April 2017

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Refining: Uncertainty grips South Africa’s Clean Fuels Program

The planned upgrading of oil refineries in South Africa to produce Euro 5-specified fuels will likely take longer than initially anticipated.

Oirere, S., Contributing Editor

The planned upgrading of oil refineries in South Africa to produce Euro 5-specified fuels will likely take longer than initially anticipated. This delay has raised concerns about possible increases in petroleum product imports and the potential shutdown of the nation’s existing refineries.

South Africa’s Department of Energy (DOE) initially set the deadline for the introduction of the Clean Fuels 2 (CF2) program in July 2017. However, this deadline has been delayed indefinitely, as the government and petroleum industry negotiate how refiners would recoup the estimated upgrade cost of $3 B–$4.6 B.

CF2 regulations stipulate that sulfur levels in petrol and diesel must remain below 10 parts per million (ppm). According to the South Africa Petroleum Industry Association (Sapia), a trade organization representing petroleum and LPG companies in South Africa, the new national standard is supposed to take effect July 1, 2017.

The country has six main crude oil processing plants with a total refining capacity of 704 Mbpd. The 180-Mbpd Sapref refinery, a JV between Shell SA Refining and BP Southern Africa, has the largest processing capacity. Other refineries in South Africa include the 150-Mbpd Sasol refinery (FIG. 1); the 120-Mbpd Engen refinery; the 108-Mbpd Natref refinery; the 100-Mbpd Cape Town refinery; and the 46-Mbpd PetroSA refinery.

FIG. 1. View of Sasol’s refinery in South Africa.
FIG. 1. View of Sasol’s refinery in South Africa.

Refinery upgrades needed for clean fuels movement

South Africa’s clean fuels initiative commenced in 2006. In that year, new fuel specifications—known as Clean Fuels 1 (CF1)—were issued under the country’s Petroleum Products Act, which revised South Africa National Standards (SANS) specifications for petrol and diesel.

Sapia announced that CF1 regulations prohibited the addition of lead in unleaded petrol. However, it allowed the use of other metals, such as manganese and phosphorus, in metal-containing unleaded petrol (lead-replacement petrol) to cater to older vehicles that might suffer from valve seat recession with the removal of lead from petrol.

CF1 specifications required the sulfur limit in diesel to be reduced from a maximum of 3,000 ppm to 500 ppm, with a niche grade of 50 ppm to be introduced. This regulation resulted in a decrease of diesel exhaust emissions.

In 2015, a joint task team was assembled by South Africa’s DOE and Sapia to formulate the best solution for refiners to recoup their upgrading costs. This decision was scheduled to be finalized before the CF2 program went into effect. However, at the time of this publication, no progress has been reported on a cost recovery solution for South Africa’s refiners. In fact, some of the refiners believe it could be more expensive to upgrade their existing processing plants, compared to shutting them down.

At a media interview in September 2016, Adrian Velaers, Senior Technical Advisor for Sasol, said, “In some cases, it could well be more cost-effective to shut the refinery down than to upgrade it. There is a consensus on the sulfur (content) that it will be 10 ppm across the board for diesel and petrol.”

Sapia earlier proposed the introduction of a $0.01 fuel levy, for every liter of petrol and diesel produced over a period of 10 yr, to help South Africa’s refineries recoup the cost of upgrading their oil processing plants. The association based its fuel levy on the estimated $3-B cost to refiners to upgrade their refineries. Sapia’s proposal mirrored an earlier proposal from the South African National Energy Association (SANEA). SANEA’s proposal included a tax of $0.01/l for the estimated 25 B l of diesel or petrol likely to be sold over a 10-yr period.

In September, former Sapia chairman Maurice Radebe said that the persisting delay in resolving the issue of cost recovery in the upgrading of the country’s oil processing plants could see South Africa’s refining industry “…wiped out in 5 yr, 10 yr, at most.” He said South Africa’s oil refining industry is in a “state of complete uncertainty.”

Burgeoning demand for cleaner fuels, new automobiles

At present, South Africa relies on imports to meet its clean fuel requirements. In a November 2016 report on South Africa’s petroleum industry, consultancy firm KPMG said that the country’s refineries are reluctant to invest in expansion due to the high cost involved and the surplus of liquid petroleum products available in the international market.

In the medium term, the ongoing uncertainty of CF2 is posing several challenges for South Africa’s automotive industry and the general performance of the country’s petroleum industry. With South Africa’s trading partners having already adopted Euro 5-standards, fears exist that the delay in upgrading the nation’s six refineries could encourage the dumping of inferior fuels and outdated vehicle technology into the South African market.

The delay is also likely to hamper the introduction of new vehicle technology. Members of the National Association of Automobile Manufacturers of South Africa (Naamsa), especially those that own production plants in Europe and North America, are unable to import vehicles with new technology because the needed CF2 fuels are not readily available.

Although Sapia member companies have invested $1.4 B in infrastructure development in the petroleum industry and an additional $127 MM in refinery maintenance between 2010 and 2014, the organization says there is reluctance to expand the existing capacity because of the high cost involved and the surplus of liquid fuels on the international market. Former Sapia chairman Dr. Johan Van Zyl previously said, “The availability of clean fuels is essential to enable the industry to offer high-technology, highly fuel-efficient and new, low-emissions motor vehicles in South Africa.”

In October 2016, the South African DOE released the country’s Integrated Energy Plan, which provides guidance on future energy infrastructure investments, and identifies and recommends policy developments to shape the future energy landscape of South Africa. In the plan’s preamble, Energy Minister Tina Joemat-Pettersson wrote, “Compliance to the CF2 standards require an effective compensation mechanism to existing refineries, as significant upgrades would need to be done on existing facilities.”

Fuel imports to the rescue?

Clean fuels imports could be the immediate option for meeting increasing regulatory demand for the use of low-carbon-emitting fuels in South Africa. Last year, the National Treasury announced an increase on carbon dioxide (CO2) emission taxes on new vehicles from $6.74 to $7.49 for every g/km of CO2 over 120 g/km. Finance Minister Pravin Gordhan said the increase is meant to “encourage consumers to use more fuel-efficient, low-carbon-emitting vehicles and for vehicle manufacturers to improve fuel efficiency.” Vehicle manufacturers in South Africa say there is no reason to introduce the tax, since the fuel that should enable vehicle owners to achieve the required low emissions levels is not available.

During a media interview in September 2016, Nico Vermeulen, the Director of Naamsa, said, “The industry, for some years now, has been taxed, but the fuel that would enable the industry to rise to the challenge of environmentally friendly, lower-emissions vehicles is not available. That appears to be unfair.”

At present, with the issue of cost recovery in the upgrading of South Africa’s refineries still unresolved, and the demand for clean fuels increasing due to a surge in demand for modern vehicles, the country may have to build additional storage capacity to satisfy increasing fuel imports. HP

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