From Russia with love

Some time back I had the idea of supplying oil from the Kenyan refinery to Uganda via well established trade routes and distribution channels with the aim to reduce the holding time and cut costs resulting in healthier profit margins. I am happy to say this venture is going very well, but within I few days of starting I would get emails requesting a meeting with other suppliers. Intrigued I met with a few and they were mostly businessmen from Tanzania who were trying to break into the Ugandan market. Now Tanzania produces some natural gas for the country and has potential for crude oil especially from Lake Malawi, but they are certainly not in a position for production. So the question is why would they need a refinery and where is the large amount of crude coming from in the first place to attempt to disrupt the Kenyan market? 

A modern trend has started where countries like Kenya and Tanzania, who either do not produce oil or indeed very little of it, are taking a slice of the petroleum pie buy offering refining processes close to potential markets. This can be beneficial for the producing country who may only be drilling for crude and not processing it and for the refining country who can then distribute the refined product back to the original producer, so the investment needed to build a refinery of around $6billion for Tanzania, should over the next few years produce a healthy return on the investment. Now as Africa is a growing economy who would benefit from using this type of refinery, other African players?

Most of the big petroleum players in Africa have their sights set on the American market and often forget the potential to sell closer to home. It is therefore more external forces who are trying to capitalise in Africa, namely India, China and Russia. Interestingly a few years ago Russia appeared to be distancing itself from the African market but Mr Putin the Russian President has decided that Russia needs to exert more influence within the region and the quickest way to achieve this is to control the trade of oil. I have previously said that oil is power and whoever controls that oil has a big say about the politics and economic structure of the trading country. When Russia pulled away from African investments, China stepped in with a number of trade deals moving into the construction of infrastructure, for example they seem to have built most of the major roads in Ethiopia. Now Cnooc (China Offshore Oil Corporation) is pushing hard to control the drilling rights in a number of countries, this has forced Russia to play a more aggressive hand to try and reclaim some of the ground they lost. Nigeria has really accepted a lot of Russian trade and is probably their biggest trade partner in Africa. When a Nigerian-American oil deal was on the table, the Russian government made it very clear that any such deal would have a serious impact on Nigerian-Russian trade. Russia was clearly seen to exert influence over the African nation. 

Now going back my original question of who was supplying the oil to Tanzanian businessmen? They openly said it came from Russia who wanted to heavily penetrate the refined petrol and diesel markets. The problem was these guys were charging too much for their product and could not hope to sell any major quantities. The businessman looked at me, made a call speaking in Russian and immediately undercut our other prices. I said “how could you make a profit doing it so cheap?” The reply was “We take the market from Mombasa then increase prices later”. So clearly these guys were happy to make a huge loss, just to claim the market share, so what does this mean for the new players in the oil market? When Kenya and Uganda start production will they survive in such a cutthroat market place? The answer is yes if they can combine resources. The big players effectively have money to waste, to sell at a loss over an extended period of time is not good business sense and ultimately unsustainable unless of course you have very deep pockets. 

The Uganda-Kenya Crude Oil Pipeline (UKCOP) will help to merge potential exports especially if South Sudan constructs their pipeline to join UKCOP. Uganda probably does not need the additional expense of building a refinery at the moment, but considering petroleum was found in 2006 they have been a little slow to capitalise on their natural resources. Kenya is in a stronger position with its established refinery and trade links, in fact setting up good distribution channels is half the battle and must be planned well in advance of the first barrel of oil being produced, after all no point producing oil if it is prohibitively expensive to deliver to the customer making your product unattractive to the consumer and unprofitable for the producer. I found the Russian suppliers wanted to keep their product pure and not mixed with other crude oil suppliers. Now we can see that they either genuinely believed their product is of a superior quality and other local crude would contaminate their oil or alternatively they wanted to block other suppliers dealing with the local distributor again taking control over the distribution rights for that region.

Whatever the reasons now is the time to set firm those supply contracts ready for when production starts. Kenya has a head start and Uganda is close behind but unity could allow both countries to survive a Western power play for the region, the last thing either of these countries need is for another state run oil supplier dictating policy because they managed to get carte blanche over oil supply and distribution, thus influencing foreign and domestic policy. Let’s not forget American and Russian policy is not necessarily the policy of Africa and its Nations. Often these superpowers are butting heads trying to get one up on the other and having economic control over a region that is desired by a rival can be seen as a political coup de grace.