Little commercial sense in a new refinery
At a time when leaders in the government and governing party are preoccupied with fighting among themselves, policy coherence and certainty can hardly be expected — nor is it clear whether anyone is thinking through the consequences of whatever grandiose policy pronouncements ministers do make.
There was certainly no shortage of these in Energy Minister Mmamoloko Kubayi’s budget vote speech earlier in May. She announced a range of changes, from relocating the highly successful independent power producer office into the controversial Central Energy Fund, shifting PetroSA to the Department of Mineral Resources, grand plans to support more black economic empowerment (BEE) fuel importers and to build a new fuel refinery.
Kubayi plans to approach the Cabinet in the third quarter of 2017 for a decision on a new refinery. Her preference is a public-private partnership that would be majority South African-owned, with black business participation and “a strong participation of a crude oil-producing partner”.
This time, market speculation is of Iranian crude, with Chinese funding. Last time, it was going to be a deal with the Venezuelans. This refinery idea is hardly new: there has long been a government ambition for PetroSA to build a new refinery in Mthombo, Eastern Cape. Whether PetroSA is still in the picture is unclear.
But the idea of a new refinery investment raises all sorts of questions, not just where the money will come from, but more fundamentally, why SA would want a new refinery at a time when the future of its existing refineries is at risk. SA’s six refineries are subscale by global standards, with the largest producing little more than 125,000 barrels (bbl) a day. New global refineries deliver 400,000 to 500,000 bbl/day, going up to 1.5-million, to get economies of scale.
SA’s domestic market is far too small to absorb that and, geographically, SA is not well positioned to export refined products. There is also a global glut of refining capacity so, many refineries have upped their exports in recent years.
So, a new refinery wouldn’t be much of a commercial proposition. It would probably require huge subsidies — from the state or fuel users in the form of higher prices — to make it work. Why that would be a sensible investment is not clear. That’s particularly so because of the question marks over the survival of SA’s existing refineries. These relate to the impasse over how the massive investment needed for them to deliver new cleaner fuels will be funded, as well as to the ever rising imports of fuel into SA.
There is still no agreement between the government and industry over the new cleaner fuels that the government originally wanted to introduce from July. Estimates a few years ago were that the industry needed to invest at least R40bn to upgrade refineries to meet new specifications. The industry wants to recover that by “passing through” the cost to the fuel price, but talks with the government are stuck.
Kubayi said regulations would be promulgated in May to defer the inception date for clean fuels “to a later date.”
But even if the uncertainty is resolved, there will be a long lead time — up to seven years — before refineries are ready to deliver to the specifications. Motor manufacturers want to introduce new models that use the cleaner fuel, and will have to be supplied, for now, by imports.
Much of the investment and deal-making in the industry is going into new import terminals and tanks, with global oil traders such as Trafigura and Vitol growing their presence in SA’s refined fuel market and a number of BEE-led consortiums in the import mix.
A new player, Burgan, is building a large new import terminal in Cape Town, against the opposition of Chevron SA, which unsuccessfully challenged its licence application in 2015.
Sinopec has promised to modernise the Chevron refinery, an investment market players estimate could cost the Chinese company $400m-$500m on top of the $900m purchase price.
But will other multinationals involved in SA’s refining industry put in that kind of money? South African Petroleum Industry Association chairman Maurice Radebe said earlier in 2017, investment would not happen without regulatory certainty.
That doesn’t seem likely anytime soon. Meanwhile, the market will prevail and the industry could face a scenario in which the clean fuels come from a growing import industry, while the existing refineries supply fuel for older models. As those are phased out, the domestic refiners’ market will be eroded and some are talking of turning their refineries into “tank farms” for imported fuels.
These would employ far fewer people and contribute far less to GDP than the existing refining industry, which employs 750,000 people, directly and indirectly, and accounts for 8.5% of GDP, as well as providing the feedstock for SA’s chemical manufacturing industries.
Sasol joint CE Bongani Nqwababa said: “Instead of managed regulatory reform, we will have disruptive market-driven change.”
Critics would say that more competition in the industry would be good. But whether to support new refineries or old ones, and whether to favour imports over local refining are effectively industrial policy decisions happening by stealth, rather than coherently made by policy makers.
INSTEAD OF REGULATORY REFORM, WE WILL HAVE DISRUPTIVE MARKET-DRIVEN CHANGE Bongani Nqwababa Sasol joint CE