THE FUEL industry faces a tough future as 55percent of local demand is being met by imported product, because more than two-fifths of the country’s refinery capacity is off-line, and refineries are losing money.
The executive director of the South African Petroleum Industry Association, Avhapfani Tshifularo, said in response to questions from Business Report that the three off-line refineries were the Astron Energy refinery in Cape Town and the Engen refinery in Durban which was owned by Petronas.
The PetroSA gas-to-liquid refinery in Mossel Bay would be shut down until the end of this month.
In October last year, PetroSA issued a tender for gas. It was being supplied by fast-dwindling reservoirs of gas offshore of Mossel Bay, and it warned then that it would have to close if no gas was sourced. In January, it announced the retrenchment of about 500 of its 1200 staff in Mossel Bay.
Tshifularo said South Africa consumes about 470 000 barrels of white oils – petrol, diesel, kerosene and liquefied petroleum gas (LPG) – a day and imports about 30 percent of diesel demand and 10 percent of petrol demand.
The total petrol and diesel imported was about 85 000 barrels a day, and, with the refineries offline, about an extra 180 000 barrels a day were being imported.
This means, based on 2019 figures, that imports amount to about 260 000 to 270 000 barrels of white oils, likely at specification better than Euro 4 standard (less than 50 parts per million sulphur).
He said the Western Cape had been fully supplied with liquid fuels following the incident at the Astron Energy refinery earlier this year.
However, “only time will tell” whether the same could be said for liquid fuels supplied through the Durban supply corridor.
Transnet said its fuel pipeline between Durban and Joburg had recently been the subject of disruption due to damage from theft.
Tshifularo said there were two LPG import terminals at Saldanha and Richards Bay, and imports were sufficient to plug the production gap.
However, another gas industry source said this had inadvertently created a monopoly, and a single company, Vitol, now controlled all the country’s LPG imports, which was certainly not what the government would have envisaged.
Although the Astron and Engen refinery closures might be short term, the industry faced a number of other challenges, including the long-delayed required investment of billions of rand in the refineries to enable Euro 6 cleaner fuel technology in vehicles, and the sliding profitability of the refineries due to slowing demand, and, over the longer term, slumping demand due to the introduction of electrically powered vehicles.
Tshifularo said the reason for the delayed investment was that refineries would not invest if a return was not provided – the oil refiners’ profit margins were regulated by the government.
“To ascribe blame on refiners for not investing is incorrect and is a failure to provide the entire picture.
“The government – in particular, the Department of Mineral Resources and Energy (DMRE) – have not been forthcoming to facilitate the necessary incentives to invest in a price-regulated environment,” said Tshifularo.
He said that, under these conditions, refiners could not invest, and their boards would not provide the assurance for investment, which would be little less than sanctioning an impairment of assets.
Tshifularo said if the government did not provide incentives, the refining industry would eventually shut down, and South Africa would become fully reliant on imports, save for the production at Secunda and perhaps Mossel Bay.
Other industry sources, who chose not to be quoted, said the stand-off on cleaner fuel and other investments between the DMRE and the oil groups had not been resolved for many years, and, in the face of declining demand, margins, and readily available imports from a glut of refining capacity in Indian Ocean Rim countries, it was very likely that the local refineries would eventually just become storage facilities for imported product.
Because the fuel price was regulated, this would not necessarily result in a higher price for consumers, but it would open the door for much more erratic fuel import agreements with international fuel traders, who were known globally for not having particularly high standards of business governance.
Tshifularo said if the government provided an incentive for local refineries to convert to cleaner fuels, which seemed unlikely at this stage, one could expect at least a five-year lead time before full implementation.
In the interim, he said South Africa would continue to import diesel that was close to Euro 5.
To understand how poorly these refineries are performing financially, Glencore took a $480 million (about R7.057 billion) impairment at its Astron refinery last year, out of total impairments for the global trader of $6.39bn.
It anticipated even lower oil refining margins due to the impact of the Covid-19 pandemic on product demand, and global refinery overcapacity.
Nevertheless, Glencore and Astron Energy had agreed to invest up to $46m in the refinery to 2024 to improve performance.
Meanwhile, government-owned PetroSA has incurred losses of R20bn since 2014, and apart from a gas shortage faces a number of other issues, including in the legislative regime, issues surrounding forensic reports, the organisation’s current insolvency and liquidity challenges, as well as the implementation of the merger of a number of different state-owned oil companies.
BUSINESS REPORT ONLINE