/ 3 September 2010

‘Refine or import’ fuels debate

'refine Or Import' Fuels Debate

While some stakeholders suggest that government approval for PetroSA’ s new 400000-barrel-per-day oil refinery at Coega in the Eastern Cape is a mere formality, the debate rages on about whether to refine fuel in South Africa or to import it.

Last month the Coega Development Corporation (CDC) said that all the indications are positive that the $10-billion greenfield Mthombo refinery project will get the go-ahead for construction to start in 2012.

Khwezi Tiya, the CDC business development manager, said about R200-million had been spent on completing a feasibility study for the project and the company now needs an additional R2.4-billion to complete a front-end engineering design (Feed), which will take about 18 months. Tiya said the government is expected to make a decision about the Feed phase in the next three months, after which a final investment decision by the government will be needed to progress to construction.

The CDC has an interest in the refinery appearing to be a fait accompli,since it is looking for an anchor tenant after Rio Tinto Alcan pulled out of building an aluminium smelter in the industrial development zone in 2008. Bheki Khumalo, the department of energy spokesperson, said the government believes there is a need for extra refining capacity in South Africa and that there should be a limit to the amount of imported fuel the country should rely on.

He said the recommendations of the board of the Central Energy Fund (CEF) regarding Mthombo are being reviewed. “In this regard we are engaging other government departments,” said Khumalo. “We will announce the outcome once we have finalised these consultations.”

The proposed refinery has come under heavy criticism, with opponents such as BP Africa arguing that supply security is not an issue — capacity at existing refi neries can be increased and any shortfall in refi ned fuel can be imported.

South Africa can produce 692 000 barrels a day at its eight existing refineries — Engen’s Durban refinery, Enref; Chevron’s Cape Town refinery, Calref; Sasol’s and Total’s Sasolburg refinery, Natref; BP’s and Shell’s Durban refinery Sapref; PetroSA’s natural gas refinery in Mossel Bay; and the three Sasol refineries, two in Secunda and one in Sasolburg.

Project Mthombo would increase refining capacity in South Africa by 58% but critics argue that there is no need for such a massive increase. A BP spokesperson says importing finished fuel products would not be a problem as there is a massive surplus of finished fuel products in the global market.

“There is enough surplus refinery capacity in the world and it is likely to remain so beyond 2020,” said Sipho Maseko, BP Africa’s chief executive. “It therefore makes no sense to burden South African taxpayers when better and cheaper options are available than building a new, expensive refinery.”

But refining crude oil locally instead of importing finished fuel products would have a major positive impact on South Africa’s balance of payments, which, in turn, has an impact on gross domestic product growth.

Frost & Sullivan analyst Ross Bruton said it would be a lot cheaper to import crude oil and refi ne it in South Africa. Expanding existing capacity is an option, but the technology employed in most of South Africa’s existing refineries is relatively old.

A former adviser to Energy Minister Dipuo Peters, Nhlanhla Gumede, who has started his own consultancy business, Khanya-Africa Business Solutions, said that if a decision is taken to refine in South Africa rather than import, the fuel refining sector will have to be carefully integrated into South Africa’s industrial policy. He said the downstream industries that result from refi ning fuel are the most important to develop.

The oil industry consumes R100-billion in goods and services and if those are procured locally it will be a huge boost to the economy and those sectors. He said South Africa currently imports most of those, which is a problem. “We are not reaping these benefits,” said Gumede.

“Refining itself does not generate that much value.” He said much of the justification for refining locally related to security of supply, but South Africa could end up having secured its supply but having to import everything else because its fuel would be too expensive.

Jeremy Wakeford, from the Association for the Study of Peak Oil, said building a huge new refinery just a few years before global oil production goes into terminal decline would probably be a massive misallocation of resources. “Higher oil prices will dampen domestic demand for liquid fuels, as seen last year,” Wakeford said.

“The money would be much better spent developing a more sustainable transport system, such as electrified railways in general and light rails in cities. Several of the oil majors are gradually divesting assets in the downstream oil sector [refining and distribution], aware that their own access to crude oil reserves is diminishing,” he said.

Critics argue that the proposed refinery at Coega would be far away from the major market and that an additional pipeline might have to be built from Coega to Gauteng. South Africans are already forking out for a new R12-billion fuel pipeline to be built between Durban and Gauteng.

Finance Minister Pravin Gordhan announced in his maiden budget this year a levy of 7.5c per litre of fuel to fund the project. A Coega to Gauteng pipeline has not been factored into the $10-billion cost of the refi nery, though some stakeholders argue that it might not be necessary as the fuel could be shipped to Durban and pumped into that pipeline.