Upgrades to existing refineries in South Africa are on ice until oil firms can get clarity on cost recovery.
The government appears stuck between a rock and a hard place when it comes to the overhaul of the country’s fuel refineries that is required to meet cleaner fuel specifications.
The 2017 deadline for implementing the standards for new fuel specifications has been delayed, in part because the cost recovery mechanism to fund this programme could not be finalised. Reasons for the delay and challenges to finalising the mechanism have not been provided, Avapfani Tshifularo, executive director of the South African Petroleum Industry Association, told the Mail & Guardian.
Changes to regulations for the fuel specifications were gazetted in 2012, to align local fuel quality with international standards. The M&G understands that a number of local refineries have halted work indefinitely on the Clean Fuels 2 project (CF2), as it is known, due to the lack of clarity on cost recovery.
The matter of refinery upgrades, however, cannot be entirely separated from ambitions to build PetroSA’s Mthombo oil refinery at Coega.
Should Mthombo – with a projected nameplate capacity of between 360 000 to 400 000 barrels per day – go ahead, it is expected to displace refinery capacity at one or more of the country’s other fuel refineries.
The cost of Mthombo, estimated in the order of R100-billion, would be much more than the R40-billion reportedly required to upgrade all the existing refineries.
The upgrades, meanwhile, could improve output performance across the existing refineries, which together totals an estimated 700 000 barrels a day, suggesting that South Africa would have adequate future fuel supplies.
The National Development Plan flagged this issue, arguing that the least risky and cost-effective option would be to import refined fuel until the country could absorb the output of either a new refinery or a major upgrade to an existing one.
But department of energy spokesperson Thandiwe Maimane said that a comprehensive review is required by the oil industry for a 100% cost recovery for CF2 upgrades, which will ultimately be wholly owned by the companies concerned.
“We believe that the owners of the operating assets to be upgraded – that is, refiners – need to shoulder some responsibility for rationale and the [capital expenditure] commensurate with the value added to these assets through a public funding mechanism, to enable the production of CF2 quality fuels,” she said.
Oil companies have also indicated they would have challenges meeting the initial 2017 deadline, given the resources required for such upgrades and the unresolved funding issues.
According to Professor Philip Lloyd of the Cape Peninsula University of Technology’s energy institute, the economic case for Mthombo, when including the costs needed to build supporting infrastructure to pipe fuel out of Coega, is “dead”. Industry speculation has put the total cost for Mthombo, after building a pipeline to Coega, at R200-billion.
Regarding the refinery upgrades, Lloyd noted that at least one refinery has indicated that to implement CF2 it would have to spend nearly double what it could reclaim in allowable costs from the government.
The energy department’s Maimane said, however, that refinery upgrade delays had no implications on the rationale behind building a new refinery. “A new refinery will be based on different considerations, particularly to enhance energy security,” she said.
However, two issues have to be differentiated in this debate, said Lloyd: fuel quality versus fuel capacity. Achieving better fuel specifications is partly driven by the rate the country takes up the new fuels, he said. That, in turn, is dependent on the rate at which the country turns over its car fleet. This is not happening fast enough, he maintained.
Southern Africa is short of about 200 000 barrels per day of refining capacity, he said.
With Angola set to ramp up oil production after starting construction on its Lobito refinery, South Africa could source the required fuel from there, Lloyd said. This would be cheaper than imports currently sourced further afield.
Mthombo for ‘high value’ products
Despite questions regarding the economic rationale for building the new Mthombo oil refinery, PetroSA said it conducted several studies that “confirm the strategic, technical and commercial viability of Project Mthombo. The latest of these was conducted with an external partner”, spokesperson Thabo Mabaso said.
The participation of external partners and funders in the further development of the project would “test and confirm the robustness of the business case for the refinery”.
“Project Mthombo will be located in sub-Saharan Africa’s largest market for transportation fuels, which increasingly relies on exports from Europe, the Middle East and Asia. The capacity of the refinery will enable it to achieve economies of scale thereby lowering operational costs,” Mabaso said. The refinery was designed for maximum efficiency, converting all its feedstock into high-value products, he added.
In line with the draft-integrated energy plan of 2013, PetroSA had the responsibility to drive investment in infrastructure required to support the security of supply of transportation fuels and related products.