Why SA will always feel fuel shocks
As motorists reel amid higher petrol prices, only two of the country’s oil refineries are operational
The price of Brent crude has climbed 10.29% to $90 a barrel in the past month in the wake of attacks on Russian oil refineries — inflicting more pain on South African motorists reeling from ever-increasing petrol costs.
South Africans have little protection against swings in the international fuel price, triggered by shocks to global supply. This comes as the country has seemingly abandoned efforts to increase its refining capacity.
Motorists were recently hit with another fuel hike this month, when the petrol price was increased by 65 and 67 cents. The diesel price rose by a staggering R1.78.
Energy analyst Lungile Mashele said South Africa will always be vulnerable to global conditions such as conflict, climate change and currency fluctuations as long as the country has limited refining capacity.
“[I]f we had all of our refineries operational, our fuel would not be as expensive as it is currently,” Mashele said.
South Africa has five dedicated oil refineries. Of those, only two are operational — Astron Energy and Natref. Enref and Sapref have shut down.
State-owned Petrosa’s Mossel Bay refinery has also closed, but has recently chosen Russia’s Gazprombank Africa as preferred investment partner to restart operations.
Enref, which was operated by Engen, was South Africa’s oldest crude oil refinery, churning 120 000 barrels a day. The refinery, situated in Durban, has been closed since a fire broke out at it in December 2020.
The refinery — which prior to its closure supplied about 17% of the country’s fuel — has since been converted into a new storage facility.
Sapref was the largest crude oil refinery in South Africa, providing 35% of the country’s refining capacity. At its peak, the plant produced 180 000 barrels a day.
The Sapref refinery paused operations indefinitely in March 2022 as its owners considered selling the plant in the aftermath of severe flooding in Durban earlier that year.
Mashele noted there are no plans to build new refineries. It seems the government is waiting for the private sector to build refineries, she said, adding that investors have no incentive to do so.
According to Mashele, the Cleaner Fuels Two initiative and the carbon tax are reasons many refineries have opted to stay closed.
The Cleaner Fuels Two initiative seeks to further tighten fuel specifications and standards.
“This means the existing refineries would have to be reconfigured, which is costly and not in anyone’s interest. Refiners then decided to close shop,” Mashele said.
Asked whether it would be possible to increase refining capacity at the operational refineries, Mashele said: “Refineries are very limited in terms of output. The only way to increase refining capacity would be to expand the refinery. But that is a very capitalintensive exercise.”
Mahele estimated the cost of expanding a refinery to be in the region of R60 billion.
“It does not make sense for refiners to invest in 45-year-old refineries that they still need to completely overhaul to meet the standards,” Mashele said.
This problem is not new.
As a BP spokesperson told the Mail & Guardian in 2010 that Sapref could have increased its capacity from 180 000 barrels a day to 360 000 barrels a day.
This would require an investment of roughly $4.5 billion (about R83 billion based on the current exchange rate).
The spokesperson said the majority of BP’S spend on the Sapref refinery at the time was dedicated to maintaining its infrastructure, adding that any increased investment would need to be rewarded adequately.
At the time, Petrosa estimated that the country would need to import in the region of 150 000 barrels a day by 2015. A spokesperson for the company noted that no international oil company in South Africa had indicated a willingness to invest in additional capacity to cater for the country’s increasing needs.
Citing estimates from energy intelligence firm Kpler, S&P Global noted that South Africa imported 321 000 barrels a day in January 2021. Enref closed the month before.
In 2022, South Africa imported $17.1 billion in refined petroleum, becoming the 19th-largest importer of refined petroleum in the world. The country imports primarily from the United Arab Emirates, India, Saudi Arabia, Turkey and Malaysia, according to the Observatory of Economic Complexity.
South Africa’s refineries can produce about 120 000 barrels a day.
Meanwhile Nigeria — which eclipsed South Africa to become Africa’s biggest economy five years ago — recently started benefitting from finally having the Dangote Refinery up and running.
Announced more than a decade ago, the refinery, owned by Aliko Dangote, began supplying diesel and jet fuel to the local economy at the beginning of this year.
With Nigeria having its own refinery, it removes all ancillary costs, such as logistics, Mashele said. It also cushions the economy against currency swings. “This also leads to more jobs, economic growth and cheaper fuel.”
But given that South Africa does not have the same crude oil resources as Nigeria, the country would still be subject to swings in international Brent prices regardless of how much refining capacity, said University of Pretoria researcher David Walwyn.
Refined fuel does cost more than crude. But, Walwyn noted, the cost of retrofitting existing refineries would put pressure on the price.
Walwyn agreed with Mashele that South Africa’s refineries were all sub-commercial facilities that could not have competed with the modern refineries — which produce between 300 000 and 600 000 barrels a day.
“It was inevitable that all these refineries would have to shut down because it costs too much to retrofit them to fit international standards for fuel refining. Rebuilding them was also going to be too expensive, essentially unaffordable,” Walwyn said.
In any case, Walwyn said, there is already too much refining capacity globally, which meant there is little incentive for international companies to build new refineries — especially in a country far away from major markets.
“At this point it’s probably more cost effective for South Africa to import finished products,” he said.
Refining crude oil in a South African refinery instead of importing finished fuel products would have a major positive effect on the country’s balance of payments, which in turn translates to GDP growth.
Independent energy analyst Martin Solomon said the real hit of closing a refinery is felt in the surrounding economy.
Refineries are usually part of the broader chemicals industry, which also boosts jobs in nearby areas, Solomon noted. Closing a refinery thus has far-reaching ramifications for the value chain.
In 2016, KPMG estimated direct employment in the refinery value chain at about 80 000 jobs. Refineries also created 300 000 indirect jobs, according to KPMG’S report — which was released long before the closures.
“If you look at our big refinery, Sapref, there is a whole ecosystem around it. And the fact that it is offline will impact that ecosystem, but it’s not really within the control of South Africa,” Solomon said.
“It’s very difficult these days to motivate a new refinery for a small market.”
He continued: “This is about energy security and you now have to get security through importing refined products rather than importing crude that has to be refined. That’s where the pain really is.”
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