48 months.”

Fairfax Africa Fund’s current global portfolio includes investments in infrastructure, technology and real estate. Through multiple investment platforms, the investment firm provides financing as private equity, venture capital and mezzanine. In certain countries it also provides investment banking and transaction advisory services.

Fairfax is a founding shareholder in Hello Cash. And it recently teamed up with a Singaporean company and Messebo Cement to establish a roofing material manufacturing company with an outlay of USD 70 million. It is processing two more manufacturing projects to be finalized in the next two or three months. “We are heading to manufacturing and infrastructure,” Zemedeneh said. 
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