Think of it as the Ogies faktor. Crude oil, which had been brought at some cost from the coast to be stored as a strategic reserve in disused coal mines at Ogies, was later made available on a preferential basis to the Sasol/Total-owned Natref refinery at Vereeniging.
Likewise, Natref received crude oil by pipeline from the coast at no cost for 17 years, as part of a set of incentives to establish a refinery in the country’s industrial heartland.
These little-known nuggets emerge from the 102-page discussion document by a task team appointed by Minister of Finance Trevor Manuel, Possible reforms to the fiscal regime applicable to windfall profits in South Africa’s liquid fuel energy sector, with particular reference to the synthetic fuel industry.
The last government, faced by sanctions, did everything possible to nurture both the conventional and synthetic-fuel industries. Measures employed ranged from direct subsidies to pretending, for pricing purposes, that Vereeniging is at the sea and Ogies has its own supplies of oil.
Where the country had to make its own fuel from coal or gas and oil refineries had to mothball some of their capacity, they were paid for lost production, so desperate was apartheid South Africa to retain foreign investment.
“Government also offered the OOC’s [other oil companies] coal mining assets in a series of deals that have never been fully disclosed by government or by the OOCs concerned,” says the task team.
“It is thus not possible to quantify the costs to the state and the benefits derived by the OOCs.”
The task team says that since the 1950s regulated pricing has been based on the price of importing fuel with a “generous” price build-up for storage and distribution.
It says the outcomes of government intervention and regulation were security of supply, reduced dependence on imported oil, stability in domestic fuels production, minimising the impact of fuels imports on the balance of payments and the wide availability of fuel to consumers and industry (including the military). “It can be argued that these objectives were achieved.”
Additional outcomes included the development of refining infrastructure, investments by multinationals, geographic distribution of refining facilities, industrial growth centres at Sasolburg, Secunda, Mossel Bay, the benefication of low-grade coal and the development of a world-leading technology expertise.
Unplanned outcomes, though, include a distribution network that favours one private-sector company, technology nurtured and developed through state investment is now in the hands of a private company and an oil industry that expects to be kept profitable at any cost.
Other negatives include the lack of a concentrated refining and petrochemicals centre, reliance on coal for petrochemicals with periodic supply limitations and a composition profile that inhibits the establishment of a petrochemicals complex independent of coal.
“The synthetic fuels manufacturing industry would not have developed in the absence of incentives and tariff protection because of high capital and operating costs. This has led Sasol shareholders to reap huge benefits from the previous investments by government as well as from structures which favour the inland producer.” The task team calculates this locational advantage as being worth R600-million a year.
“The cooperative relationship between Sasol and Petronet continued after privatisation and it appears that significant government resources and spending were effectively diverted to a privatised Sasol.”
Direct taxation on fuels products is much lower in South Africa than in many developed countries. “It could be argued that the option of earning income from direct taxation — which could have been distributed to socio-developmental causes — was sacrificed in favour of the narrower option of building a state-owned synthetics fuels business and to a lesser extent promoting refining investments,” the task team says.”
Consumers have borne the costs of establishing and maintaining synfuels producers over about 70 years.
“On the other hand the economy has benefited from value adding investment in oil refining and its knock-on economic impacts.”
The task team says that significant over-investment in pipeline infrastructure in the 1960s and 1970 was borne by taxpayers.
“Even today when pipeline capacity is at a premium it is doubtful that some pipelines have recovered their costs.” The DWP (Durban-WitwatersrandÂPretoria) pipeline was funded by setting product pipeline tariffs at rail rather than pipeline costs, which are much lower, denying motorists the benefits of the more efficient form of transport.
Sasol’s Marina Bidoli says, “We are confident that the public hearings will take place in a fair and transparent manner to collectively arrive at a conclusion that is in the long-term interest of South Africa, equitable to the synfuels industry and cognisant of the objectives of government and all other stakeholders.”
Treasury spokesperson Thoraya Pandy says the task team “is mandated to look into the liquid-fuel industry but more specifically the synthetic-fuel sector in the context of the excess profits generated as a result of the high oil prices and possibly due to some of the current regulatory interventions.”