/ 21 September 2021

New clean fuel standards could be the end of refineries and lead to job losses

Safrica Un Climate Warming
Smoke billows from Sapref South African Petroleum Refinery just outside Durban City. (Photo by ALEXANDER JOE/AFP via Getty Images)

South Africa has lagged behind other countries when it comes to clean fuel but new emission limits gazetted this year are about to change that. 

Although it is a positive move for the country’s air quality and people’s health, the new limits will have far reaching consequences for the fuel sector with thousands of jobs at risk if refineries close. The new limits are expected to take effect in September 2023.

In 2006, the energy department published new standards that prohibited the addition of lead into all grades of petrol and the reduction of the level of sulphur in diesel.

At the time, it said it would be prudent for the oil industry to invest in modifications in a once-off manner rather than by making piecemeal investments, which could ultimately prove to be costly. 

The changes did not happen. Now, nearly five years later, the regulations have been published and the fuel sector is not ready, according to the local economic research institution, Trade & Industrial Policy Strategies (TIPS).

Clean fuels are determined by Europe’s benchmark and range between one and six, where six is the cleanest fuel.

“While the rest of the world operates with Euro five or even six fuel standards, SA still only operates with Euro 2 standards.  The country was meant to implement so-called clean fuels II requirement by 2017 but this did not materialise, in the absence of enforcement and a mechanism for refineries to recoup the required investment,” said senior TIPS economist Gaylor Montmasson-Clair.

He said the problem is there is no mechanism for oil refineries to recover an investment in making cleaner fuels, which may come down to closures. 

“The key issue is more about the ability of refineries to recoup any investment, and about starting to prepare the entire value chain for the impacts that are to come in the future. We do have some time before impacts reach petrol stations, where most of the employment lies, and we should use this to plan and implement a just transition in the value chain,” he said. 

 In 2016, KPMG estimated direct employment in the value chain at about 80 000 jobs, and close to 300 000 indirect jobs.

The bulk of the employment is at the retail level, petrol stations and forecourts, which would not be affected in the short term. How fast that happens also depends on how long it takes for South Africa to move to electric vehicles. 

Refineries do not directly employ a lot of people — about 5 000 — said Montmasson-Clair, “but these jobs do underpin larger numbers in the value chain and are very important in the communities that rely on them”.

Other legal limits such as those pertaining to minimum emissions standards for air quality, have resulted in big emitters like Eskom and Sasol applying for exemptions because most of their operations are too old or not fitted with the technologies to meet those standards. 

If the same happens to the new clean fuel regulations, South Africa may continue to lag behind global standards. 

Many imported vehicles made for cleaner fuels have to be retrofitted in South Africa so they can function on its fuels.

The South African Petroleum Industry Association (SAPIA) played a role in the development of the first standards and asked that the government rescind its 2017 deadline for a ramp up in clean fuel requirements. 

“Due to major process changes that needed to take place in the refineries and the timing of the introduction of the new fuels, certain fuel supply disruptions were experienced. Lessons need to be learned from these experiences so that similar supply disruptions do not occur with the introduction of new specification fuel,” SAPIA said.  

So what are South Africa’s options for the sector?

It will probably come down to closing refineries, and importing the finished product or upgrading refineries to meet the new standards, although Montmasson-Clair and others believe the time frames are too short. He said that every day that passes makes it more unlikely that refineries will upgrade. 

The other option would be to close refineries and find an investor to build one large, new refinery in line with the new clean fuel requirements. 

“There have been talks about such a development with some Saudi investors but nothing concrete has materialised so far. It’s not clear that SA [and the region] have a large enough market to justify such an investment, estimated to [be] R150-225 billion. This would also depend on how fast we plan on moving towards electric vehicles,” Montmasson-Clair said.

South Africa needed concrete plans in anticipation of possible refinery closures to prepare workers. 

“Among other things, this should include reskilling/retraining of workers, early retirement schemes for older workers, improved social protection for affected workers, effective placement schemes, repurposing of existing facilities where possible, development of new opportunities on existing sites as well as in the broader economy to ensure new employment is available for affected workers,” Montmasson-Clair said.