STATE oil company PetroSA seems to be ignoring expert opinion and the government’s own National Planning Commission with its recent plea to the government to prioritise the building of an R82-billion oil refinery at Coega in theEastern Cape.
‘You can always buy petrol and diesel much cheaper on the open market than you can produce from refined oil’
CEO Nosizwe Nokwe-Macamo told the Nelson Mandela Bay Business Chamber there would be a “fuel crisis” similar to Eskom 2008 if Project Mthombo was not implemented as a matter of urgency.
Government, which has committed itself to the project in principle, has consistently said it is waiting for PetroSA to put together a business case and feasibility study first, get it approved by its board and then present it to cabinet.
Two years ago PetroSA said it had done this. It even claimed on its website that building of the “world-class” refinery had begun. Operations vice president Michael Nene told a conference inDubaiit would be up and running by 2015.
Clearly that was nonsense. It indicates muddled thinking around the project and inspires little confidence in the state-run oil company’s ability to manage it, say those in the industry.
When contacted last week the head of corporate affairs Kaizer Nyatsumba confirmed that PetroSA and its Chinese partner, the state-owned oil company Sinopec, still had to put together a business case, which would then have to be submitted to the board for approval before going to the cabinet.
He refused a request for an interview with the CEO, saying she had nothing to add to what she’d already said on the matter. This was unfortunate because she might have explained how she could demand instant implementation of a project for which there was as yet no business case.
Until recently PetroSA said the new refinery would have a capacity of 400000 barrels a day from day one, which those in the industry dismiss as madness. Existing refineries produce most ofSouth Africa’s needs, leaving a shortfall of 120000 barrels a day. This meant PetroSA would have to export almost 300000 barrels a day into a surplus market, which made no economic sense at all.
The National Planning Commission pointed out last year thatSouth Africawould have to export the surplus product at a loss, which would be covered by local consumers through the basic fuel price. This, it said, would be “unfair, politically risky and economically reckless”.
PetroSA revised the proposed output of the new refinery downwards to 360000 barrels a day, which still made no sense. At a recent presentation to parliament, a figure of 200000 barrels a day was mentioned.
At this level the question becomes less about marketing the surplus than about from where and at what price it will source the crude oil for the new refinery.
“That is the elephant in the room that PetroSA is not addressing, and in fact that the entire government is not addressing,” said Jeremy Wakeford, energy consultant and chairman of Peak Oil Association SA.
In its 2010 world energy outlook the International Energy Agency confirmed that oil production reached a peak in 2006 and would begin to decline by 4% per annum. As supplies dwindle the price rockets, which explains why we’re paying $110-115 (R946-R989) a barrel today.
“The critical issue in the oil game is what’s happening with crude oil supplies and prices”, says Wakeford.
This will not only make it exorbitant for PetroSA to keep the new refinery supplied with crude, it will also affect the level of demand for the refined product.
“I think the price of fuel is going to increase to such an extent over the next decade that demand for liquid fuel is not going to increase in this country. In fact it is still below what it was in 2007.”
The National Planning Commission said last year that “the least risky, most cost effective option seems to be continued importing of our refined product needs”, a view widely supported.
“We can import refined fuels to make up the balance,” says Wakeford. “And the margin on importing refined fuel is not going to be enough to justify the massive capital expenditure of a new refinery. They’re talking R82bn but the costs are likely to escalate. They always do.”
Says petrochemical consultant Dr Philip Lloyd: “You can always buy petrol and diesel much cheaper on the open market than you can produce it from refined oil. The only thing that keeps our refineries afloat is that we have an administered price.”
PetroSA says the new refinery is necessary so thatSouth Africacan meet new international clean fuel standards. It points out that existing refineries do not meet the necessary specifications.
The oil companies say meeting these higher specifications will be no problem but their capital investment will be commensurate to demand.
PetroSA says the new refinery will create thousands of jobs, but this too has been disputed.
“There are not that many jobs in refining,” says Lloyd. “The jobs come downstream when you’ve got fuel to distribute, and that’s not going to change very much.”
The most fundamental objection to the proposed new refinery is its geographic location, far from where demand for refined fuel is situated, principally inGauteng.
Existing refineries inDurbanandCape Townare supported by a vast distribution infrastructure, which is entirely absent at Coega.
There would be two choices. Ship the refined product toDurban, which would be very costly and practically challenging given the gale-force winds which lash the coast off Coega, whence it could be transported inland via the new multi-product Durban-Jo’burg pipeline.
Or build a pipeline from Coega to the hinterland, which would cost R30-billion and destroy Transnet’s R23bn investment in the recently completed Durban-Jo’burg multi-product pipeline.
The reason for siting a new refinery in Coega has everything to do with politics and very little to do with economics, say the critics.
All of which has left many people wondering why PetroSA is so desperate to impose Project Mthombi on taxpayers.
Its track record and the absence of a single economically compelling argument invites one to speculate on the vast opportunities for corruption that expenditure on an R82-billion project of this nature creates.
This, after all, is a company with a history of corruption and almost criminal levels of financial mismanagement. There was the 2003 Oilgate scandal which saw PetroSA in effect funding the ANC’s 2004 election campaign and the 2010 corruption and mismanagement case of R800mn.