Sep 07, 2012
Local refineries face many challengesBack
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Trade sanctions against Iran and stricter clean fuels legislation are further challenges facing the local industry, the firm adds.
KPMG management consulting director Christo Roux says Asia-based refineries enjoy several advantages, such as new equipment, cheap labour, large capital reserves and rapidly growing local petrochemicals demand.
In comparison, refineries in South Africa, as well as some older ones in Europe and Australia, cost more to maintain and operate and could possibly become unsustain- able in future.
Roux adds that a further blow to the majority of local refiners is the recent European Union- (EU-) and US-led trade sanctions against Iran on the export of its crude oil. The sanctions are aimed at getting Iran to stop its suspected nuclear weapons development programme.
The sanctions have resulted in protec- tion and indemnity insurance no longer being available for ships carrying oil from Iran, making shipowners reluctant to send vessels to Iran.
Further, the US requested that South Africa, which previously imported about one-quarter of its crude oil from Iran, cut its crude oil imports from the Middle Eastern country significantly or face US sanctions.
Newswire Reuters reports that South Africa, in avoiding the sanctions, did not import any oil from Iran in June, compared with the 285 524 t of oil it had imported from the same country in May.
South Africa imported about 249 115 t/m of crude oil from Iran between January and June, compared with the 403 171 t/m imported in the preceding six months, Reuters states.
The country has increased its crude oil imports from Saudi Arabia, Angola and Nigeria instead.
However, most of the country’s refineries are configured to refine light crude – mainly sourced from Iran.
Further, finding alternative crude supplies with similar densities and sulphur content to that of Iranian crude, or changing refinery configurations to enable the refining of different kinds of crude feed- stock, will also come at a financial cost to the local economy, notes Roux.
Meanwhile, two voluntary moves taken by some companies in South Africa in the area of lowering carbon emissions involve the decision to adhere to the Carbon Disclosure Project (CDP) and the Clean Development Mechanism (CDM) frameworks.
The CDP is a global initiative that encourages large businesses to disclose their carbon emissions and report their energy consumption and the initiatives they have implemented in reducing energy consumption. This is done to provide a transformative global system to measure, disclose, manage and share environmental information.
Further, the CDM framework, which has already been adopted by companies in South Africa, encourages developing countries to implement emission reduction projects to earn certified emission reduction (CER) credits.
CER credits can then be traded and used by industrialised countries to meet part of their emission reduction targets under the Kyoto Protocol.
The Clean Fuels 2 specifications outline the South African government’s direction in further improving the quality of transportation fuels.
The Clean Fuels 2 specifications aim to reduce the aromatic and benzene content of petrol to be in line with Euro 4 emission standards by 2017 and include the reduction of sulphur from 500 parts per million (ppm) to 10 ppm, the lowering of benzene from 5% to 1% of volume, the reduction of aromatics from 50% to 35% of volume and the specification of olefins at 18% of volume.
Roux says the South African Petroleum Industry Association has estimated that the conversion of local refineries to meet the Clean Fuels 2 specifications will cost R25-billion, while other sources estimate the cost to be about R40-billion.
Further, he adds that South African refinery owners have indicated that local refineries would not be sustainable after 2017 at the current levels of production of about 515 000 bbl/d if a cost-recovery mechanism, which will enable the refineries to convert, is not put in place.
“To date, however, the South African government has not indicated the type of cost-recovery mechanism, if any, it would use in assisting the industry to recover the initial capital outlay needed to convert the refineries,” says Roux.
Meanwhile, government’s current strategy is to reduce South Africa’s reliance on imported refined products, he says.
“This requires government to work with industry in finding a solution to increase refinery margins by decreasing the cost of compliance. Refineries will also have to increase their capacity in meeting the demand or, alternatively, a new refinery will have to be commissioned,” adds Roux.
In contrast, KPMG Southern Africa oil and gas director Alwyn van der Lith says that, should refinery owners decide to close the ageing refineries instead of upgrading them according to the Clean Fuels 2 specifications, national oil company PetroSA’s proposed $10-billion 360 000 bl/d Mthombo refinery project, in the Coega industrial delevopment zone, in the Eastern Cape, will gain support.
However, two out of the four South African crude oil refineries, Durban-based Sapref and Sasolburg-based Natref, have indicated that they have started their planning for compliance with the Clean Fuels 2 speci- fications, with their conversion projects expected to start in 2014 and run until 2017, says Roux.
In the KPMG Global Energy Institute’s ‘The Future of the European Refining Industry’ report, released in August, KPMG highlights that refinery owners should change the way they operate if they want their operations to remain profitable.
The report suggests that refinery owners invest in their refineries to increase production, improve yields and reduce costs; improve operations, procedures and management; divest of unprofitable assets to increase the return on investments; and close unprofit- able assets and possibly convert some, if not all, of those sites into facilities for other operations, such as storage.
KPMG notes that refinery owners generally choose to upgrade their refineries.
Investments have been made in plant upgrades, increased plant refining capabilities to process lower-grade crude oils, desulphurisation capacity to comply with the ever- increasing environmental legislation regarding clean fuels, as well as the reconfiguration of the refining process in reducing carbon emissions and increasing energy efficiency.
In terms of the value and market outlook for local refineries, Van der Lith says that by replacing local refining capacity with imported product, the refined-petroleum sector and the related downstream sectors will be significantly affected.
Further, he says short-term petroleum industry growth will be limited, as refiners firstly need to ensure compliance with the proposed legislation before additional refining capacity can be developed.
South Africa is serviced by four crude oil refineries – the 180 000 bl/d Sapref refinery, which is a joint venture between petroleum firms Shell and BP; the 125 000 bl/d Engen-owned Enref refinery, in Durban; the 108 000 bl/d Natref refinery, which is jointly owned by petrochemicals firms Sasol Oil, which holds a 63.64% stake, and Total South Africa, which owns the remaining 36.36% stake; and the 100 000 bl/d multinational energy corporation Chevron-owned Chevref refinery in Cape Town.
The refineries produce liquefied petroleum gas, petrol, jet fuel, diesel, lubricants and bitumen.
Edited by: Chanel de Bruyn
Creamer Media Senior Deputy Editor Online
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