Meeting demand: A new refinery will help address pressing supply shortages

A rapidly expanding population and economy has led to ever greater demand for refined petroleum products – especially diesel – in Egypt. This became quite apparent during the first half of 2013, when shortages at petrol stations led to widespread queuing and mounting public dismay. The question of fuel, supply, therefore, is as much a political one as it is an economic one, and has presented a challenge for succeeding administrations. As governments have strived to satisfy the demand for lighter petroleum products, one thing has become clear: deliveries of Egyptian crude to the nation’s nine refineries are not sufficient to meet growing demand, and thus expensive imports are becoming a more important part of the national supply. Both oil production levels and refinery capacity need to rise in order to meet long-term demand, and the Ministry of Petroleum has been focusing on exploration and production (see analysis) as well as turning its attention to adding more refining infrastructure to its current stock.

SETTING GOALS: In 2007 the Egyptian Refining Company (ERC) was incorporated as a Law 8 company to establish a new refining unit adjacent to the venerable Cairo Oil Refining Company (CORC) facility in the suburb of Mostorod. The goal of the initiative was to provide the nation with additional lighter petroleum products such as diesel and jet fuel and reduce dependence on petroleum imports. “It’s a project of national interest and one of the cornerstones of Egypt's energy security, two facts that make it a magnet for potential investors,” Thomas Thomason, CEO of the ERC, told OBG. As well as addressing a pressing supply issue, the project was a test of Egypt’s ability to finance developments of this scale. The $3.7bn financing it required was to be sought from private investors in the domestic market, including the driving force behind the concept, Citadel Capital, and regional and foreign capital.

EVENING OUT: The global economic crisis and the subsequent onset of Egypt’s political unrest threatened to derail the initiative at an early stage, and the five years that have passed since its inception have been particularly challenging for project leaders seeking to attract financing from increasingly wary commercial banks. However, the closing of funding in the summer of 2012 marked the end of this period, and as of 2013 initial engineering at the site is under way and expected to be complete by the end of the year, after which construction will commence. If the development of the ERC goes as planned, operations at Egypt’s new refinery will start in 2016.

FINANCING: The funding of the ERC is a demonstration of how public, private and development finance can be combined and utilised to establish large-scale projects. The final funding structure contains an equity component of $1.1bn and a debt component of $2.6bn. The equity side includes an array of domestic, regional and foreign investors. The state-owned Egyptian General Petroleum Corporation (23.8%) and private player Citadel Capital (11.7%) represent the home interest, with Qatar Petroleum International (27.9%), another parastatal, holding the largest equity stake of the regional institutions.

Interest from further afield comes primarily from development finance institutions, such as the International Finance Corporation (6.4%), the Dutch development bank FMO (2.2%) and Germany’s DEG (2%). The Inframed Fund, launched by the European Investment Bank, Egypt’s EFG-Hermes, Caisse des Dépôts et de Consignations of France and Italy’s Cassa Depositi e Prestiti, retains an equity stake of 11.7%.

The $2.6bn debt package which supplements the equity component was arranged by the ERC’s financial advisor Société Générale and is derived from an equally diverse array of sources. Japan’s Bank of Tokyo-Mitsubishi served as global coordinator for the senior debt element, which drew capital from institutions spanning three continents, including Japan Bank for International Cooperation, Nippon Export and Investment Insurance, the Export-Import Bank of Korea, the European Development Bank and the African Development Bank. The subordinated debt element, meanwhile, is provided by the African Development Bank and Mitsui & Co, which is also part of the contractor consortium building the refinery.

THE TECHNOLOGY: The ERC’s refining processes will be synchronised with the neighbouring CORC refinery, currently the nation’s largest refining facility, accounting for around 20% of total refined output. CORC’s principal outputs include liquefied petroleum gas (LPG), light distillates such as naphtha and gasoline, and middle distillates which include diesel, jet, kerosene and gasoil. However, some 67% of CORC’s output is in the form of atmospheric residue, the heavy residual liquid that is the by-product of atmospheric distillation of crude oil, for which the older refinery lacks the facilities to process.

Once operational, the ERC will purchase atmospheric residue from its neighbour and apply a number of technologies to add value to it. Facilities at the new plant are set to include a hydro-cracking unit, hydrogen plant, kerosene and diesel hydro-treatment units, a naphtha hydro-treatment/CCR unit, a coker unit and a sulphur recovery unit.

The main products produced at the new refinery will be diesel, jet fuel/kerosene, reformate and naphtha, LPG and fuel oil. Some by-products of the project, meanwhile, are of sufficient value for the ERC to sell directly to local and international markets. The task of overseeing the installation of the ERC’s new technology falls to GS Engineering & Construction of Korea and Mitsui of Japan, while WorleyParsons has assumed the role of project manager.

BENEFITS: According to the ERC’s estimates, demand for gasoline in the economy is currently growing by nearly 100 kilotonnes per annum (KTPA), while demand for diesel is rising by 500 KTPA each year. The principal objective of the new refinery is to allow Egypt to meet this surging demand in a more economical way than importing fuel from other markets. When operational, the plant will produce around 3.5m tonnes of transportation fuels and deliver them directly to the Cairo, the largest consumption market in the country. In the ERC’s estimation, the government will be in a position to generate revenue through storage and processing fees. The development of the project will also bring much needed employment opportunities to the country, providing around 7000 jobs during its construction phase and in the region of 700 permanent jobs.

Moreover, the project promises to deliver a range of environmental benefits to one of the most polluted cities in the region, not least through the provision of Euro V diesel, the cleanest-burning diesel fuel in existence. The technologies adopted by the ERC have been assessed according to both Egyptian and international environmental standards, and offer a number of further advantages.

EMISSIONS REDUCTION: According to the ERC, the plant will reduce the amount of sodium dioxide released into the air by 186,000 tonnes per year, lowering Egypt’s overall emissions by 29%. The development will include the installation of low-nitrogen oxide burners at the neighbouring CORC plant, reducing emissions. The local environment will be protected by a three-stage water treatment system, while tertiary wastewater treatment units and filters will be added to the CORC plant; and the production of fuel in a location adjacent to Cairo rather than transported from coastal ports will reduce the risk of spillages and reduce greenhouse emissions. The ERC will also install environmental measuring equipment that meets international standards to monitor its effect on the environment.

With financing complete, the commencement of construction at the Mostorod site will mark the next important phase of the project’s development. Given that petroleum supplies around 92% of the nation’s primary power needs, its economic significance is considerable. Also important is the fact that 85% of the new development’s funding is derived from private investors – achieved during a politically and economically turbulent era in the nation’s history. The development of Cairo’s new refinery, therefore, bodes well for the wider ambition to develop infrastructure with the assistance of private capital.

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The Report: Egypt 2013

Energy chapter from The Report: Egypt 2013

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