Interested in the oil and gas business in Africa? You’re about to learn some great stuff!
I finally decided to write an article about the oil and gas business after a couple of requests from some of our readers; especially from Nigeria.
The interest in oil is hardly surprising given that it’s a multi-billion dollar business opportunity in Africa. Oil (also known as ‘petroleum’) remains the biggest and most developed source of energy on our continent because millions of Africans depend on it every day for lighting, heating, cooking, transportation, electricity and several other direct and indirect uses.
Without using technical jargon to confuse you, this article will give you a basic understanding of how the oil and gas business works, the top hot-selling oil products in Africa, and some tips you need to succeed as a small business or individual entrepreneur.
If you’ve been looking for an easy-to-understand explanation of the oil business, you’ll love this article!
Why is the demand for oil and gas huge in Africa?
According to a 2004 United Nations Report, when compared to other regions of the world, especially developing areas in Latin America, the Middle East and Asia, Africa has the lowest energy consumption per person.
Today, the situation is changing very rapidly. At a growth rate of 4.1 percent, the consumption of energy per person in Africa is growing faster than anywhere else in the world.
As long as the demand for more energy continues to grow on our continent, the oil and gas business will continue to boom and become more lucrative.
We shall now look at a couple of reasons for the growing demand for energy in Africa.
#1 A fast growing population
Africa has one of the fastest growing populations in the world with an annual population growth rate of nearly 3 per cent over the last 20 years.
With the world’s highest birth rate, our current population of nearly one billion people is expected to more than double within the next 40 years to 2.3 billion people. The logic here is simple; the larger the population, the higher the energy that will be consumed. Nearly everything we do or use in today’s world requires energy: lighting, heating, cooking, transportation, lighting and so on.
#2 The size of African cities is increasing
The amount of energy consumed in cities is much higher than in rural areas.
Due to the nature of city life and its higher level of physical and economic activities, people, companies and even the government spend more on energy to keep things running.
With our current rate of urbanization at 38 percent, Africa now has more people living in cities and rural areas than India (30 percent). Our continent is now as nearly urbanized as China which has a 45 percent urbanization rate.
At the moment, up to 52 African cities have a population of more than one million people. By 2016, the number of cities with more than one million people will reach 65. This outcome will lead to more energy consumption on our continent as the size and population of our cities grow.
#3 Africa’s economies are growing
You would have heard that six of the ten fastest growing economies in the world are in Africa. It is nearly impossible in today’s world for any economy to grow without a corresponding growth in the amount of energy it consumes.
Factories will need energy to produce goods that boost the economy. People need to move around (transportation) to conduct business and involve in the actual trade and commerce that leads to economic growth.
Another interesting reflection of the growing African economy is its expanding middle class. At the moment, there are more than 300 million people on the continent who fit into this category.
The African Development Bank describes the ‘middle class’ as people who spend between $2 to $20 a day and many people in this category can afford to spend more on energy. They are more likely to use and spend more on kerosene or cooking gas in place of charcoal and firewood (which are popular with low income earners).
Some of these people may own their own cars and use private power generators for electricity.
#4 Few options or alternatives
Despite their disadvantages (such as climate change, health problems etc), fossil fuels like oil and gas remain very popular in developing regions like Africa because there are very few options or alternatives.
Even where they exist, alternative sources of energy are not yet reliable, cheap enough or energy efficient to compete with oil.
Other interesting sources of energy (like nuclear energy) are totally underdeveloped (only South Africa enjoys nuclear power on the continent). Wind and solar energy often do not provide reliable supplies, and hydroelectric power is now at the mercy of the changing climate.
Other cheaper alternatives to oil and gas in cooking and household use (like firewood and charcoal) cause environmental damage because they cause destruction of our forests.
As a result, more Africans now depend on oil and gas products to run their daily lives because they are cheaper, more efficient and reliable than any of the other options available.
This is one of the strongest factors driving up the demand for petrol, diesel, kerosene, cooking gas and other petroleum products that we use directly and indirectly every day.
#5 A serious electricity problem
The severe shortage of electricity in many parts of Africa is causing people (who can afford it) to spend more on petrol and diesel to generate their own electricity.
Millions of individuals and companies in Africa now spend a lot of money every year on oil products like petrol (gasoline) and diesel to provide their own electricity. This problem, which is blamed on inadequate infrastructure, deep corruption and lack of investment, is also responsible for the growing demand for petroleum and gas products.
Even when the electricity problem is solved and ordinary people like you and I enjoy all-day-round electricity, the government (or whoever will be generating the power) will likely depend on oil and gas to run the gigantic turbines that supply power to the electricity grids.
Either way, whether we produce our electricity or somebody else does, oil and gas will still be in huge demand for electricity generation across Africa.
How the oil and gas industry works – A quick introduction
Without boring you with big sounding technical jargon, I’ll try to introduce you to the interesting and complex world of oil (also known as petroleum).
All the popular petroleum products we use today (like kerosene, petrol and diesel), come from a dark, smelly liquid known as ‘crude oil’.
Crude or ‘raw’ oil is mined from deep down under the earth. It is produced by plants and animals that died thousands of years ago (that’s why they’re called ‘fossil fuels’).
For centuries, these fossils decayed under high pressure and temperature to produce crude oil. To reach this crude oil, big and heavy machines are used to drill thousands of feet into the earth’s surface. Around the world every day, more than 80 million barrels of oil are produced by a handful of countries.
More importantly, crude oil may be very valuable but it’s not very useful until it is refined to produce the powerful products within it. (photo credit: theguardian.com)
To refine crude oil, it has to be transported away from the fields in the desert, swamps or ocean where it is produced to a large factory (commonly known as a refinery).
In a refinery, the crude oil is processed and heated to very high temperatures to produce petrol, diesel, kerosene and several other valuable products. These products are transported by tanker trucks or pipelines to major depots and gas stations where you fill up your car’s petrol tank and buy some kerosene for cooking at home.
We seem to be talking a lot about oil; what about gas?
Well, drilling for oil is much like opening a bottle of CocaCola. When you remove the crown from the top of the Coke bottle, gas usually comes out first (sometimes with bubbles due to the high pressure) before you can drink the liquid Coke.
Gas (which is commonly known as ‘natural gas’) is a mixture of several gases that come out of the earth with the crude oil. During drilling, you could find a well that contains only gas or a mixture of gas and crude oil.
Usually, when oil companies drill for oil, natural gas comes out of the ground first before the crude oil.
In some parts of the world, this gas is not used and may be burned or wasted (technically known as ‘gas flaring’). Nowadays, natural gas has become an important product commonly used as cooking gas and fuel for cars, power generators and factories.
Today’s modern oil business is quite organized. It is broadly arranged into three main segments known as the Upstream, Midstream and Downstream. Let’s find out exactly what they mean…
- Companies in the Upstream oil business are involved in anything that concerns looking for oil (prospecting and exploration), drilling for the oil and getting it out of the ground (production). When the oil is out of the ground, it is often cleaned, processed, stored and then sold off or transported to the refineries.
- The Midstream sector involves the transportation (by pipeline, rail, sea barge, or truck), storage, and wholesale marketing of crude or refined petroleum products. Pipelines and other transport systems can be used to move crude oil from production sites to refineries and deliver the various refined products to downstream distributors.
- The Downstream segment involves everything from refining the crude oil into all the important products we mentioned previously. The downstream also covers storage and transportation of all the refined products until it ends up in your car’s petrol tank or in your kitchen stove as kerosene.
The hottest selling oil and gas products in Africa
Although there are more than five major products that result from refining crude oil, we shall only focus on the top four that are highest in demand and most popular with everyday consumers in Africa.
There are many other products that are applied for various uses such as road construction, aviation and marine fuels, and in chemical and manufacturing industries.
#1 – Petrol
Petrol (technically known in the oil business as Gasoline, Premium Motor Spirit or ‘PMS’) is one of the most popular and widely consumed oil products in Africa. It is the common fuel for private cars and small power generators used for providing electricity to households.
It is estimated that Africans consume more than 100 million litres of petrol every day. In a previous article about the motor vehicle and automobile business, we looked at how the number of vehicles (especially private cars) is increasing across Africa.
The volume of petrol Africans buy will continue to increase as more people buy their own private cars or depend on petrol-powered buses and other means of transportation. The electricity problem is also likely to encourage the petrol business as most individually-owned power generators run on petrol.
Petrol is commonly sold through retail outlets (also known as gas or petrol stations).
In some parts of Africa, these retail outlets are operated by government-owned units or big multinational oil companies like Shell, Chevron and Mobil.
In some other parts of the continent, most notably Nigeria, many of these retail outlets are run by independent businesses.
#2 – Diesel
Diesel is technically referred to in the oil business as ‘AGO’, an abbreviation of ‘Automotive Gas Oil’. It is commonly used by heavy-duty engines which power many of the large trucks, tankers and trailers that transport heavy goods (and people).
Diesel may not be as popular as petrol (or gasoline) but it remains a very important fuel to the economy. It helps to move most of the heavy goods (like agricultural produce, building materials, imported goods and raw materials) that drive trade and commerce.
In a previous article, we looked at the growing potential of the trucking and haulage business across Africa. As the demand for trucking and haulage increases, so will the volume of diesel that will be consumed on the continent.
Diesel is also commonly used as fuel for bigger power generators that produce electricity for factories and medium-large companies. As more of these factories and companies demand more electricity and (if) the electricity supply situation worsens, the demand for diesel is also likely to increase.
#3 – Kerosene
Technically known as ‘Household Kerosene (HHK)’, Dual Purpose Kerosene (DPK) or Paraffin, kerosene is one of the most widely consumed fuels in Africa. It is commonly used in homes and households to provide heating, lighting (in kerosene lamps) and for cooking food.
Especially in low and middle income households, kerosene remains the cleaner, more effective and often cheaper alternative to charcoal and firewood. Kerosene is very likely to remain a hot selling fuel as environmental awareness discourages more people from destroying our forests to produce wood for firewood or charcoal.
#4 – Cooking Gas
Cooking gas, also known as ‘Liquefied Petroleum Gas’ or LPG is expected to become the preferred fuel for household cooking and heating in Africa’s future.
Although cooking gas is not yet as popular as Kerosene in many parts of the continent, it is considered a cleaner, more efficient and cheaper option than kerosene.
Unlike Kerosene, charcoal and firewood which produce soot and other harmful particles when they burn, cooking gas burns more efficiently and is much safer for the health of humans and the environment.
As more Africans join the economic middle class and migrate to the cities, the demand for cleaner and cheaper fuels like cooking gas will surely increase. Climate change concerns and a growing consciousness to preserve our natural environment will lead to higher adoption of cooking gas as the preferred fuel for households.
Tips to succeed in the oil and gas business in Africa
Now that we have looked at the basics of the oil and gas business, how it works and the hottest selling products in the market, it’s time for a few tips to help you succeed; that’s if you’re interested in starting something in the oil and gas space.
#1 You may need quite some capital
Most entrepreneurs often do not consider the oil and gas business because they think it’s exclusive to the ‘big boys’ who have a lot of capital at their disposal.
While this is not entirely false, it is not impossible for individual entrepreneurs and small businesses to play in the oil and gas business.
You don’t have the money? Start small. Look for like-minded partners to invest or you could consider any of the ten ways to raise capital for your business.
You don’t need to have all the capital in the world to start. You could start a low-capital kerosene retail business in your neighbourhood or invest in a cooking gas refilling station.
If you can find the capital, you could become a supplier of diesel or petrol to businesses in your area who will need it to power their generators.
#2 Watch out for the risks!
While there is money to be made in the oil business, you shouldn’t forget that the products you will be dealing with are very high inflammable (that is, oil and gas products can catch a fire very easily). So, safety should always be a priority for you.
Applying safety procedures at all times and using the right safety gear (like fire extinguishers etc.) are very important. Theft and loss (through spillage) are also common ways to lose your products. Taking out an insurance cover is always a good strategy to protect you in this regard.
#3 – Get the necessary licenses and permits
The oil and gas business is usually a well-regulated business. In most countries, a permit or license may be required for anyone who wants to start an oil and gas related business.
You will need to contact the relevant government office in your country to find out the required registration, licenses or permits for businesses that operate in the oil business.
If you don’t comply with the rules, your products may be seized, you could pay a fine or serve jail time for running an unauthorized business.
In countries that offer subsidies to operators in the business, it may be difficult (if not impossible) to claim these subsidies if you’re not registered with the relevant government agency, trade or workers’ associations.
#4 – It works best if you can find a niche for yourself!
As you have learned in this article, there already exists a huge demand for oil and gas products on the continent. However, there is often a lot of competition in this business because it’s relatively easy to start if you have the capital.
To avoid the crowded marketplace and unhealthy competition, this business will work better if you can find dedicated customers or an under-supplied area of town and dominate it.
For these two customer segments (dedicated customers and areas suffering from scarcity of oil products), there is a good potential to make more profit. Rich homeowners, businesses, factories, schools, office buildings and shopping malls are just some examples of customers who can become dedicated to a supplier who can meet their needs for petrol and diesel.
You just need to think of creative ways to separate yourself from the crowded competition.
Now you know more about the oil and gas business in Africa…
Africa’s energy needs will continue to grow with its population, urbanization and economic prosperity.
Although fossil fuels are often regarded as dirty, they will continue to play an important role in our daily lives until cheaper and more efficient alternatives start to make an impact. It may not be the best candidate for any person who wants to start a ‘small business’ but it’s definitely worth considering if you can find the capital.
We believe that the opportunities we have shared with you in this article can be taken further by your creativity and energy. You could also choose from many more lucrative business ideas in the Business ideas section of this website.
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To your success!