Why is Putin in Syria?

By Ian Simm

Russian airstrikes against anti-government and Islamist militants in Syria have brought into focus President Vladimir Putin’s intentions in the country.

With Syria home to a mere 2.5 billion barrels of oil reserves, small by Middle East standards, hydrocarbons do not figure to be of much relevance in this power play. Instead, the efforts to prop up the regime of Bashar al-Assad – opposing the line taken by the West, which has backed ‘moderate’ rebels – appear to be based in three major strategies: those of politics, defence and economics.

Map of Russian airstrikes in Syria (September 30-October 5) - Courtesy of the Institute for the Study of War (ISW)

 

Politics

That Putin has taken matters into his own hands is hardly surprising though. Relations between Moscow and the West are at a post-Cold War low in the wake of the contentious annexation/reclamation (depending on one’s point of view) of Crimea. Russia’s willingness to take a lone stand in international matters is a show of strength both for those at home and abroad, but aside from political one-upmanship Putin has sufficient incentive to take military action.

The missiles being fired at targets in Syria from Russian warships 1,500 km away in the Caspian Sea must to fly over Iranian and then Iraqi territory to reach their objectives – these countries are also key to the initiative to eliminate the extremists. Tehran is another strong ally of Moscow, and Iran’s regional influence has grown significantly in the last 18 months, and it holds considerable control in the corridors of power in Shia-majority Iraq.

Iranian and Kurdish fighters have so far been the most successful in stopping and reclaiming ground from militants in northern and western Iraq. With no sign yet of a major breakthrough on the ground though, Baghdad has now reportedly asked Russia to target militant-held locations in Iraq. Also buoyed by Russian involvement, on October 11, the Iraqi air force reported that it had carried out its own attack on an Islamic state convoy in the Anbar province, killing several of the group’s highest ranking members, but missing leader Abu Bakr al-Baghdadi.

Defence

Syria is a long-time ally of Russia, and the ports of Latakia and Tartous are the country’s only foothold in the Mediterranean. Even from a purely selfish point of view then, Putin can claim to be looking after Russia’s own best interests, and the same can be said of the move to tackle the jihadists.

I understand from Russian diplomatic sources that several of those closest to Putin believe that jihadism is the single most significant threat to the country’s national security.

Russia has a longer history than most in dealing with Islamic separatism and extremism, having fought a war in Afghanistan and two with Chechnya and quelling uprisings in former Soviet republics in Central Asia, all within fairly recent memory.

In order to stop the expansion of the group’s influence, it will take a concerted and single-minded effort to cut off their revenue streams and thereby disincentivise sympathisers. It is therefore, little surprise that Russian and Western-backed coalition air attacks appear to have focused on the group’s infrastructure, including oilfields, pipelines and processing facilities expropriated from firms operating in Syria.

In addition, to ensure that the effort against the militants is unified, Putin may see the reported attacks on anti-Assad rebels as necessary to strengthen the government forces’ position prior to a major ground offensive. Russia is unlikely to take part in a ground offensive, but it has shown willingness to at least provide covering fire. As a result, Western-backed rebels will be looking to their sponsors for more funding and weaponry to fight back.

Economics

In a 2007 cable released by WikiLeaks, former US Ambassador to Syria, Michael Corbin admitted the comparative fruitlessness for international oil companies (IOCs) of doing business in Syria. “Senior managers of both Shell and PetroCanada in Syria have admitted … that their presence in Syria is due in part to its strategic location next to Iraq.” He added that the firms saw Syria as a platform to move into Iraq – “this includes training Syrian staff envisaged as a core of workers willing to work in Iraq once the market opens.”

Indeed, the onset of internal conflict in Syria in 2011 was enough for most firms active in the country to leave, and even the closeness of ties between Damascus and Moscow have not proved strong enough to keep Russian firms interested. Plans announced in late 2013 by private Russian firm SoyuzNefteGaz to explore a 2,190-square km area of Syria’s Mediterranean waters, made little progress, and the company’s chairman announced last month that the effort would be dropped. The conflict has driven oil production down from around 380,000 barrels per day to less than 10,000 bpd in four years.

It may be though, that with Iran’s impending return to global markets from the economic wilderness, Moscow sees the situation in Syria as an opportunity to work together with Tehran, thereby building political ties that could bear fruit for Russian companies. The country’s firms stand to benefit more than many others from the lifting of sanctions on the Islamic republic – likely in March or April next year. 

While Corbin’s conclusion was apt – “Economic considerations rarely, if ever, trump political interests in Syria” – the country may eventually prove to have been a litmus test for changing dynamics in the region.

Behind the shroud: Russia stands guard against Islamic incursion

Largely out of sight of the mainstream media, militant Jihadist groups continue to seek to create a caliphate in the Caucasus, in south-west Russia, Georgia and Azerbaijan. The al-Qaeda-affiliated Caucasus Emirate group was officially formed in 2007, originating from the Chechen Republic of Ichkeria and Caucasus Front organisations, and also includes the Vilayat Dagestan (Dagestan Governorate) of the Islamic State.

Today, the group is made up of a small group of militants in Dagestan, loyal to Abu Usman Gimrinsky (also known as Magomed Suleymanov), who took over as emir in April after the death of Ali Abu Muhammad al-Dagestani (Aliaskhab Alibulatovich Kebekov).

Gordon Hahn, advisory board member at the US-based Geostrategic Forecasting Corp., said recently: “The Caucasus Emirate has been greatly weakened, with a decline beginning in 2012 first due to the emigration of fighters and potential recruits to Syria and Iraq,” and those remaining have yet to accept the Islamic State’s (IS) Abu Bakr al-Baghdadi – who Abu Usman frequently calls an ‘imposter’ – as their Caliph.

By 2014, the number of attacks carried out by the Caucasus Emirate had fallen to less than 25-33% of the number attained at its peak in 2010-11.

“This year, Caucasus Emirate emirs representing an overwhelming majority of the mujahedin defected to IS/Daesh and recently the latter accepted them into its fold as the Vilayat Kavkaz (Caucasus Welayat or Governate) of the Islamic State (CWIS) with its leader being the former emir of the Caucasus Emirate’s most powerful network, the Dagestan Vilayat, Abu Muhammad Kadarsky (Rustam Asildarov),” Hahn said.

Danger in numbers

Therefore, it is now this unified CWIS that poses the greatest threat in the region, but while Russia, having defeated Islamist groups in the latter of the Chechen wars, is well aware of this, it appears, publicly at least, to have done little more than ban selected Islamic literature and adopt minor punitive measures to prevent the spread of jihadism.

These steps, according to Mairbek Vatchagaev, Co-editor in chief of the Caucasus Survey and Senior Fellow at The Jamestown Foundation, are misguided. “Russia perceives the jihadists in the North Caucasus as some group that manipulated from abroad. It is naïve and even criminal to do so,” he said. He added that these do not take into account people’s longing for a feeling of inclusion, and by ostracising Islam as a whole, more young people are pushed towards jihadism.

Hahn said that he expects that the formation of the CWIS will lead to a rise in the number of suicide attacks in the Caucasus in the next year. “Moreover, whatever is left of the original Caucasus Emirate may seek to one-up the CWIS and radicalise its tactics, returning to the use of female suicide bombers and more attacks on civilians.”

He added: “It remains to be seen what if any new measures are being undertaken by the Kremlin, the National Anti-Terrorism Committee (NAK) and FSB to counter this likely growing IS/Daesh threat, which has just emerged in the last few months and weeks. It cannot be excluded that Moscow will attempt to strengthen counter-terrorism co-operation with the West, given their common interest and the Kremlin’s ability on occasion to compartmentalise as demonstrated in its role in the questionable and risky, albeit, Iran nuclear agreement despite the ongoing conflict over Ukraine.”

Missing the point

While the spread of jihadism in the Caucasus is by and large overlooked by most mainstream media channels, Vatchagaev said he believes that many of the analysts who do cover the North Caucasus “assume that the Islamic State will be presented in the region by those who return from Syria and Iraq.”

He argued that this is not the case. “No one is coming back. Those who have been in the North Caucasus have themselves become part of the system created by al-Baghdadi in the Middle East,” adding that Moscow must accept that the Islamic State has a cell in Russia in the form of the CWIS, the threat of which should not be underestimated. “Islamic State does not have any public framework restrictions in achieving its goals, and is therefore far more dangerous than the former Caucasus Emirate.”

In Russia, the largest concentrations of Muslims are in the northern Caucasus, Tatarstan, Bashkiria and Moscow, while Islam has a significant influence in the Volga region thanks to radical Uzbek and Kazakh groups. Tatars are also involved in such movements, in an effort to realise the unity of the Turkic world.

It is though, not just Russia that should be concerned about the spread of Islamic extremism. “I suspect that the other post-Soviet state to be most affected by the Caucasus Emirate and CWIS threats is Azerbaijan, where the Caucasus Emirate already has undertaken attempted attacks, as in the 2012 Eurovision plot to attack Baku,” said Hahn. CWIS emir Abu Muhammad was a leading figure in the Dagestan Vilayat, which organised the plot.

Influencing an area that stretched from the Azov Sea near the Russian border with Ukraine, down to Abkhazia in western Georgia, and the country’s Pankisi Gorge, and from Artezian, south of Astrakhan down to the border with Azerbaijan, the reach of the Caucasus jihadists was sizeable even before the formation of the Islamic State-aligned CWIS. With competition between it and the Caucasus Emirate likely to be fierce, the countries neighbouring jihadist ‘territory’ in the Caucasus must take more dramatic steps to prevent any further spread.

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Middle East oil & gas: five top picks for 2015

By Ian Simm

The events of the last few months will have oil and gas firms reaching for their purse strings. With the price of crude dropping from in excess of US$110 per barrel in the summer, to below US$70, investors are certainly feeling the winter chill. However, in the long-run, their fears should not be overblown. We are all aware of the peaks and troughs that delight and blight our industry, and just as the good times come to an end, so do the bad.
With that, and the year-end in mind, it is perhaps a good time to take a look at a few of the areas and themes I expect to rise to prominence in the Middle East during 2015.

1. Kurdish delight
Home to around 45 billion barrels of proven oil reserves, and a comparatively stable and investor-friendly political environment, the Kurdistan Region of northern Iraq should really not be on this list. It has world-class assets, which, in different circumstances, would have already been producing far greater volumes years ago.
As things stand however, output from the region is estimated to be chugging along at between 300,000 and 400,000 barrels per day, with much of it coming from the Taq Taq and Tawke fields, run by a consortium that includes Genel Energy and Norway’s DNO International. News last week that the Kurdistan Regional Government (KRG) had, after what has seemed like an eternity, come to an agreement with Baghdad that will allow both authorities to use the northern arm of the Iraq-Turkey Pipeline (ITP) to transport oil to the Turkish port of Ceyhan. Kurdish operators had been doing this for some time now, but Baghdad took exception, leading to a legal to and fro, which benefited nobody, save for the lawyers of course.
Providing the deal sticks, look for Kurdish output to ramp up in 2015 – good news for Genel and DNO. It will also buoy MOL, Gulf Keystone Petroleum, which operates the Shaikan field, the region’s largest, holding around 9.4 billion barrels of stock tank oil initially in place (STOIIP), and others.

2. Russian involvement
While much of western Iraq has been a no-go zone since the summer incursion by militants from the so-called Islamic State group, projects to the north (see Kurdistan Region above), and the south have remained largely untouched.
Progress in Iraq has been stop-start in 2014, but strides have been made by Russian firms Gazprom Neft and LUKoil at their concessions in the south of the country.
The former has achieved rates of around 15,000 bpd from the Badra oilfield since it was connected to Iraq’s main pipeline system in early September, and the consortium developing the field will begin being reimbursed for the costs incurred.
LUKoil reported in late November that its concession on the second stage of the giant West Qurna field (West Qurna-2) added US$1.25 billion to its third quarter earnings, having shipped the first cargo from the field – of 1 million barrels – in late August. Production from the field, which has estimated recoverable reserves of 13 billion barrels, is estimated to have risen to 280,000 bpd.
Meanwhile, the firm’s CEO, Vagit Alekperov was last week quoted as saying that LUKoil has been “studying” returning to Iran’s Azar and Changuleh onshore oilfields. In addition, the reappearance of barter discussions between Moscow and Tehran points to growing co-operation, which will likely centre on oil.
On the other side of the Gulf, through an 80:20 joint venture with Saudi Aramco – LUKoil Saudi Arabia Energy (LUKSAR) – the Russian firm operates Block A in Rub’ al-Khali (the Empty Quarter).
In mid-2013, vice president Leonid Fedun announced the discovery of 400 billion cubic metres of gas in the desert, and that output would begin the following year.
However, in August, the Saudi Gazette quoted Aramco CEO Khalid al-Falih as saying: “One challenge we have is the pricing of gas is very low in Saudi Arabia and does not make unconventional gas or tight gas in the Rub’ Al Khali economic.” He told the daily that said he hoped the gas price issue would “be addressed by the government in due course,” without providing a timeline.
Setbacks including water scarcity have pushed back the development of these remote projects, but there is an outside chance that a breakthrough will come in 2015.
Russia’s cosying up with Iran has much to do with the sanctions both have had imposed upon them by the US and EU, and if Moscow’s energy investments are spurned by Brussels, then it is unlikely to lack alternatives in the Gulf with deep pockets and deeper reservoirs.

3. Oman’s frontier
To the East, Muscat closed bidding on its 2014 bid round on November 30, with three offshore and two onshore blocks on offer, covering a total of 76,416 square km. Information on these blocks can be found here.
The sultanate has been one of the trailblazers of enhanced oil recovery (EOR) technology, owing to Oman’s notoriously difficult geology and tight formations. French super-major Total is thought to be one of those involved in the bid round, however, as we have previously discussed, despite the expertise and technology available making it possible to increase recovery by more than 10%, Oman’s tight carbonate reservoirs add around US$10-20 per barrel to drilling costs. The country’s offshore offers exciting new potential, which may be less hampered by geological constraints. Companies including Circle Oil and Masirah Oil are involved in the Oman offshore, with the latter announcing last week that it had commissioned a 3-D seismic survey of its Block 50. Circle carried out a survey of Block 52 earlier in the year, and having identified prospects with “upside potential of billions of barrels of oil in place”, the firm is now looking to “farm-out and share the risk on the licence”.
With political uncertainty continuing to shroud much of the Gulf region, Oman is seen as a beacon of stability and attractive investor environs. We expect a new wave of exploratory drilling to begin in the Oman offshore during 2015, while super-majors BP and Total will continue their unconventional onshore programmes.

4. Ghawar and the rest
In addition to what it spends on maintaining production from Ghawar – the world’s largest oilfield – Saudi Arabia has been investing heavily in other oil developments, notably Manifa, Khurais, and Shaybah, to increase output, and this will help offset any production declines at the ageing supergiant.
The Saudis are serious about it too. Khalid al-Falih, CEO of Saudi Aramco has announced plans to spend more than US$40 billion per year on exploration and development from 2014 to 2024, while production from the offshore Manifa field has increased from 500,000 bpd in July 2013 to roughly 900,000 bpd now, Khurais will increase from 1.2 million bpd to 1.5 million bpd by 2017, and output from Shaybah is slated to swell to 1 million bpd from 750,000 bpd by 2017.
There are though to be around 60-70 billion barrels of oil remain at Ghawar, but amid rumours that the water cut is increasing, Aramco is obviously keen to ramp up output from less depleted reservoirs and ease the strain on its largest asset.
As it pursues this strategy, I expect the number of opportunities for engineering firms to grow through 2015. Meanwhile, security firms may also see an increase in demand in the kingdom as a result of the recent spike in unrest.

5. Tehran on the horizon
Still the industry waits, as if King Solomon’s mines had been found, but entrance was prohibited. Iran’s vast hydrocarbon wealth continues to tease foreign firms, but for now the fruit remains forbidden.
The floodgates will not open until the United Nations’ P5+1 and Tehran have come to an agreement regarding the Islamic republic’s contentious nuclear programme. Iranian officials and Iran ‘peddlers’ have iterated and reiterated that this is ‘just around the corner’, but the ‘no decision’ at the last round of talks put another bend in the road.
Iran’s Shana news agency this week announced that US$40 billion worth of oil and gas contracts would be offered along with the announcement of the country’s new contract model in London in February 2015 -tantalising.
There has been a major shift in the way Iran is represented in the western world of late, and at times it has felt like the press has been preparing the groundwork for the image of the Islamic republic to shift from ‘bad guys’ to ‘our old mate in the Middle East’.
Whether or not that is the case, EU firms are champing at the bit to be the first (back) into Iran; apparently none more so (unofficially) than Repsol and Total. Unfortunately for Iran, the timing of the oil price crash could hardly be worse, lessening investor appetite for risk amid a perceived over supply of oil. But as we mentioned earlier, this is likely to be relatively short-lived, and when the market rebounds, Iran will again jump to the fore.

OPEC: Oil’s transfer deadline day

Last week saw the world watching Vienna with bated breath. Oil cartel OPEC met on November 27, with most in the upstream hoping for a production cut to prop up prices, and consumers keeping their fingers crossed that things would remain unchanged.

Drake kept his finger on the pulse, and in the process, couldn’t help but draw similarities between ‘OPEC Day’ and Sky TV’s Transfer Deadline Day – the 24-hour bonanza that follows all the last-minute transfer of football players from club to club.
Indeed comparisons could be drawn between OPEC and Arsenal yesterday, as despite all the talk, OPEC’s Jim White, Secretary General Abdullah Al-Badri, announced that there would be no change – not that anyone was really expecting Ali al-Naimi to sign a tricky young French winger.
Both spectacles attract the interest of Russian oligarchs, and they would have received this week’s decision with just about as much pleasure as if Eden Hazard had turned down Chelsea at the last minute to take a cut-price deal at Havant and Waterlooville.
OPEC’s decision is bad news for Russia, which despite Rosneft noting that its extraction fees are among the lowest in the world, is reliant on an oil price in excess of US$100 per barrel to have any hope of balancing its economy. Not even the signing of the mercurial Lionel Messi would help with that one.
The two events both enjoy their fair share of drama, and irony – encapsulated by Venezuela’s Rafael Ramirez, who said: “The US is producing in a very, very bad manner. Shale oil, I mean it is a disaster from the point of view of climate change and the environment” – a comment that appears to have come out of the Paul Merson school of logic. Merson, on the other hand, may have suggested the removal of at least 1 gillion barrels per day of OPEC production.
Despite being a member of OPEC, Venezuela’s desperate wish to cut the group’s output (also because of its economy’s over-reliance on oil) fell on deaf ears, and Ramirez left the meet in a foul mood, no doubt worried about being battered by the press at home, and the distinct possibility of a relegation dogfight. Caracas now finds itself in dire need of help from its parent club in Beijing.
Unfortunately, OPEC’s meetings are conducted behind closed doors. However, a Transfer Deadline-style show would make captivating viewing. Imagine the excitement that would have erupted upon the appointment of OPEC’s new first team coach (President) – Nigerian Energy Minister Diezani Allison-Madueke.
Updates every quarter of an hour sound rather appealing, with pundits discussing each move in the intervening period. Former Shell CEO Peter Voser would make an excellent candidate to be included in the panel alongside Angola’s Jose Maria Botelho de Vasconcelos and former EU Energy Commissioner Guenther Oettinger, all hosted by Sheikh Mansour of Abu Dhabi, who owns Manchester City.
The ever-evasive Al-Naimi took a leaf out of Harry Redknapp’s book yesterday, throwing a scrap to the gathered journalists as he emerged from the meeting: “It was a great decision,” before confirming that OPEC had decided not to make any changes. When the seagulls follow the trawler…
One person we didn’t see in Vienna yesterday was Darren Bent, with the striker having surprisingly avoided the deadline crunch by signing a loan deal with Brighton and Hove Albion the day before.
With the window now shut until June, clubs will have to make do with what they’ve got. As ever, this will prove easier for some OPEC members than others.

What might it look like?

Gulf refining boom to fill demand gap

By Ian Simm

An unprecedented rise in the number of refineries throughout the Middle East is set to cut the region’s reliance on imported petrol and diesel in a move that could transform the global products market.

“The Gulf is generally short on petrol and diesel, and that is set to change in the coming years,” Robin Mills at Dubai-based Manaar Energy Consulting and Project Management said in a recent interview with Bloomberg. “They are putting more refining capacity into an oversupplied market.”

Increasing capacity

Saudi Arabia is close to completing the 400,000 barrel per day Saudi Aramco Total Refinery & Petrochemicals (Satorp) refinery at Jubail in order to slash its imports of fuel products, while two more projects with the same capacity are also under development in Yanbu and Jazan.

The latter, which includes a sea terminal, is worth around US$6 billion in contracts and is the first in a number of facilities that Saudi Arabia is planning that will lead to the development of the southwestern part of the country.

Contracts for the work went to South Korean firms Hanwha Engineering and Construction, SK Engineering and Construction and Hyundai, Japan’s JGC Corp. and Hitachi Plant Technologies, the UK’s Petrofac and Spanish firm Tecnicas Reunidas.

Saudi firm Al-Ali Al Ajmi Group will prepare the site, which covers a 12-square km area. A number of Saudi officials attended the signing ceremony and commented on the importance of the project for the development of the industrial city and surrounding area.

Downstream capabilities

The Jazan unit will be designed to process Arab Medium and Arab Heavy crudes and produce petrol, ultra-low sulphur diesel, benzene and paraxylene (PX). Products from the refinery will supply the Jazan, Asir and Najran areas and also be exported through the new marine terminal, which will supply the refinery with crude oil and export refined products.

Jazan will be in addition to four refineries owned and operated by Saudi Aramco in the country that have a total production capacity of 1 million bpd. The firm also holds interests in the Saudi Aramco Mobil Refinery Company (Samref) in Yanbu, in partnership with ExxonMobil, and in the Saudi Aramco Shell Refinery (Sasref) in Jubail, with Shell.

The latter units have a combined capacity of 700,000 bpd. Furthermore, Saudi Aramco holds an interest in the Petro Rabigh refinery which has a 400,000 bpd capacity, giving the leader of the Organisation of Petroleum Exporting Countries (OPEC) a refining capacity of more than 2 million bpd.

The Yanbu and Jubail facilities will also process heavy crudes for export. Operations resumed at Yanbu last week after two months of maintenance work.

In January, Fereidun Fesharaki, chairman of Facts Global Energy, said in a report that “despite growing demand at home, most of the products will go to exports and have a regional impact on product markets and the flow of products globally”.

Following the trend

Other Gulf countries are also following a similar pattern. The UAE, Kuwait and Oman are planning a number of new facilities in order to keep up with rising domestic demand and to diversify their economies.

In mid-June, the Kuwait National Petroleum Company (KNPC) intends to award a major engineering, procurement and construction (EPC) contract to build new sulphur-handling and marine export facilities at its Mina-al-Ahmadi refinery in the southeast of the country.

In late April, the state-run Oman Oil Company (OOC) announced that it was seeking a US$4 billion bank loan to build a large export refinery and petrochemical complex at Duqm in the south of the country.

The Duqm Port & Drydock project will host a planned US$6 billion refinery with a capacity of 230,000 bpd and will be commissioned in 2017. OOC – which owns a 50% stake in the Duqm Refinery and Petrochemical Industries Company (DRPIC) – recently appointed Shaw Energy and Chemicals as PMC to oversee the greenfield scheme.

The remaining 50% is owned by Abu Dhabi’s International Petroleum Investment Company (IPIC).

Up the coast from Duqm, Oman Oil Refineries and Petroleum Industries (ORPIC) is carrying out an expansion project on the Sohar refinery, which is due to be ready in 2016.

The expansion will add around 60,000 bpd, to take the total capacity to just under 180,000 bpd.

Deeper into the Gulf, state-run Qatar Petroleum (QP) last month announced a US$1.5 billion joint venture agreement for its Laffan Refinery 2 (LR2) project in Ras Laffan. At the time, the company said that the 146,000 bpd plant would boost the country’s export capacity, further adding to the threat of oversupply in the Gulf market.

The Middle East’s push to increase refining capacity is one that will have an impact on oil and product markets around the world.

While Saudi and its neighbours’ efforts to cater to growing domestic demand may result in a dip in available crude oil for the global market, the downstream facilities will also produce sizeable levels of refined products, a large amount of which will be available for export.

As European refineries continue to be mothballed or closed permanently, mega-refineries throughout the Middle East and Asia are filling the void left by these ageing beasts, creating a new dynamic.

The Middle East’s increasing capacity allows for healthy economies of scale that make it cheaper for European end users to import high-grade fuels and petrochemical products rather than refining crude closer to home.

Refining squeeze on in Cameroon

By Ian Simm @drake.newsbase.com

As Cameroon heads towards elections, in July, the country faces pressure to maintain social spending – particularly by keeping fuel prices affordable. It is becoming an increasingly expensive business, though, and local refinery expansion plans are unlikely to bring near-term relief.

In July 2012 Cameroon raised its fuel subsidy spend for the year to 400 billion CFA francs (US$742 million). This represented an increase of almost 24% on 2011, when it spent 323 billion francs (US$600 million).
At the time, Reuters quoted Gilbert Didier Edoa, head of the finance ministry’s budget department, as saying: “The decision to raise fuel subsidies was taken in order to stabilise prices at petrol pumping stations in the interest of the ordinary Cameroonian”.
The country introduced fuel subsidies in 2008, in the wake of violent protests about price hikes that led to the deaths of around 100 people – making the continuation of subsidies particularly important during the electoral season.
Edoa was quoted as saying: “the need to increase the subsidy was unfortunate and would deprive the government of budget resources for major infrastructure projects, including road construction”.
In March, petrol and diesel in Cameroon were priced at US$1.15 and US$1.04 per litre respectively. According to a note from Ecobank, pump prices have been static since 2009.
The Togo-based bank said the “subsidy component is as high as 50% on kerosene, which is the major heating fuel for low-income households in the country.” The bank also noted the country was forced to provide greater subsidies for areas further inland, which would otherwise be penalised by transport costs.

Out on a Limbé
Cameroon only has one refinery, Sonara’s 45,000 barrel per day Limbé unit, located around 350 km southwest of the capital, Yaounde. In mid-2011, the then general manager of Sonara, Charles Metouck, announced that the facility would receive 75 billion francs (US$164 million) from eight banks to fund its expansion. The project is expected to raise the unit’s capacity to around 80,000 bpd.
Metouck was dismissed in February of this year and broke into his former office, apparently in order to destroy documents implicating him. As a result, he was arrested and, in April, sentenced to nearly 10 years in prison.
The refinery investment will also allow the unit to process heavy crude. The government owns a 66% stake in the refinery, with Total holding an 18% stake, while ExxonMobil and Royal Dutch Shell have 8% each.

Making the grade
Cameroon produces two grades of crude – Kolé, a light crude with 34º API, and Lokele, a heavier crude with an API gravity of 20º. However, the Sonara unit currently only refines light crude.
In the note, Ecobank’s head of research, Rolake Akinkugbe said: “Kolé crude grade represents less than 20% of the refinery’s feedstock but Sonara is undergoing an upgrade that could raise its utilisation of Kolé crude oil above 30%. Due to the high residual fuel production from Kolé, put at over 40%, the upgrade is billed to include the installation of a hydro-cracking unit, which would significantly boost the refinery’s output of petrol and jet fuel, for which the refinery is currently unable to satisfy market demand.”
At present, according to local sources, the facility relies on imported Bonny crude from Nigeria, Alba condensate from Equatorial Guinea and a mixture of light crudes from Angola to blend with Kolé, and thus satisfy domestic demand.
The Ecobank note added: “Plans to expand capacity at Sonara or build a new refinery are unlikely to immediately reduce fuel prices … However, the refinery would require more hydro-cracking capacity than planned to be able to process purely Kolé crude. The government has also considered building a new export-focused refinery that will process Cameroonian crudes, as well as other crude blends.”
The planned new unit in Kribi is expected to be built with a refining capacity of 200,000 bpd, which can be later ramped up to 350,000 bpd. It will also be able to cover cover supply cuts from Sonara during maintenance work at the latter.
However, already paying the price for the lack of complexity at the Limbé facility, Cameroon will continue to be at the mercy of the market, as “depend on crude oil bought at international market prices (Brent plus), it will have to cover its margins and thus offer no measurable reduction in fuel prices too for the foreseeable future,” according to Akinkugbe.