The bottom of the barrel
WITH SOUTH AFRICA’S growing economy fast running out of fuel refining capacity, rumour has it that oil companies are lobbying Government to provide incentives for the construction of a new oil refinery, which could ramp up the cost of fuel.
For consumers, the most worrying of the various incentives being punted involves a possible amendment to the basic fuel price (BFP) formula.
Simply put, the BFP formula is an import parity price that uses a complex mathematical formula to determine the theoretical cost of importing refined product (as opposed to crude oil) into SA. This is then used to set the price of locally refined fuel, even though the cost of refining oil in SA is cheaper than the price arrived at through the BFP formula.
As is typically the case with oil companies, no comment on the issue was forthcoming. Instead all inquiries were directed to Colin McClelland, Director of the SA Petroleum Industry Association (Sapia).
McClelland says, although he’s not personally aware of any lobbying from oil companies, an amendment to the BFP would be a good way of persuading local oil companies to construct a new refinery.
However, he also acknowledges that an
amendment would probably make petrol “a few cents more expensive per litre”.
McClelland says another possible incentive would be the imposition of tariffs on imported fuel, which would effectively force SA companies to source their fuel locally.
This would guarantee a ready market for a new refinery, which analysts say is just too expensive to contemplate without some form of incentive.
Feasibility studies carried out by Sasol for the construction of two coal-to-liquid (CTL) refineries in China put the cost of a new refinery with a nominal capacity of 80 000 barrels/day at between US$5bn and US$7bn (about R50bn).
McClelland says the alternative option would be to construct a conventional crude oil refinery. Although the cost of erecting a conventional refinery – even one capable of processing 300 000 barrels/day – would be slightly lower at roughly US$3bn to US$5bn (about R36bn) it does come with its own problems.
Says McClelland: “With a CTL refinery most of your capital outlay is in the beginning. Thereafter, your only feedstock cost is the cost of mining the coal.
“Although it’s a lot cheaper to set up a conventional crude oil refinery, the high cost of crude oil feedstock makes it more expensive to run over the long term.”
One problem, though, is that if one of the oil companies in SA decided to build a new refinery, it could find itself with excess capacity. As it stands, each oil company has about one-sixth of the local market of 600 000 barrels per day. A new 300 000 barrel/ day refinery would thus provide them with three times more capacity than their total sales.
This raises the prospect that a new refinery could be jointly operated by several of the oil companies active in SA.
However, McClelland points out that since a new refinery takes about five years to build, and given that local demand is expected to grow at about 5% a year, a new 300 000 barrel/day refinery could be running at close to full capacity within eight years.
McClelland says there are also strategic reasons for constructing a new refinery.
“A new refinery would provide greater security of supply, while at the same time creating more jobs,” he says. “It would also reduce SA’s import bill. As such it would make sense for Government to look at providing some sort of incentive for constructing a new refinery.”
A new refinery would reduce SA's import bill. Colin McClelland