New refinery will place others at risk

Energy experts have poured cold water on PetroSA's renewed lobbying for the go-ahead to build a mega oil refinery, project Mthombo, in the Coega Industrial Development Zone.

The port lacks critical supporting infrastructure needed to justify the construction of the refinery, most notably a pipeline to transport fuel from the coast inland, according to Philip Lloyd, a professor at the Cape Peninsula University of Technology's Energy Institute.

Although a decision to build Mthombo at Coega may be "politically desirable", he noted, it would require the construction of an additional pipeline, which could add substantial costs to such a project.

PetroSA's parent company, the Central Energy Fund, told Parliament in June that project Mthombo, which will have refining capacity of between 360 000 and 400 000 barrels a day, would cost R100-billion to build.

Furthermore, the creation of a new pipeline from Coega could render the R24-billion investment that Transnet had already made in the new multi-products pipeline that runs from Durban inland redundant, according to Lloyd.

In its 2012 pipeline development plan, Transnet indicated that the building of a Coega pipeline would create significant overcapacity in the inland region. It would result in the first phase of the multi-products pipeline being underused and delay the commissioning of its second phase from 2012 to 2038.  

The multi-products pipeline has already cost South Africa far more than initially budgeted. Costs have ballooned from the original R9.5-billion in 2006 to the nearly R24-billion at present.

South Africa is, however, short of refining capacity, according to Lloyd.  It imports an estimated five billion litres of refined products a year, equating to about 120 000 barrels a day. Upgrading and improving South Africa's existing refineries, however, could go a long way towards addressing these shortages, he said.

One of the reasons South Africa was importing so much additional fuel was to power Eskom, said Lloyd. Eskom is heavily reliant on its open-cycle gas turbines – peaking power plants fuelled by diesel that are being used to meet acute electricity shortages.

PetroSA chief executive Nosizwe Nokwe-Macamo said at a recent business breakfast meeting in Port Elizabeth that South Africa "cannot afford to postpone a firm, positive decision on project Mthombo, lest we find ourselves, as a country, in the terrible situation with regards to liquid fuels that we experienced in 2008 during the electricity crisis, when blackouts became a norm in many parts of the country".

The recently published national development plan, however, advocates delaying a decision on building a new refinery until 2017 and details a range of complex factors the government needs to consider before taking this decision.  

The plan notes that building a refinery, which would have to produce 400 000 barrels a day to achieve economies of scale, would put a number of South Africa's existing refineries out of business.

Increasing costs
South Africa has six refineries, including Sasol's plant in Secunda, that produce fuel from coal and gas, as well as PetroSA's gas-to-liquids plant at Mossel Bay.

The plan says that unless a greenfield site at Durban can be found for the new refinery, fuel will have to be transshipped from Coega to Durban for transport inland, thereby increasing costs.

Although Mthombo could be geared towards the export of refined fuel, the plan states that this is likely to be exported at a loss. The sheer size of such a project has significant macroeconomic implications and increased risk, it says.

"The least risky and most cost-effective option is to continue importing a share of refined product until the country reaches a stage where it can absorb the output of either a new refinery or a major upgrade of an existing refinery," says the plan.

Nevertheless, PetroSA is committed to Mthombo. It signed a memorandum of understanding with Sinopec, China's state-owned integrated energy and chemical conglomerate, in September 2011 and this was followed by a joint study agreement in May 2012.

According to PetroSA, the agreement "defines the process by which PetroSA and Sinopec will shape the business case for project Mthombo and involves the commissioning of studies over two phases".

Business case
'The first phase, already under way, focuses on market studies as well as the review and selection of a business case," the company said this week. "The second phase will develop a business case that is expected to prepare project Mthombo for the important front-end engineering design stage."

An industry source, who did not want to be named, warned that forcing a decision on Mthombo ran the risk of crowding out private investment. The local market simply was not large enough to support a refinery of Mthombo's proposed size and it would replace the production of an existing refinery such as Sapref, jointly owned by BP and Shell.

If refinery efficiencies could be improved, however, it could significantly reduce the need for imports, the source said.

It was also not clear where the crude oil needed to supply a refinery of Mthombo's size would be secured, which contradicts assertions that it would radically improve the security of supply for South Africa.

A second source from the petroleum sector, who also wanted to remain anonymous, said although additional refining capacity was needed along with improved efficiencies, Mthombo would put two existing refineries out of business if it was brought on stream in current circumstances.  

Adding complexity to the issue is the introduction of cleaner fuel specifications, under the clean fuels 2 programme led by the energy department. In line with global standards, the department gazetted new petroleum products specifications and standards in June.

Existing refineries

South Africa's refinery infrastructure is rapidly ageing and requires a significant upgrade to meet these standards. This, too, is linked to the decision whether to construct a new refinery, which could be built to meet clean fuel standards, according to the national development plan.

The introduction of clean fuel standards "requires major investment in upgrades and conversion of existing refineries at a time when the major oil companies are increasingly selling off refinery assets," states the plan. "A mechanism has to be found to fund these upgrades."

The energy department is in the process of conducting a long-awaited audit into the state of local refinery operations and their capacity.

The department said although the due date for finalising the refinery audit report was the end of March, almost all the oil companies requested an extension of the deadline to June. However, the last batch of refinery audit data was received only at the end of August.

Apart from the extension and other delays in the submission of data by the industry, there were problems relating to the quality and integrity of the data submitted, said the department. The submission of the final audit report was still expected before the end of the current financial year despite these challenges, it said.

The department will also have to indicate what type of cost-recovery mechanism can be implemented to pay for the upgrading of the refineries.

The fuel price is regulated and the industry cannot simply recoup investments necessitated by the imposition of new standards by raising product prices. Such costs will have to be recouped through either the fuel price, or through an allocation from the fiscus.

The construction of Mthombo would impact on the investment decisions oil companies must take in relation to existing refineries.

"It is well understood that refinery upgrades will require investment, which needs funding in one way or another," said the department's spokesperson, Thandiwe Maimane.

A task team comprising the department and the treasury has been established to, among other things, make recommendations on the funding mechanism for investments pertaining to the cleaner fuels 2 programme. It could not, however, pre-empt the decision regarding the funding mechanism to be adopted and the corresponding quantum, said Maimane.

PetroSA spokesperson Thabo Mabaso declined to comment on Mthombo, although according to the company's statement, PetroSA welcomed renewed media interest in Mthombo following Nokwe-Macamo's remarks.

Lynley Donnelly
Lynley Donnelly
Lynley is a senior business reporter at the Mail & Guardian. But she has covered everything from social justice to general news to parliament - with the occasional segue into fashion and arts. She keeps coming to work because she loves stories, especially the kind that help people make sense of their world.

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