Slippery battle lines emerge

After years of secrecy, overriding political and security considerations and protected monopolist practices, the fuel industry in South Africa is heading for a new showdown as competing players variously promote and resist new options in a changed global and local environment. While state-owned fuel company PetroSA wants government to invest billions of taxpayers’ rands in a new 400 000 barrels-per-day refinery at Coega, known as the Project Mthombo, one of the largest petroleum groups in South Africa, BP Africa is cautioning the government against approving the greenfields refinery project of more than R77bn.

BP says there are other cheaper and more cost-effective options, that the costs are likely to be much more than envisaged, and that there is a surplus refinery capacity worldwide at present, which is likely to be the case beyond 2020.

It claims a new refinery now would be an unfair burden for taxpayers and called for a comprehensive review of all supply-side options that could have far-reaching implications for the industry.

BP maintains there is no fuel security threat to South Africa and that high-quality clean fuels are readily available on world markets. Pressures were experienced rather in storage and pipeline facilities, and  immediate investments should be focused on in those areas. Existing refinery capacity as those owned by BP and the other major fuel companies in South Africa should also rather be expanded.

PetroSA, on the other hand, maintains that building the Coega refinery is the most sustainable solution for meeting the country's need for supply-side security and to improved fuel quality. It says the country must make an immediate strategic decision regarding its fuel supply.

Of course, PetroSA is also concerned about the fact that it has already spent more than R250-million on the project. Its board met recently to consider a further proposed investment of R2.4-billion to complete the front-end engineering design of the project.

PetroSA, however, cannot finance the full project, passing the decision on to its shareholder, the Central Energy Fund (CEF) and ultimately to the Department of Energy. This could mean that taxpayers and private partners may have to cough up the necessary funds.

PetroSA acknowledges the problem of global refinery surplus capacity, but counters the argument by saying South Africa’s relatively remote location means over-reliance on imported fuel products are a high-risk option that could be addressed by Project Mthombo at Coega. BP again counters by saying alternative options that transcend “individual company and political interests” should be considered. BP says hasty decisions could be costly over the long-term for taxpayers.

For many, the spectre of Eskom’s financing attempts will jump to mind.

Many feel the issue should be debated widely and in the public domain before a decision is taken, but information and facts about the industry that could inform such a debate are scant. Without that, any decision to fund a state-owned refinery through tax money will be met with suspicion and resistance, with the image of state enterprises already in tatters at the moment.

PetroSA is also not advertising the fact that much of its anxiety to forge ahead with the Coega refinery is motivated by the carrot of a lucrative Venezuelan oil deal hinged on a South African refining component. The deal was negotiated in some detail at the time of President Hugo Chavez’s visit to South Africa in 2008. However, his political future is by no means secure, and any future change of government could see oil-related and other concessions being reversed.

There are also questions whether the cost of the new refinery, which BP claims could be up to 50% more than what is projected, fully took into account the impact of climate change imperatives and the anticipated peaking of world oil production.

At the time of the talk of a Venezuelan deal, industry experts said local oil refineries are designed to process light crude oil and the investment required to bring such a deal to fruition might cost more than what it would be worth. Responding at the time, PetroSA’s vice-president for of new ventures Everton September said that PetroSA was well aware of the fact that Venezuela’s oil was heavy crude and that PetroSA was designing the Coega refinery to handle such heavy crude, stressing that South Africa’s fuel security was the driving motive.

Some suspect that BP and other big oil companies operating in South Africa have every reason to promote postponement of a decision to delay competition from a new player that could cut heavily into their profits, especially as their conventional refineries are ageing and uncompetitive. Mthombo, some say, could threaten the very existence of the oil multinationals in South Africa.

Then there are the questions of environmental impact studies. While Coega is supposedly offering a green alternative, there are those who say impact studies have not sufficiently considered climate change, the fragile biodiversity around the Coega and Port Elizabeth coastal area, and the effect on water supply.

Rapid urban development, and industrial and ports congestion around the Durban and Cape Town refineries, for example, also makes expansion of existing facilities, as proposed by BP, very problematic.

Then there are those who say the ANC government should end the protection of the multinationals as it does not have to repay the debt owed to them by the apartheid government.

The government, it seems, would agree. Already, the Department of Energy has responded through spokesman Bheki Khumalo who reportedly said the planned Coega refinery was part of the government’s long-term energy security plan, and that South Africa could not continue to rely on imports which were unsustainable. “PetroSA’s decision to build the refinery is in response to a government policy position through the liquid-fuels master plan, which identified the need to invest in new refineries,” he was quoted as saying in Business Day.

Who is right and who is wrong is hard to tell when it comes to an industry that for so long has been so shrouded in secrecy. That vested interests are threatened on both sides, however, seems clear that the fight could only get ugly. For now, taxpayers will have to keep an eye on these developments to ensure they don’t end up footing another horrendous, unnecessary bill in the long run as in the case of Eskom.