THE DEFINITIVE TRUCKING SITE

August 2009

Fuel Security

More refineries or stockpile?

THE PETRO.T.EX (PETROTEX) conference held in Midrand during June this year provided a comprehensive and well-informed forum for discussion and debate on the daunting question of “Energy Security” and, for our purposes, “Fuel Security”. The speakers were drawn from among the most knowledgeable and experienced in and around the liquid fuel industry and the delegates were equally impressive representing a diverse cross-section of producers, distributors, regulators, consultants and related roleplayers. 

How best to secure fuel supplies, who should pay for it and how to keep a reasonable balance between the oil industry and consumers of fuel is a complex matter especially when it needs to balance the books between assuring the investors in this vital industry that they will earn an acceptable commercial return on the colossal sums they need to spend whichever way the decision goes, while at the same time assuring consumers they will receive an uninterrupted supply of credible products at a reasonable price. To this must be added factors such as the status of geriatric refineries and a skewed distribution network that holds risks for the largest industrial and commercial hub in the country. There is also pressure to introduce cleaner fuels in order to bring on the latest engine technology that offers fuel efficiency benefits and the all important element of making a worthwhile contribution to cleaner air in the interest of improved public health. Much of how to achieve what needs to be achieved resides in several different influential spheres of interest, each with massive investments at stake and huge egos to drive their respective points of view. 

The available space is quite inadequate to cover the range of discussions and debates that took place over two days on this compelling topic. However, it is an important topic that needs to be understood by a wider audience, especially since the ultimate decisions will impact on our lives for generations. With this in mind I have cherry picked some of the most important and controversial aspects that were debated in an earnest endeavour to find the best way forward. 

The question “does South Africa need more Refineries” could well begin with considering the existing refining capacity in various African countries, how well they are maintained and whether they are capable of producing cleaner fuels at an ongoing competitive price. David Sineke, researcher and analyst at Engen, says presently there are 44 refineries in Africa producing almost 3,5 million bpd. Currently Africa consumes between 2,3 and 2,6 million bpd. This suggests Africa can be a net exporter. Sineke draws our attention to the facts that only 10 African countries each have one Refinery. Eleven Refineries have been shut down and are now operated as terminals. Maintenance, he believes, is weak across the continent and there are many fires especially in South Africa. Only seven of these Refineries are at full production. A key question is that the majority of existing Refineries across Africa are long in the tooth and need substantial upgrading at a massive cost of at least R40 billion and will then be technically capable of producing the required fuels for only around 15 to 20 years. 

Well publicised is Petro SA’s intention to build a new 400 000 bpd Refinery in the Coega area at a projected cost of around R10 billion. If construction commences in 2011, it will be sometime around 2014 before production can begin and 2020 when it reaches its optimum planned production. Together with the existing Refineries (Chevref, Enref, Natref, Sapref, Sasol’s CTL and PetroSA’s GTL production), South Africa would produce more than it needs and would need to find export markets to take up the excess production. Currently, according to Sineke, Africa exports eight million bpd of crude to EU Refineries and buys it back as refined products. 

The national and international oil companies operating in South Africa are waiting to obtain clarity and confirmation of the specifications vehicle and engine manufacturers require and indeed that the Government accepts in order to achieve the economic and environmental benefits cleaner fuels should deliver (Euro 4 and Euro 5 are examples) before deciding how much needs to be invested in upgrading their respective Refineries and how the cost should be funded. Keeping in mind the time it takes to upgrade existing Refineries, the stakeholders and roleplayers need to finalise this issue sooner rather than later if the country is to avoid the potential expensive consequences of further procrastination. 

Many oil industry watchers believe the severe economic crash that slammed on the economic brakes at the beginning of 2009 was in fact a God-send that saved the country from a major shortage of liquid fuels to the extent that the inland area would have run dry if demand had not cooled as rapidly as it did. 

To meet the increased demand during the recent economic boom and other industry related factors, it has been necessary to import refined products (approximately three billion litres a year). Based on current and anticipated demand, Rod Crompton of NERSA compiled a scenario to indicate the impact if, say, Natref’s production went down for 30 days in 2010:

If Secunda’s production went down for an additional 30 days the impact is considerably worse: 

Current combined petrol and diesel storage capacity in the country is 411 million litres when full, of which 41% covers inland markets. Inland demand is 60% of petrol, diesel, paraffin and jet fuel consumption. To quote Robert Crompton, “Supply vulnerability is no longer international. It is rather between the East Coast and the inland market.” Based on NERSA’s 2007 Energy Master Plan, unavailability of R1 billion a day. These conclusions strongly support the case for an additional pipeline in the short term and increased refining capacity in the medium term. 

Here is a brief summary of just some of the considerations that need to be taken if the question of fuel security is to be properly secured and sustained: 

Import refined products from other African Refineries

• Most of these are yester-year technology and will need upgrades and better maintenance. The average capacity is only 69 000 bpd. Analytical reviews indicate there is a general lack of product and market knowledge and ongoing ability to access finance largely influenced by political instability and volatile currencies. Existing crude oil commitments to the US and China are additional factors to consider. 

Construct more Refineries

• Government is supportive of PetroSA.’s planned new Refinery in the Coega area. Energy Minister, Dipuo Peters is concerned that without additional refining capacity we will become progressively dependent on imported products. The Minister is giving consideration to making it into a regional development by inviting other African countries to participate in the project. Other plus factors include the potential to benefit from better construction costs during the economic downturn. 

• This new Refinery will produce a wide range of products including the cleaner fuels compatible with Euro 4 and Euro 5 specifications. From a national perspective this would provide a decent level of social upliftment in a distressed area, and provide opportunities to train technicians and artisans. 

• Equally challenging, the decision to go ahead with the project raises questions around pipeline tariffs, transport costs and other distribution considerations that inevitably impede pricing issues. Being an intensely competitive industry some are already asking whether PetroSA can earn an acceptable return on the massive investment and if it intends seeking its own retail distribution network.

Would increased storage capacity add to fuel security?

Importing refined products is expensive and risky especially in the climate of unpredictable geo-politics. As outlined by NERSA, the short term priority lies with establishing additional pipeline capacity that is urgently needed to address the inland vulnerabilities. The present total storage capacity (when full) hardly meets demand for a month. Somehow no one I have met seems to know why the large tank farms that served South Africa so well when it was threatened with oil sanctions are now derelict and abandoned. What happened to the massive storage facilities that were created in disused mine shafts representing something like a year or more back up? Probably the high cost of holding such large emergency supplies while funding supplies as required at much higher prices became a burden just too heavy. 

The more we discuss and debate these issues the more time we lose. Readers will recall the conversation with SAPIA’s Anton Moldan (FuelWatch May 2009) when he said there is no time to waste in getting a fully representative working group appointed, up and running to dot the Is and cross the Ts. Whatever is finally decided, it is going to cost billions and will take several years before we can begin to reap the benefits. Whatever eventually transpires as to which cleaner fuels we will get and when they will be available, we should be mindful of the sage words that Adrie Visser, Process Director at Fluor SA quotes – “We do not inherit the Earth from our parents we are borrowing it from our children”.