Ministry of Mines, Energy and Water Development Study on the Supply of Petroleum Products into Zambia FINAL REPORT November 2014 STUDY ON THE SUPPLY OF PRODUCTS INTO ZAMBIA – FINAL REPORT Importance Notice Important message to any person not authorised to have access to this report. Any person who is not an addressee of this report or who has not signed and returned to a member of the Channoil Consortium (comprising Channoil Consulting Ltd, PricewaterhouseCoopers Associates Africa Limited and Corpus Legal Practitioners) a Release Letter is not authorised to have access to this report. Should any unauthorised person obtain access to and read this report, by reading this report such person accepts and agrees to the following terms: 1. The reader of this report understands that the work performed by the Channoil Consortium was performed in accordance with the approach agreed in our Technical Proposal submitted to the Ministry of Mines, Energy and Water Development and was performed exclusively in relation to the study on the supply of petroleum products into Zambia. 2. The reader of this report acknowledges that this report was prepared for the direction of Ministry of Mines, Energy and Water Development and may not include all procedures deemed necessary for the purposes of the reader. The reader agrees that the Channoil Consortium, its partners, principals, employees and agents neither owe nor accept any duty or responsibility to it, whether in contract or in tort (including without limitation, negligence and breach of statutory duty), and shall not be liable in respect of any loss, damage or expense of whatsoever nature which is caused by any use the reader may choose to make of this report, or which is otherwise consequent upon the gaining of access to the report by the reader. Further, the reader agrees that this report is not to be referred to or quoted, in whole or in part, in any prospectus, registration statement, offering circular, public filing, loan, other agreement or document and not to distribute the report without prior written consent from a member of the Channoil Consortium. Although as part of this study, we have undertaken a high level review of various financial statements, we have not carried out anything in the nature of an audit nor, except where otherwise stated, have we subjected the financial or other information contained in this report to checking or verification procedures. Accordingly, we assume no responsibility and make no representations with respect to the accuracy or completeness of the information in this report, except where otherwise stated. CHANNOIL CONSULTING LTD 1 | P a g e STUDY ON THE SUPPLY OF PRODUCTS INTO ZAMBIA – FINAL REPORT TABLE OF CONTENTS 1. BACKGROUND ................................................................................................................. 6 2. EXECUTIVE SUMMARY ..................................................................................................... 8 3. CURRENT STATUS - EXECUTIVE SUMMARY OF TASKS 1-3 ................................................. 19 4. STORAGE ....................................................................................................................... 24 5. METHODOLOGY ............................................................................................................. 28 5.1 PRICING MODEL - CRUDE & PRODUCT PRICING FORECASTS ............................................... 28 5.2 REFINING ............................................................................................................................... 33 5.2.1 MASS BALANCES ........................................................................................................... 33 5.2.2 CAPEX ............................................................................................................................ 39 5.2.3 OPERATING COSTS ........................................................................................................ 41 5.3 PIPELINE ................................................................................................................................ 42 5.3.1 CASE BY CASE ANALYSIS ................................................................................................ 43 5.3.2 BUILDING A NEW PIPELINE ........................................................................................... 52 5.3.3 RECOMMENDATIONS .................................................................................................... 53 6. DEMAND/CONSUMPTION .............................................................................................. 55 7. OPTIONS ........................................................................................................................ 57 7.1 OPTIONS – INTRODUCTION .................................................................................................. 57 7.2 UPGRADING INVESTMENT .................................................................................................... 58 7.3 NEW REFINERY ...................................................................................................................... 63 7.4 TERMINAL AND PIPELINE ...................................................................................................... 66 7.5 ROAD ONLY ........................................................................................................................... 69 8. COST BENEFIT ANALYSIS ................................................................................................. 72 8.1 METHODOLOGY .................................................................................................................... 72 8.2 KEY FINANCIAL METRICS AND ASSUMPTIONS ...................................................................... 75 8.2.1 KEY FINANCIAL METRICS ............................................................................................... 75 8.2.2 ASSUMPTIONS............................................................................................................... 75 8.2.3 CALCULATIONS .............................................................................................................. 78 8.2.4 OUTPUTS ....................................................................................................................... 80 8.2.5 PRICE ............................................................................................................................. 80 9. RESULTS SUMMARY ....................................................................................................... 97 9.1 MODEL OUTPUTS SUMMARY ............................................................................................... 97 9.2 SENSITIVITES ......................................................................................................................... 99 CHANNOIL CONSULTING LTD 2 | P a g e STUDY ON THE SUPPLY OF PRODUCTS INTO ZAMBIA – FINAL REPORT 9.3 RESULTS SUMMARY ............................................................................................................ 100 10. STRATEGIC ISSUES ........................................................................................................ 101 11. CONCLUSIONS .............................................................................................................. 105 12. RECOMMENDATIONS ................................................................................................... 106 13. NEXT STEPS .................................................................................................................. 107 APPENDICES ............................................................................................................................ 108 APPENDIX 1: TERMS OF REFERENCE - CHECKLIST ........................................................................... 108 APPENDIX 2: PROCESS DESCRIPTIONS FOR THE NEW REFINERY .................................................... 111 APPENDIX 3: GLOSSARY .................................................................................................................. 121 FIGURES FIGURE 1: ZAMBIA LIQUID FUELS MIX 2003 TO 2030 BASE CASE- LOWER ............................................ 9 FIGURE 2: FOUNDATION BLOCKS FOR DEVELOPING THE MODEL ........................................................ 10 FIGURE 3: OIL PRODUCT SUPPLY ALONG THE CHAIN (METRIC TONNES) ............................................ 19 FIGURE 4: ARABIAN GULF REFINING MARGINS .................................................................................... 30 FIGURE 5: ARABIAN GULF CRACK SPREADS .......................................................................................... 30 FIGURE 6: PROFILE HIGH CONVERSION REFINERY- MURBAN CRUDE .................................................. 38 FIGURE 7 : PROFILE HIGH CONVERSION REFINERY- UPPER ZUKUM CRUDE ......................................... 38 FIGURE 8: NUMBER OF DETECTED LEAKS PER YEAR ............................................................................. 46 FIGURE 9: LINE PIPE REPLACEMENT TRENDS PER ANNUM METAL LOSS ............................................. 47 FIGURE 10: ZAMBIA LIQUID FUELS MIX 2003 TO 2030 BASE CASE- LOWER ........................................ 55 FIGURE 11: ZAMBIA LIQUID FUELS MIX 2003 TO 2030 BASE CASE- UPPER ......................................... 56 FIGURE 12: SCENARIO 1A – UPGRADE REFINERY WITH GASOIL HYDROTREATER & ISOMERISATION UNIT BY 2017, NEW CRUDE PIPELINE OVER 6 YEARS ......................................................