According to an International Monetary Fund working paper on East Africa, the EAC has seen an impressive economic growth of 6.2 percent. Its average growth rate between 2004 and 2013 is in the top one-fifth of the distribution of 10-year growth rate episodes experienced by all countries worldwide since 1960. The IMF concluded, [T]he picture that seems to emerge is that recent diversification and structural transformation bode well for continued economic growth in the EAC.

Growth Drivers

There has been a surge in the discovery of new oil and gas acreage in the region. In September 2013, Tullow found oil in Kenyas Anza and South Lokichar basins, and hopes are that commercial production will commence in 2016. Uganda is expected to commence commercial production in 2017. And Tanzanias Tangawizi 4-6Tcf discovery was been described as the sixth-largest global oil and gas discovery of 2013.

However, South Sudan remains the only country in the EAC producing crude oil in commercial quantities with an output of 150,000 barrels per day. Rolake Akinkugbe, head of oil and gas research for Ecobank Group, projected that by 2020, the EAC (including South Sudan) could be producing 500,000 b/d of crude oil and 600 million cubic feet per day of gas while exporting 36 million metric tons of liquefied natural gas.

In a presentation at the Argus Africa Base Oils and Lubricants Conference in Johannesburg, South Africa, in May, David Ohana, group managing director of KenolKobil Kenya, emphasized that agriculture is biggest contributor to GDP for countries in the region at above 20 percent. However, he noted that the manufacturing and service sectors have been growing steadily for the last decade.

This echoes IMFs working paper on the EAC, which reported that both output and exports have become more diversified in the region and agricultures share has fallen substantially. The gains in share have been broadly distributed, with the largest gains going to construction, transportation, and wholesale trade; manufacturing and mining posted modest gains, the IMF said.

Rapid growth has thus not been driven by a narrow range of products (as might have been the case with natural resources in some other low-income developing countries). Therefore, Ohana noted that, going forward, infrastructure development, services, mining, oil exploration and mechanized agriculture will act as catalysts to development in the region.

According to PriceWaterhouse Coopers Africa Oil and Review, the governments of South Sudan, Uganda and Kenya recently signed a memorandum of understanding on a partnership to invest and coordinate in the development of Lamu Port and the 1,300-killometer Lamu-Southern Sudan-Ethiopia-Port pipeline at a cost estimated at U.S. $25.5 to 30 billion. The report noted that when completed, the pipeline for the export of crude from Sudan to Kenya will be the largest such heated facility in the world.

In Uganda, there is an ongoing U.S. $2.5 billion 60,000-b/d refinery with 30,000-b/d to be dedicated to local demand. In Tanzania, the 542-km natural gas pipeline from Madinda in Mtwara to Dar es Salaam is nearing completion. It will increase power generation from natural gas to around 40 to 80 percent of total supply.

Lubricant Consumption

According to Ohana, the East African region consumes over 100,000 cubic meters of lubricants per year. He noted that of the total volume, 80 percent is blended within the region. He added that the region has no base oil refineries or additive production, so blending plants depend on imports.

Only Kenya and Tanzania have blending plants. Ohana reported that the four in Kenya have an annual capacity of 110,000 cubic meters and operate at a 40 percent utilization rate. The three plants in Tanzania have an annual capacity of 114,000 cubic meters.

All the blending plants use API Group I base oils, said Ohana. However, he anticipates that Group II base oils will gain traction as the price difference between Group I and II base oils decreases globally. Base oils are supplied via co-chartered vessels by the various lubricant blending plants while the smaller plants buy from the bigger plants or import in flex tanks, he added. Higher performance products like synthetic engine oils and food grade lubricants are imported.

Only Fuchs Petrolubs Tanzania plant produces grease in the region with a capacity 2,000 tons per year. As a result, more than 95 percent of grease consumed in the region is imported.

Ohana said that exports of locally blended lubricants are mostly within the region, especially to Uganda, Rwanda, South Sudan, Eastern and Southern Congo, Somalia, Zambia and Ethiopia. He said this is made possible by the East African Community common tariff and free movement.

According to Ohana, Total, Shell and KenolKobil are the dominant players in the region with their own lubricant brands. Puma, a strong contender in Tanzania, markets Castrol brands. Other notable players include Engen in Kenya, Burundi and Rwanda; Libya Oil in Tanzania and Kenya; National Oil Kenya in Kenya; Petrolub in Tanzania; Gapco in Kenya, Tanzania and Uganda; and Mogas in Uganda and Kenya. In addition, imports from the United Arab Emirates are very visible across the region.

Lubricant Trends

According to Ohana, monograde engine oils comprise about 60 percent of the EAC market and multigrades about 40 percent. Synthetics are available but comprise a minuscule portion of the market. Other lubricants include hydraulic oils, automatic transmission and manual transmission fluids, industrial gear oils and automotive and industrial greases. He reported that the lubricant market in East Africa is moving from monograde engine oils to multigrades, with lower viscosities beginning to gain market share, although the EAC is highly price sensitive. Also, API standards are more common than ACEA and OEM standards.

Ohana then identified factors that will positively impact the future of the regions lubricant market. He noted that Kenyas stable economy, driven by higher private sector investment, increased exports and creation of a water and irrigation ministry to accelerate agricultural output will help the countrys lubricant market grow.

For Uganda, Ohana said a favorable climate has enhanced agricultural output, which is the leading contributor to GDP. Other factors include the countrys sustained fiscal and monetary policy, focused on containing inflation and stimulating economic growth; increased manufacturing activities, enhancing exports of value-added goods to the region; investment incentives; and modernization of roads, railways and power generation facilities.

In Tanzania, Ohana cited rehabilitation of aging infrastructure, including railways and ports; increased government spending on agriculture; gold mining; and manufacturing and industrial production growth as critical factors that will impact the lubricant market.

Ohana added that Rwanda is focused on road construction and housing, which will greatly impact lubricant consumption. He said the country is improving its power generation sector, which accounts for 12 percent of total lubricant consumption, and growing the manufacturing sector, which consumes 10 percent of total lubricant volume.

On the negative side, Ohana said that the festering political instability in Burundi and South Sudan hurts the EACs lubricant market. Also, the inability of governments in the region to stem substandard imports and products is a major concern. Tanzania, Uganda and Kenya, in particular, are awash in counterfeit lubricants. Finally Ohana said corruption and tax evasion are challenges that must be faced.

Ohana concluded with an analysis of lubricant pricing. Prices are not regulated by governments but left to market forces. However, he said, some energy ministries are involved in licensing of lubricants businesses.

In addition, base oil and lubricants imports are subject to preshipment inspection, leading to issuance of certificates of conformity. However, duties vary widely across the region, Ohana noted. Kenya charges 10 percent duty on locally blended lubes, 25 percent on imported finished products, and 16 percent value-
added tax. Tanzania charges 10 percent on locally blended lubes, 15 percent on imported finished products, and 18 percent VAT. Uganda charges 25 percent on imported finished products and 18 percent VAT while Rwanda charges 25 percent on imported finished products, 18 percent consumption tax and 18 percent VAT.