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Mthombo is no crude white elephant

In the Mail & Guardian of March 11 Jeremy Wakeford wrote a one-sided opinion piece on Project Mthombo, PetroSA’s proposed 360 000-barrels-a-day crude-refinery project.

Wakeford criticises the proposal to build Mthombo, citing inter alia, the phenomenom of peak oil and the current abundance of refined oil as factors that could render this project a “white elephant”.

Like Wakeford, we find the idea of peak oil warrants consideration for planning purposes. The idea of a non-renewable resource reaching a production plateau, followed by a decline, is consistent with the definition of a non-renewable resource. Of course, we are aware of the debates and divergent opinions on the definition of peak oil, the timing and the characterisation thereof.

Of greater importance are global trends in supply and demand. We see oil remaining the primary source of global energy beyond 2050, especially in transportation, where substitution remains difficult and costly.

We also see technological advances continuing to enhance oil recovery and shift the supply barrel towards non-conventionals, including the heavier and dirtier crudes. We agree that the shift to non-conventionals raises the price of oil, but this also helps compensate investors, thereby stimulating the search for more oil.

We interpret all this to mean that only the most efficient and cost-competitive refineries will thrive. The Mthombo refinery will process a wide variety of crudes, including the heaviest and dirtiest, leveraging on economies of scale. The refinery is also configured to make products to the highest quality standards, as demanded by an increasingly health-conscious, efficiency-driven and environmentally sensitive society.

We see estimates of global reserves (discovered and undiscovered) rising in the foreseeable future. The authoritative Oil & Gas Journal recently increased its estimate of proved world oil reserves by 12-billion barrels. This follows such major discoveries as the Barracuda, Caratingua and Tupi fields off Brazil and the Jubilee field off Ghana.

‘Inexorable decline’
The US Energy Information Administration (EIA) expects an increase in conventional liquids production from Opec (10,3-million barrels a day) and non-Opec sources (4,8-million barrels a day) by 2035. Unconventional liquids supplies are expected to increase by 9,5-million barrels a day.

Of course, we are also aware that some of the most important oil fields in the world, such as Mexico’s Cantarell field, Kuwait’s Burgan and even Saudi Arabia’s Ghawar field, are in inexorable decline.

We see the resultant production profile being either a delayed attainment of peak oil or a relatively shallow net decline or both. Such a shallow decline would help ensure the continued relevance of crude oil in the global energy mix through and way beyond, the Mthombo operating window.

The global economic downturn has increased the vulnerability of many crude-refiners by creating a product surplus. But this is a short-term phenomenon and was always inevitable considering that the smaller and less sophisticated refineries are unable to compete with the new wave of modern, flexible, high-efficiency mega-refineries such as the proposed Mthombo.

The “writing on the wall” that Wakeford suggests the multinationals have seen is that of the inevitability of diminished competitiveness on the part of their refineries. Obviously, under such circumstances, strict profit-centred shareholder interests would dictate a drift away from downstream.

Growth in energy demand will continue, driven primarily by China and India, an increasing wealthier global population and higher per-capita energy demand. The present surplus of refining capacity is thus bound to decline in future, especially as the smaller and uncompetitive refineries struggle (or fail) to survive.

Although forecast of growth in demand for South Africa’s liquid-fuels varies, it is clear our import requirements are set to grow rapidly over the next decade.

Insufficient local manufacturing capability and inadequate investment already means that South Africa depends on the import of blending components to produce the fuels required by the market.

With the imminent introduction of more stringent, globally acceptable fuels specifications, there is a real possibility that one or more of the existing local refiners may, under shareholder pressure, adopt a similar “no investment” approach, which will further exacerbate import requirements.

Surely it would be prudent not to bank on acquiring finished product from sources that cannot guarantee long-term sustainability, especially when the relatively small demand, by global standards, reduces the relative attractiveness of the local market.

The International Oil Companies’ appetite for refining has decreased considerably in the past few years, resulting in withdrawal from downstream activities in several countries in Africa and, in virtually all instances, compromising fuel-supply security. Already there are early signs South Africa could be next in line.

South Africa has a choice: either to continue to place a key element of strategic energy supply in the hands of others, who naturally place their own commercial interests ahead of South Africa’s, or to take its future into its own hands.

Now is the time for South Africa to plan for additional refining capacity that, in any event, will require six to eight years to materialise. Project Mthombo will be a key part of the solution to South Africa’s security-of-supply challenge.

A “white elephant” like that is good to have, especially when the white elephant is, as Mthombo is, technically feasible, commercially viable and strategically vital.

Godwin Sweto is PetroSA’s vice-president of corporate strategy and planning

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