Potential for new refinery

SA needs to choose carefully between a new refinery and increasing storage capacity, but has already indicated its preference for the former.

Upgrading existing refineries will come at a cost of at least R40bn as they ramp up to the new global clean fuels standards by 2017.

But it still has to find storage space as demand grows and imports rise.

The major energy companies which own most of SA's fuel say there is no need to build new refining capacity as it is cheaper to import finished products. They say a refinery doesn't change a country's energy supply equation for the better because it must still import crude.

Government's reply is that building new refining capacity and additional storage will strengthen security of supply and shield it from disruptions it has no control over.

"In the short term we need to attract investment in product storage and this is already happening, given the applications that the National Energy Regulator SA (Nersa) has received for storage," says Victor Sibiya, the energy department's deputy director-general for petroleum control.

Since the fuel shortages of December 2005, Nersa has issued about 80 licences for the construction of storage tanks. The Moerane commission of inquiry into the crisis found that lack of storage and refining capacity were the main causes of the shortages, which came as SA migrated to cleaner fuels.

Oil companies are waiting to hear how they will recoup costs from government before upgrading their refineries for cleaner fuels.

The R40bn refinery upgrade will not add any new capacity, so there is still a need to find more fuel. Is it better to build more refining capacity or more storage tanks?

"Those countries that have refineries have a false sense of security about energy supply," says a Johannesburg-based international oil company executive who asked not to be named as his company is in a closed period before its results presentation next week. "Today it is actually cheaper to import finished fuel products than to build a refinery."

The executive argues that SA needs more fuel storage infrastructure.

SA has never had more than 15 days' worth of fuel in its storage tanks. The international standard for reserves is 90 days. For the major oil companies, which are responsible for more than 90% of the liquid fuels market, it is uneconomic to store that much fuel. "You produce [only] what you need to sell," says the executive.

To bring SA up to the 90-day international strategic storage level, it would have to retain about 5,9bnl in reserve but still need to produce the 24bnl of fuel that SA consumes annually.

SA has never had a fuel supply shortage and has used up the strategic stocks kept in disused underground coal mines by the National Party government to counter international sanctions against it. The only major economy that has had to resort to strategic stockpiles was the US, when it released 11mbbl in 2005 after Hurricane Katrina shut down 95% of its oil production.

SA's Central Energy Fund (CEF) says it has 10,3mbbl of crude oil in storage as a strategic stockpile, equivalent to 20 days' supply. The fair value of the stock, stored at Saldanha, was R9,7bn in the year ended March 2012, says the CEF in its annual report. The CEF is owned by government and holds the crude stock for strategic reasons.

The energy department is reviewing the strategic stocks requirement and has said it wants to bring it closer to the international standard. It is developing policy on stocks of finished productsheld by oil companies to cater for catastrophes and emergencies. That would bump up reserves from the prescribed 14 days' worth.

What is not yet clear, however, is who will pay for the additional storage infrastructure, and for the stock that companies will be required to put away. Taking the CEF's stock as an example, it can be inferred that the companies must invest at least a combined R45bn in oil to get to the 90 days' level. In addition, they would have to build storage tanks to accommodate that.

To bring into context the investment that would be required to build storage facilities, Shell SA is spending about R190m to build a 40Ml storage facility in Alberton, it said in its licence application to Nersa in 2011. That more than doubles the company's storage facility to 70Ml in Africa's biggest fuel storage depot.

To build a 10Ml storage facility costs about R50m, says Russel Glass, business adviser and head of BPSA's strategy & regulatory affairs unit. To meet the 90-day requirement, the industry would have to build storage for about 25% of current annual consumption, or 6bnl. That would require 600 storage tanks of 10Ml capacity each, at a cost of R30bn.

"To just hold a week's stock would cost about R7,5bn," says Glass. "It would just sit there and wait for emergencies. Who is going to pay for it?" The companies hold about 1bn l of fuel among them now.

Can government afford this? Or would it have to sacrifice some other pressing energy investments like a refinery or power station in order to build storage capacity in anticipation of an unknown and remote possibility of a fuel emergency? "Investments in other forms of energy do not happen to the exclusion of investments in other forms of energy," says Sibiya.

There is also the possibility that the costs will be transferred to the taxpayer by way of higher fuel prices.

Sibiya is vague, saying government believes there are "sufficient incentives in the fuel pricing system for investment in refining and storage capacity".

Government must balance the need for either a refinery or new storage tanks with demand. "There's a possibility you can create excess refining capacity if you build a new one, which may damage the refining industry and lead to the closure of some in the long run," says Glass.

Whatever route government pursues, it has serious implications for the industry and taxpayers.

Says the industry executive : "It's not refineries that make for wealthy countries. It's really what you do with the resources you have."