China's Sinopec Eyes South Africa Refinery Project

South Africa's national oil company PetroSA and China Petroleum and Chemical Corp. /quotes/zigman/269314/quotes/nls/snp SNP +0.57% , known as Sinopec, will build a refinery that could process several hundred thousand barrels of oil a day and cost several billion dollars to construct. PetroSA Group Chief Executive Nosizwe Nokwe said Monday that by teaming up with the Chinese company it would enable the national oil company to complete the "mega" project, which has been in discussion for several years but has struggled to find sufficient funding.

PetroSA first announced plans to build the refinery, called Project Mthombo, in the Coega Industrial Development Zone in the southern town of Port Elisabeth, in 2008. At the time, the company said it expected the refinery to process 400,000 barrels of oil a day and cost between $9 billion and $10 billion to build.

A spokesman for PetroSA said those figures are being looked at in the study and final capacity and cost will be determined over the next 18 months. The study will be carried out by Sinopec Engineering Incorporation. PetroSA said commissioning of the Coega refinery is scheduled between 2018 and 2020.

Many in the market expect a reduction in the final size of the of the refinery, said Paul Eardley-Taylor, who covers oil and gas at Standard Bank. Most of South Africa's existing refineries process around 100,000 barrels of oil a day.

China's resource companies are driving much of the country's foreign investment on the continent. In 2011, Standard Bank estimates merger-and-acquisition activity from China on the continent totaled $5 billion.

It's also not the first Chinese company to invest in oil refinery capacity on the continent. In 2010, Nigeria said it had signed deals with a number of state-backed Chinese companies to help build refineries there.

China has also become Africa's biggest trading partner and the new refinery could play a role in helping China's ambition to expand global resource trading by being a destination for crude oil.

"Sub-Saharan Africa is a growth area for oil demand," said Roy Jordan, downstream consultant at Facts Global Energy. "It will be helpful to have both crude oil production and more refinery capacity on the continent." South Africa currently has four refineries, Jordan added, and countries such as Uganda have had recent oil and gas discoveries which will drive more interest in the sector, he said.

PetroSA and Sinopec signed a memorandum of understanding in September and settled the agreement to work together Monday. They will now carry out a study to finalize the details of the plant.

South Africa is an importer of crude oil, mostly from Iran and Saudi Arabia. Many refineries said they have cut Iranian crude oil imports amid international pressure.