Local refineries still in need of capital investment to meet clean fuels requirements

SAPIA head of strategy Kevin Baart

SAPIA head of strategy Kevin Baart

8th July 2024

By: Schalk Burger

Creamer Media Senior Deputy Editor


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Industry organisation the South African Petroleum Industry Association (Sapia) has reiterated the need for capital investment in local refineries to ensure they can meet the second clean fuels programme in 2027.

During a July 8 media roundtable hosted by Sapia, head of strategy Kevin Baart noted that the required capital investment could not be funded with the current price structure, which was why some refinery owners had chosen to shut down or pause operations.

During the event, which provided an overview of South Africa's fuels industry over the past 20 years, Baart pointed out that there had been an average improvement of 1% to 2% a year in the efficiency of petrol vehicle engines, leading to the reduction in demand for petrol despite an increase in the number of internal combustion engine (ICE) cars in the country.

He noted that there was some concern that the closure and mothballing of local refineries would affect security of supply, but assured attendees at the event that “these risks have consistently been well managed by the fuels industry over the past 18 years".

"The free on board prices will not be affected by the shutdown or pausing of operations. The basic fuel price is determined mainly by the dollar price (90%), with the balance arising from coastal storage and wharfage costs, among others," he added.

Meanwhile, the introduction of mandatory Clean Fuels 2 specifications – 10 ppm sulphur content for diesel and petrol fuels – from July 2027 would be positive for fuel consumption and tailpipe emissions, he said, explaining that the continuous introduction of new technologies that reduced fuel consumption and related emissions, should ensure that.

Additionally, with cleaner fuels, Euro 6 and 7 tailpipe emissions controls technologies could also be introduced, which would reduce emissions as new vehicles progressively replaced older ones over time, said Baart.

"This also means that the declining trend in petrol consumption seen over the past 18 years will continue. Diesel demand is primarily related to GDP growth, and we expect to see diesel demand grow into the future, albeit not as aggressively as in the past."

Liquid fuels would remain a significant part of the transport energy mix into the foreseeable future, he emphasised.

"Of the 500 000 vehicles sold each year, 99% are ICE vehicles. We will not see significant changes in terms of this until government incentives are in place to move to new-energy, hybrid and electric vehicles," he highlighted.

Economics play a large role, particularly when it comes to the price of electric and other new-energy vehicles. Consumer acceptance is also necessary.

"We [also] call for refiners to be given the same incentives afforded to other energy industry companies that are part of the transition, such as accelerated depreciation, a reduced corporate tax rate, as appropriate, and value-added tax and customs relief.

"This will promote refining in South Africa as the country transitions into the new energy space. This will also provide employment and spinoff industrial benefits," added Baart.

Sapia has further called for a review of the Customs and Excise Act in terms of jet aviation kerosene, stating that it was outdated in terms of market conditions.

Jet fuel does not attract customs duties or levies but does attract value-added tax. The South African Revenue Service has implemented strict rules for jet fuel, including customs and excise rules, as well as requiring special warehouses, and that the fuel is not transported to other facilities, among others.

"The changing refining environment meant that the industry has had to go to extraordinary lengths to keep OR Tambo International Airport supplied to prevent stockouts in the region," he noted.

Sapia also called for illuminating paraffin to be taxed at the same rate as diesel to remove the economic incentive to adulterate diesel with illuminating paraffin.

"The adulteration of diesel is a major problem, especially as demand has increased. Taxing illuminating paraffin at the same rate as diesel will remove the incentives for blending it into diesel.

"Illuminating paraffin is generally used by indigent people, and taxes on paraffin can be refunded via social grants systems to them," he proposed.

Diesel that has been adulterated with Illuminating paraffin can damage engines, but the fact remains that the lack of tax on illuminating paraffin means that there is roughly a R3/ℓ or more incentive for the illegal adulteration of the fuel.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online




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