SAR Refinery No Panacea
BMI View : The government's decision to keep open its indebted SAR refinery seems inconsistent with a broader drive to reduce energy sector subsidies. In our view, it will also do little to relieve the country's heavy dependence on expensive oil and oil product imports; we believe that the country will need to look to an alternative solution.
The Senegalese government has decided keep its sole domestic refinery in operation, according to a report by Reuters. The government had been considering closing down the 25,000 barrels per day (b/d) SAR plant, due to its age and high running costs. The decision follows a government-commissioned strategic review of the plant, which explored the options for its conversion to a liquefied natural gas (LNG) import and storage terminal.
SAR, which is owned by state oil company Petrosen and has been in operation since 1961, has come under increasing financial strain. In the absence of a domestic source of crude oil, it relies largely on imports from Nigeria. In 2012, the company reported debt in excess of US$63mn, and has taken out a loan of US$350mn in order to finance its crude imports for 2014, according to the same report by Reuters. In light of this, the government's decision to maintain the refinery was somewhat unexpected. The current President, Macky Sall, was elected under a heavily reformist agenda, and has been pushing hard to cut spending and reduce the country's weighty fiscal deficit. A cornerstone of his economic policy has been a reform of the country's energy sector, which swallowed up more than 2.5% of the country's GDP in subsidies in 2012 (see 'Fiscal Deficit Reduction To Slow', January 16 2014).
|Deficit Reduction A Key Concern|
|Senegal - Revenue & Expenditure, US$bn, and Budget Balance, % GDP|
SAR's refining capacity is also relatively limited, satisfying less than half of the country's domestic oil consumption, and concern over the resulting dependence on expensive refined product imports has been increasing. Senegal relies on diesel for the vast majority of its electricity, with diesel accounting for an estimated 78% of total power generation in 2011. Without finding alternative sources to petroleum products to meet the country's energy needs, even with the SAR refinery open Senegal's energy bills are not set to shrink in the near future unless it secures other cheaper energy alternatives.
Exploring Other Energy Options
Demand for electricity is growing and, with historically elevated global oil prices, the burden on the wider economy is proving heavy. In November 2013, the government launched a three-month study into the feasibility of importing liquefied natural gas (LNG) via a floating regasification and storage unit (FSRU). The use of gas for power needs would ease Senegal's reliance on oil and oil products, which appears attractive option for cash-poor governments such as Senegal as we expected prices for both oil and oil products to remain historically elevated; the price of Brent is still expected at above US$90 per barrel (bbl) through our five-year forecast period.
|Oil Prices To Largely Stay High|
|Average Yearly Price Of Brent, US$/bbl|
Floating infrastructure has its appeal; it is more cost-effective, and can also be brought online more quickly and with greater flexibility, than onshore facilities. However, we have previously noted, uncertainties surrounding the future LNG market and the direction that gas prices would go could put the economics of gas imports into question in the longer-term (see 'Promise And Peril In LNG Import Plans', November 13 2013).
It is probable that Senegal, alongside other West African countries, will look to import its gas from the US. With our expectation that the US Henry Hub benchmark will rise over the coming years, the differential between the prices for oil and US gas may be set to shrink. In the case of LNG, the cost of liquefaction and regasification is also a factor. We estimate that it could add US$2-3 per mn British thermal units (mnBTU) to the price of LNG from the US. Shipping is another add-on expense, with freight costs for Nigerian LNG exports to the US Gulf Coast currently averaging US$1.30/mnBTU and the reverse may also be applicable for shipments from the US Gulf Coast to West Africa. Finally, with growing demand in the premium-priced Asian markets swallowing up supply, small importers such as Senegal may struggle to secure long-term buyers contracts. If so, they face open competition on what could be increasingly high prices in spot markets. Thus, LNG may not necessarily be able to reduce Senegal's energy import burden.
Domestic Supply To The Rescue?
Senegal has seen a marked uptick in exploration activities over the past year, with companies including FAR, Cairn Energy and ConocoPhillips currently involved in offshore explorations there. A domestic supply of crude would render the SAR refinery more profitable and could ultimately reduce the country's reliance on imported crude products. However, we emphasise that the upside risk offered by offshore exploration is both long-term and highly uncertain.