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* 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
By Humeyra Pamuk and Emma Farge
DUBAI/GENEVA, Feb 21 (Reuters) - East Africa's emerging oilproducts market has sparked intense competition between tradershunting for better profits to bolster tight margins in Europeand the Middle East.
Oil traders with Gulf operations based in Dubai are lookingto sell into an East African market now worth $15 billion a yearto supply oil products to power emerging economies growing onthe back of a rising population and robust mining activity.
"It is no secret that competition in African tradingmarkets is increasing," says Gary Still, executive director atCITAC Africa Ltd, a UK-based consultancy focused on the Africandownstream energy market.
With only one functioning oil refinery in the 11 countriesthat make up the region, it has always had to import fuel.
Kuwait's International Petroleum Group (IPG) has shippedfuel to ports dotted along the coast for more than a decade,fighting alongside established suppliers like trader Trafiguraand local companies like Gapco Kenya.
With profits from selling to the moribund European orisolated Iranian markets drying up, Middle East fuel shippersare increasingly prepared to risk sailing cargoes through thepirate infested waters off Somalia to quench the growing thirstfor fuel in ports further south.
Among those attracted to the trade are SOCAR Trading, a unitof Azeri-state oil firm SOCAR and U.S. refiner Phillips 66, which have offices in Dubai and are betting the regionwill remain dependant on fuel imports, particularly diesel, astheir planned refining capacity will take longer to come online.
Apart from IPG and Trafigura, which operates through itsAfrican subsidiary Puma, the newcomers will also be competingwith Dubai-based Galana Petroleum, BP, Shell,Swiss-based traders Augusta Energy and Addax Petroleum, Indianrefiner Reliance, Glencore and Vitol which have all boostedtheir presence in the region.
In January Vivo Energy, a joint venture of Shell, Vitol andHelios, was set to win its first Kenyan tender.
Gloomy margins and growth prospects elsewhere help traderspursue profits in the African market, once deemed too risky.
"With the global economic slowdown market players see agrowth rate several times that of Europe and are interested,"Still said. "The growth was there before of course but peoplelooked 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 barrelso far this year compared to an average of nearly $8 a barrel inthe second half of 2012, according to Reuters data.
Depressed margins in Europe weigh on the Middle East aswell, especially as the regional market is also stagnant.
"Arabian Gulf business is non-existent," a middledistillates 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 theirsupplies directly from India's Reliance."
Iran, once a major gasoline and gasoil buyer, is no longerin the market as Western sanctions banning the supply of oilproducts to the Islamic Republic make it almost impossible forinternational oil traders to do business with Tehran.
The other big fuel importer Saudi Aramco set up its owntrading company last year and is handling most of its cargoesthrough its own shop. Saudi Arabia will also reduce its importdependency by 2015 with new refineries coming onstream.
LACK OF REFINERIES
In contrast, in East Africa refining projects are delayed orshelved due to financing difficulties and ports act as a gatewayto other landlocked nations fully dependant on imported fuels.
"Part of the attraction of East Africa is that it opens upto the interior, into Zambia and Uganda. There're lots ofcompanies interested in placing product into these markets ifthey can optimise the logistics," Still said.
Togo-based pan-African bank Ecobank estimates oil productsdemand 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 outputfrom 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 by2020 to just over half a million bpd.
"Over the next few years, new refineries are expected to beconstructed in Mozambique, Uganda and Kenya," Ecobank energyanalyst Rolake Akinkugbe said in a research note.
"However, over the last decade, only 7 of the 90 newrefinery and major expansion projects announced in Africa werecompleted or even started. Furthermore, some completedrefineries have been shut down following disagreements overproduct prices between investors and government," she added.
Currently, Kenya's Mombasa refinery, owned jointly by theKenyan government and India's Essar Energy is the onlyfunctioning plant in East Africa and it operated with a 50percent capacity usage rate in 2012, boosting import needs.
Essar said early last year it planned to invest $1 billionto raise refinery capacity by adding secondary units that couldhelp the refinery use more of its available capacity, althoughit was not clear if the project would proceed.
Among the projects in the pipeline is the establishment of a100,000 bpd refinery in Kenya's northeastern town of Isiolo thatwould refine crude from Turkana, Uganda's first refineryestimated to cost up to $2.5 billion and a proposed $12 billionrefinery from Mozambique with a planned capacity of 350,000bpd.
All have challenges ranging from securing financing todisagreements over plant sizes, signalling potential delays onthe way and leaving the region import-hungry for years to come.
Traders say this robust demand does not mean everyone canturn it into profitable business. Logistical network andfinancial strength are key, and players that already have anestablished downstream supply chain have a head start.
"Trafigura is pretty big here and so is Vitol. Others arestill working to get more market share," one trader said.
The Swiss commodities giant Trafigura revealed that Africagenerated $29 billion worth of revenues in 2012, almost aquarter of its revenues, highlighting the big growth storyalbeit high risks.
Its Africa-focused subsidiary Puma, which is being preparedto float, has shown strong interest in buying downstream assetsin Africa and last year started talks to acquire majority stakein Kenyan fuel marketer KenolKobil but the outcome is not clear.
Getting in the downstream infrastructure would certainlygive companies a strong foothold.
"It is getting crowded indeed. But the demand is risingfaster than before. So the market is still very much there," aDubai-based trader who sells into East Africa said.
