Engen refinery runs on empty

Durban - Engen's largest oil refinery plant, which lies south of Durban, could stop refining crude oil in the next few years, unless majority shareholder Petronas comes to the party with an investment in the region of R20bn.

The plant's general manager, Willem Oosthuizen, said this is one of three possible options presented to shareholders - it's now up to them and a decision will have to be taken by the end of next year.

After Sapref (refining about 165 000 barrels of crude oil a day), Engen is the second largest refinery in the country (120 000 barrels per day).

But it's also the oldest refinery in SA and this is a large part of the problem. Production has been patchy at times, punctuated by fires that have closed the refinery down. Oosthuizen said while maintenance costs have levelled, they remain high.

The refinery plant was built in 1954 on a model very different to modern refineries. "It's typical of the older refineries. The complex configuration was popular after the Second World War, aimed at creating employment," Oosthuizen said.

The model has also served people in the neighbouring area of Wentworth, a lower-income township where jobs are scarce. "If we don't follow the conversion option, which would include installing a hydro cracker to make new products and increasing refining capacity to more than 200 000 barrels a day, it will have a big knock-on effect on the local economy."

He said two other options are for the refinery plant to become a "post-treatment" facility, not refining but adding to the finished products. "That would scale the cost down to about R1bn, but would have a severe effect on our margin." The third option is for the plant to become an import terminal, just storing the crude oil pumped through a pipeline off the coast by oil tankers every day. Oosthuizen said this would be the worst option for the local community.

The age of the refinery plant, related production problems and high maintenance costs - together with a volatile oil price - have squeezed the refining margin. This refers to what it makes on selling the refined products, mainly petrol but also diesel, aviation and marine fuels and bitumen, after the cost of crude oil.

At present the refining margin is about $2 per barrel. Oosthuizen said the yearly average is around $3 to $4, but at times the margin also goes negative, as it did a few weeks ago.

Generally, a high oil price like the current one of more than $70 per barrel, squeezes the refining margin. If there are production problems at the other end of the refining process the margin goes negative, by as much as $2 per barrel.

Apart from the social effect if the plant stops refining crude oil, it could also further threaten fuel supply in the country. With more than 20% of the market,Engen is the largest petrol retailer in South Africa.

"Right now our refining margins are so low we're running on a break-even basis. We've tabled the three options before shareholders. It's now up to them,: Oosthuizen said.

- Fin24.com