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Aug 01, 2008

Fall in SA’s refining capacity leads to higher imports, but some supply-security hope on the horizon

DURBAN|Maputo|Engen|Engen GM|Eskom|Shell|Witbank|South Africa|Crude Oil Refineries|Crude Oil Refining|Electricity Crisis|Imported Refined Oil Products|Oil|Oil Crisis|Oil Refinery|Oil Refining Capacity|Oil-refining Capacity|Peak Oil Production Scenarios|Petroleum Products|Project Finance|Eastern Cape|Department Of Minerals And Energy|Connel Ngcukana|Dave Wright|Johann Van Rheede|Sasol|Tony Twine|Eastern Cape
© Reuse this As the global oil crisis deepens, countries across the world are scrambling to reassess their options. South Africa is no exception to this trend, and South Africans, who have felt the pinch of escalating petrol prices in recent months, are glancing towards government for viable solutions.

One issue that government needs to examine closely is the country’s oil-refining capacity, which has shrunk in the last two years, resulting in South Africa having to rely increasingly on imports to close the widening gap. However, there are projects under way, or in the pipeline, that could well change this reality.

Prior to 2006, the country was in an export mode, with more capacity than was required, says petroleum company Engen GM for corporate planning Dave Wright, who hastens to add that this situation has changed markedly in the last two years.

“The existing refineries and manufacturing facilities are not operating at anything like their nameplate capacity. As a consequence, their supply has dropped much more than people expected,” he says.

Cleaner Fuels Crimp Capacity

Wright says that when companies invested to comply with Cleaner Fuels 1 – the Department of Minerals and Energy’s (DME’s) legislation which came into effect on January 1, 2006, in terms of which oil companies may no longer add lead to petrol and sulphur levels in diesel should be reduced – all oil companies, except for Sasol, went for the lower-cost investment options, which saw capacity taken out in favour of quality. This was done as many did not expect that the growth in demand would spike as it has in the last two years.

Wright attributes the shortfall in refining capacity in South Africa to demand growth, and says that there is now an urgent need for clarity in what will be required for Cleaner Fuels 2 (the second round of the legislation). All oil companies with refineries expect to be required to make investments of R5-bil- lion to R8-billion with effectively no return to meet the possible requirements of Cleaner Fuels 2. This, he says, has led to a situation where companies are reluctant to make any refinery investments until there is clarity regarding what will happen under Cleaner Fuels 2.

Wright says that the strong growth in the country over a period and the electricity crisis, which has led to more diesel and paraffin being used by Eskom’s peak generation facilities, have driven this demand, with the facilities not running as peak-load facilities, but as consistent-demand facilities.

Whether a country has a shortfall in oil refining capacity should be viewed in light of the policy a government adopts, says the South African Petroleum Industry Associa- tion (Sapia) executive director, Connel Ngcukana.

What is the Refined-Oil Target?

“A government may decide that the country needs 50% of the products to be refined locally, or it may decide to have all products imported. “For an example, if government policy requires 70% of petroleum demand to be refined locally, a shortfall will only occur if this is not achieved,” he says.

Economist Tony Twine notes that, in South Africa, no genuine expansion has taken place at the four existing crude oil refineries since the late 1960s and early 1970s.

“An oil refinery is usually budgeted on a 20-year to 30-year basis, and the outlook for the industry in South Africa is bleak if peak oil production scenarios are to be believed,” he says.

PetroSA vice-president: new ventures midstream Jörn Falbe says that the demand for petroleum products is now outstripping the available capacity for the first time in 45 years, owing to new refining investment not keeping pace with the country’s economic growth.

“Traditionally, South Africa has relied, mainly, on international oil companies for its refined product requirements. With the fierce competition for project finance within these companies’ global organisations, new expansion investment in their South African refineries, due to the relatively small size and isolation of our market, has been limited.

“Further, the global trend is that independent oil companies are cutting back on their investment in downstream refining, and are sweating the existing assets. This is owing to, besides other reasons, environmental considerations, where further capacity requires major capital investment without economic returns, and the South African scenario is no exception,” he says.

Reliance on Imports

Ngcukana says that the country imports about two-billion litres of oil a year. He maintains that the country’s reliance on imports is set to remain in the near future, commenting that whether new refineries are built or not will be dictated by government policy that questions whether the country only wants local supply, or whether it wants to take advantage of refining in other countries, which he describes as “cost-effective” and large-scale”.

Twine concurs that South Africa will continue to rely on imported refined oil products in the future.

“Any alternative for liquid fuel supply will take about five years to develop on the production side and even longer if specialised distribution channels are required in parallel with existing ones. Alternative fuels do not solve the problem of lubricants, petrochemical feedstocks, solvents, bitumen, waxes and polymers that would arise if crude oil refining stands still, or goes backwards in South Africa, “ he says.

Wright says none of the expansions being talked about will kick in until 2015. Even if the projects, bar PetroSA’s Project Mthombo, at Coega, in the Eastern Cape, are successful, the country will still have a shortfall in capa-city, he notes, assuming relatively conservative growth rates going forward. However, he says, if Coega is successful, it will make a substantial difference to the country’s refining capacity.

Typically, Wright notes, the product availability in 2006 would have been in the region of 26-billion litres a year. Currently, he estimates that it is between 23-billion litres and 24-billion litres a year, with the demand having grown from 22-billion litres to 25-billion litres a year. Demand is, therefore, outstripping the county’s capability, and this has led to a reliance on imports.

Mthombo and Mafutha

Projects being undertaken to boost local refinery capacity include PetroSA’s Project Mthombo, and Sasol’s Mafutha project.

“There are plans to add refinery capacity, and, based on those plans, one can say that, by 2015, we will go back to a situation where there is enough local refined capacity. However, between now and 2015, any growth in demand in South Africa will have to be met by imports,” says Ngcukana.
Wright estimates that the new projects will add 24-billion litres to 25-billion litres, essentially doubling the current capacity, assuming that the Coega project is to produce 400 000 bbl/d.

The 400 000-bl/d Project Mthombo is expected to be fast-tracked, with construction starting in 2010, and completion scheduled for 2014.

The project, including logistic infrastructure at Coega, will cost $11-billion and, to date, R45-million has been spent. While there is no one on site at this stage, 8 000 direct and 39 000 indirect job opportunities will be created at the project’s peak.

The planned refinery’s design considerations allow for the processing of oil grades from several global regions and will enable South Africa to diversify its sources of supply.

Falbe notes that the location of Coega provides an alternative to the congested and vulnerable Durban supply chain, which accounts for 75% of South Africa’s crude imports. The refinery will maximise the use of heavy, sour acid crudes. The diesel-to-petrol ratio will be 70:30, and the facility will generate its own power, independent of Eskom. He says that the manufacturing licence application is a “work in progress” with the DME, and that a logistics master plan is under way in close cooperation with Transnet on ports and rail configurations.

Falbe says that challenges do exist, such as the pressure to have the plant on stream by 2014, the global competition for skills and resources, and selecting the best partners from a wide variety of choices.

Wright comments that the Coega initiative is a mechanism for government to manage its balance of payments.

“It is more about a payment issue than a security of supply issue, because if one imports crude oil, one is actually spending between $15/bl and $20/bl less than if one imports the product, and if one is importing large volumes, the numbers become large very quickly.

“If 400 000 bbl/d comes on stream in 2015, the country will then go from a shortage to a surplus, and someone will then export, assuming the refineries continue to be able to supply into the South African system. This will then suggest that they would have done what is requi-red to meet the Cleaner Fuels 2 specifications,” he says.

Chemicals and fuels producer Sasol has Project Mafutha on the cards, which will create a new town, similar to the creation of Sasolburg in the 1950s and Secunda in the 1980s. The proposed project will involve building a new coal-to-liquids (CTL) facility with a potential capa- city of about 80 000 bbl/d. Mafutha is the Zulu word for oil.

The project will also include other processing units, utilities and off-site facilities necessary to support the development.

Three potential sites with abundant coal reserves are being considered, namely the Free State, Limpopo and Mpumalanga pro-vinces. The project is set to come on stream between 2015 and 2017.

Sasol media manager Johann van Rheede says that the project is currently in its prefeasibility phase. He says that Sasol is working closely with the South African government to advance the construction of a CTL plant in a coal-rich inland region as another option in maintaining a measure of self-sufficiency in future energy supply.

Project Mafutha could add about half of the fuel volumes of the Secunda plant to the country’s supply, besides its meaningful broader socioeconomic benefits for the country.

Sasol is also increasing its synfuels (coal-to-liquids) production in South Africa by 20% over the next eight years. This, says Van Rheede, will add the equivalent of 30 000 b/d to production volumes. The expansion will be mainly fuelled by natural gas, with the added environmental benefit of this feedstock releasing fewer emissions for every ton, he notes.

He adds that the National Petroleum Refiners of South Africa, the only crude oil refinery in the inland region of South Africa, and in which Sasol has a 63,64% share, has hold- ing plans to raise crude oil throughput and improve product yields.

Van Rheede notes that, in the last few years, the liquid fuel industry in South Africa witnessed a substantial increase in domestic consumption of its products, tracking the country’s strong economic performance.

According to Sapia, petrol sales increased by 2,2% in the first six months of 2007 on the corresponding period in the previous year, while diesel sales grew by a healthy 11,1% on the same basis. However, notes Wright, recent demand figures show a significant slowdown in demand in the second quarter of 2008.

New Pipelines

South Africa is set to have two new pipelines in 2009 and 2010. Petroline is building one out of Maputo, which is set to be commissioned at the back end of 2009 and carry 3,5-billion litres a year into Witbank. Transnet is building a new multiproduct pipeline with a capacity of 8,8-billion litres, which will come on stream in the fourth quarter of 2010.

While there will not be a need for more pipelines, when those two are operational, Wright says that the problem remains what to do before they come on stream.

Twine maintains that there is a need to build more pipelines in the country, even if there are no additional refining expansions at the coast. Economic growth, he says, implies that there is refined product demand growth, some of which will take place in the industrial heartland around Gauteng, where the existing pipeline and rail networks are opera- ting at full capacity already. Whether refined product comes from coastal refineries or from overseas, it must be able to get to the interior, which implies a need for additional pipeline capacity.

Wright says that South Africa’s refineries are small compared with other refineries globally, with all local refineries below the global average of 200 000 bbl/d. Further, he adds, the general standard of local refineries is below world standards.

“South African refineries tend to be in the third and fourth quarter of operational efficiency and cost-effectiveness when compared with other refineries in, for example, Asia Pacific. There is, therefore, scope for improvement in local refinery operations,” he states.

Twine agrees that South Africa’s refining capacity is small in an industrialised world sense, but massive in terms of the Southern African region.

He says that the country’s refineries are individually very small, except for the joint venture between petroleum companies Shell SA Energy and BP Southern Africa, (Sapref) in Durban, which is twice the size of the other three refineries, but smaller than the one proposed for Coega, while the synfuel complex is of the same order of magnitude as Sapref.

He adds that the country does not mass-produce anything, including refined petroleum, and is effectively a batch producer.

Challenges Ahead

Keeping the inland regions of South Africa supplied with the volumes of fuel required from now until the new pipelines come on line, whether in 2009 or in the fourth quarter of 2010, is a major challenge, states Wright. He adds that there are short-term solutions being developed by the DME, together with Transnet and the oil industry, with more trucks being put on the road. However, he says that a better solution would be for Transnet to put more rail cars on the rails.

Ngcukana says that owing to the advanced age of South Africa’s refineries, which were built in the 1960s, the country faces the challenge of ensuring the standing refineries do not “break up”, and the cost of running them is not excessive. He notes that planned refineries that are expected to come on stream globally in the next two to three years have larger volumes and lower costs of operation, resulting in better efficiency.

However, Wright disagrees with this sentiment. He says that all the refineries in South Africa have had additions and modifications such that most of the original 1960s equipment has been replaced. So, the ‘age issue’ is, in his view, a misnomer and not an issue at all.

Another challenge, he notes, is that the global economic downturn could lead to a decrease in demand. If linked with plans to commission new refining capacity, this could also, he says, lead to a lot of spare refining capacity, which will place pressure on the refinery margins and, in turn, place pressure on anyone planning to invest in a new refinery.

Challenges that Twine highlights include the aged installed capital stock, and consequent difficulties in both expanding it and modernising it, competition from alternative liquid fuel sources, such as synfuel and bio- mass conversion, and the threats to the entire synfuel and crude refining operation from resistance to further global warming and pollution threats.

Wright says that the local refining industry has to overcome the additional challenge of the uncertainty surrounding biofuels and bioethanol, with a strategy currently being accepted, but uncertainty and lack of clarity remaining around the implementation. He says that if there is an 8% mix of ethanol and petrol, there could be significant capital requirements from a refinery perspective, depending on what specifications are acceptable.

“The potential effectiveness of biofuels depends on what petrol specification the National Association of Automobile Manufacturers decides to accept. If we follow the model in some areas of the US, where ethanol is added to ready-made petrol, then one gets an increase in the volumes of petrol, and that would then reduce imports and that might be a way to go.”

Edited by: Martin Zhuwakinyu
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