The bot­tom of the bar­rel

Finweek English Edition - - Openers - GARTH THE­UNIS­SEN

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

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