On-off oil refinery back on the table

Minister of Energy Jeff Radebe has refuelled the government’s determination to build another oil refinery.

In his budget vote speech this week, Radebe said “[Oil refining] is a significant contributor to the economy and the issue of the sustainability of the current refineries is of utmost concern”.

The current refineries “are not equipped to produce the latest fuels required by modern vehicle engines to reduce vehicle emissions and improve efficiency”, he said. Resolving these problems would require significant investment with long lead times. Radebe added that he would consult the industry and provide policy certainty by the end of the year.

At a recent media briefing, Radebe, accompanied by departmental officials, announced that, to ensure the security of South Africa’s fuel supply, an implementation framework for a new oil refinery would be finalised this year.

The state has long had plans for such a project, which have been extensively debated but among the difficulties that remain is the cost.

The issue is further complicated by long-running negotiations between the government and oil firms about the upgrading of the existing refineries to meet cleaner fuel specifications and a cost recovery mechanism to fund it.

According to the department’s deputy director general for petroleum, Tseliso Maqubela, South Africa is now importing about a quarter of its petroleum products because of economic growth and increased demand.

There are six refineries, which include state-oil company PetroSA’s refinery at Mossel Bay, and petrochemicals giant Sasol’s refinery at Secunda. The Chevron refinery in the Western Cape is the subject of rival bids from China state oil company Sinopec and commodities major Glencore.

A proposed PetroSA refinery at Coega in the Eastern Cape that was developed in partnership with Sinopec has not been built. PetroSA has been battling with huge losses. The company’s latest results revealed a loss of R1.6-billion for the past financial year, although this is a recovery from two years previously when it reported losses of R14.5-billion.

The initial estimate to build a new refinery at Coega in 2012 was about R100-billion to produce 360000 to 400 000 barrels a day. But one of the major problems was the lack of supporting infrastructure, including a pipeline to transport the fuel to the inland market, which would have added significant costs to the project.

According to Avhapfani Tshifularo, the executive director of the South African Petroleum Industry Association, a new refinery would reduce the amount of diesel and petrol being imported but it would be expensive to build and more expensive than expanding an existing refinery, he said.

The amount of fuel being imported was too small to justify building a new refinery solely aimed at supplying the local market, so it would need to be large enough to also service the export market, said Tshifularo.

According to 2016 figures, South Africa imported about 3.7-billion litres of diesel and just over one billion litres of petrol.

Tshifularo said a significant amount of these imports were of 50ppm diesel and 95 unleaded petrol. These cleaner product variants are manufactured in South Africa but not at levels needed to meet the demand.

He also said the import figures included diesel for Eskom’s peaking power plants, which did not reflect “normal” fuel demand.

The cost of upgrading the existing refineries, most importantly to meet Clean Fuels II specifications, is estimated at about R40-billion.

“South African refineries must be upgraded to be able to produce Clean Fuels II otherwise they would die if the products produced have no market,” Tshifularo said.

Radebe said he had held discussions with some of the major oil companies. “We will consider all those issues within the context of finalising our posture on this but we have to go into this [Clean Fuels II]; there is no choice,” he said.

In the case of the Chevron refinery, Minister for Economic Development Ebrahim Patel has specified that the new owner must spend R6-billion to upgrade the facility to meet the cleaner fuel requirements.

But, ultimately, refinery owners decide whether to import or refine crude oil locally, Tshifularo said.

All the current debates notwithstanding, if a refinery owner decided it made commercial sense to close a refinery, “there is no law to stop that”, he said.

He likened it to General Motors, which left South Africa last year despite the government’s automotive production and development programme.

“Even with that support programme, which is considered to be very successful for supporting manufacturing capacity in South Africa, General Motors still took a decision to pull out of South Africa,” he said.

A new refinery would be more expensive than expanding an existing refinery