The South African Petroleum Industry Association (Sapia) reports that South Africa might face becoming a permanent importer of fuel, should local refineries be unable to start operating at nameplate capacity.

In implementing the changes needed to produce 100% unleaded petrol and reduced sulphur petrol and diesel, about 500 ppm, all crude oil refineries in South Africa took the minimum capital route, reports Engen GM for corporate planning Dave Wright, on behalf of Sapia. In doing so, the refineries kept the amount of hardware that was added to their existing setup.

The main reason for the minimal capital spend approach was largely that the final specifications for the Cleaner Fuels Phase 1 took a substantial amount of time to finalise, and in order to meet the January 1, 2006 deadline, the refiners made decisions which they would be able to rework, should there have been changes to the details of the specifications, states Wright. The new specifications were only promulgated in June 2006, six months after the industry had started providing fuel to these specifications.

“The octane grade splits and other important specification assumptions for petrol were only finalised in March 2005, which was too late for the refiners to be able to design, build and start up the correct hardware to deliver new octane grades.”

Wright states that, as a result, all crude refineries in South Africa do not have the intrinsic capability of producing the correct volumes of petrol without importing a high octane blend stock, and exporting a low octane petrol blend stock.

“It is for this reason that all the crude refineries are unable to run at their nameplate capacity, at present. This is a temporary situation and all refiners will be looking to use the investment needed for Cleaner Fuels Phase 2 to restore the operation of their refineries back to current nameplate capacity.” Wright adds that there will be sufficient time to do so before the next Cleaner Fuels Phase is implimented, since government has accepted that implementation of the new specifications will only be feasible five years after they have been finalised.

Wright says that, although South Africa is already a net importer of product, this situation could change if local refineries are able to start operating at full capacity. The possibility of the local refineries meeting South Africa’s future demand, Wright says, will depend on the relation- ship of supply to demand in the product-demand growth rate. “If one assumes high product-demand growth rates like 3% a year for petrol, and 6% a year for diesel, then South Africa moves into a permanent import mode within the next two years.

He adds, however, that if the product-demand growth rates are 1,5% a year for petrol, and 3,5% a year for diesel, then it will take between five and six years for the permanent import mode to set in. “At present, the product-demand growth rates are towards the higher level; however, it is hard to see these levels being maintained for a period of more than two years.”

The lower production rate is not the only challenge faced by the oil refinery industry, states Wright. The shortage of skilled manpower at all levels in the international refining industry is making its impact felt in South Africa as well. “Besides the shortage of trained and experienced engineers, there is a chronic shortage of operations and maintenance staff, in other words, those people who are responsible for the day-to-day operations at the facilities.”

Wright states that the ability to retain experienced operations and maintenance staff has been difficult. “The problem in replacing these staff [members] is that the most effective method of training them, after providing them with some basic fundamental training, is on-the-job training. The challenge with this approach is that it takes a between five and six years for operations personnel to be fully competent.” He adds that, in many cases, these personnel [members] tend to leave the company before the training period is over.

Though there are very few organisations in South Africa that are able to provide the type of training required, Wright says government has highlighted the shortage of competent and qualified people, particularly in the hands-on journeyman category. “This has highlighted the ageing profile and the reducing numbers of people who have completed full apprenticeships and are properly experienced.”

Wright says that at graduate level, most oil companies have their own bursary schemes that are fully subscribed, in addition to which, the companies are regular visitors to tertiary education campuses in South Africa, in a bid to explain the opportunities that exist in all divisions of their companies, including the refineries.

Another challenge for the refining industry is capacity. The option of when and where to build on or add to South Africa’s current capacity, particularly at a time when there is excess refining capacity being built and streamed internationally within the next two to four years, is always a challenge, states Wright.

“The additional refining capacity is likely to cause international refining margins to drop significantly from the current levels, and this will make new capacity investment in South Africa impossible to justify, simply on an economic return basis.”

The implications and challenges of the Cleaner Fuels Phase 2 is the set of specifications that fuel will need to be produced to meet, and the cost of the equipment that will need to be installed to achieve these specifications, states Wright. “Although the specifications still need to be agreed upon by government, the oil industry and other involved parties, the focus will be on reducing sulphur in both petrol and diesel to a level lower than 100 ppm.Initial indications are that the cost of producing product with this level of sulphur will be between R3-billion and R5-billion per refinery.”

Wright adds that the price difference between the current grades of petrol and diesel, and the new grades of petrol and diesel, will not be sufficient to generate an adequate return on this investment.

The incorporation of biofuels into the industry in a manner that does not negatively affect value for the refiners, but still allows for a viable biofuels industry, is also proving challenging, states Wright.

He says that based on the challenges, the future of the refining industry in South Africa is bound to be an interesting one, and he adds that there will be no shortage of work or opportunity in this sector.

The decision by Finance Minister Trevor Manuel, to relinquish windfall taxes on the synfuels sector, is very welcome, states Wright, and goes towards a stated intention by government of creating an environment in the liquid fuels industry that encourages investment. “This is particularly important in an environment where the oil industry’s profitability is being squeezed on a number of other fronts. In what is clearly understood to be a capital-intensive industry, the growing demand that drives reinvestment will continue to offer investment opportunities for many shareholder groupings.”

Wright adds, however, that the current regu- latory environment is not as well coordinated across the various authorities who impact upon the liquid fuels industry, which leads to duplication, contradiction, and omission in several areas. A well-coordinated approach by government will also facilitate reinvestment into the industry, he concludes.