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Why SA must secure oil refining capacity - and how it must be done

Cape Town – If South Africa wants to build a new oil refinery, it will need to make sure it is in the right location and that it will be able to produce clean fuels.

This is according to the latest specifications, EY's advisory oil and gas leader Christo Roux told Fin24.

In May this year, Energy Minister Mmamoloko Kubayi revealed in her budget speech that South Africa is ready for a new refinery investment. She said should would approach Cabinet in the next months to get the final go-ahead for the project, which she believes should ideally be a public-private partnership and majority South African-owned.

The rationale behind a new oil refinery is to make South Africa is less reliant on import finished products, which Kubayi said was neither positive in respect of energy security nor for the advancement of industrialisation in the country.

By the time a new refinery is completed, South Africa will be importing more than one-third of its fuel requirements, according to the minister.

There are concerns however that South Africa could face oversupply of oil with its own refinery, given the current global oil glut.

READ: Kubayi: New Oil refinery will boost SA industrialisation 

Oil is currently priced at less than half the levels of the middle of 2014, due to a persistent surplus, even after the Organisation of the Petroleum Exporting Countries (OPEC) and other non-OPEC producers cut back on production from January.

EY’s Roux pointed out that the South African downstream refined product market has seen a gradual shift from being a net export market to a net import market in the last 15 years.

“The main driving factor behind the increased imports is aging in-country refinery infrastructure, which generally operates at lower efficiency levels than their global competitors, due to smaller nameplate (installed) capacity, and lower levels of reliability.”

The sustained net import market has attracted new players to the South African downstream petroleum market in the form of commodity traders – companies with limited or no refining capacity – that are mainly focused on the trading activity of the finished product.

The entry of these commodity traders, Roux said, has significantly increased the investment in new petroleum storage infrastructure, thereby "de-bottlenecking" the imports of finished product into the South African market. 

“The consequential effect is a business model which challenges the in-country refinery margins. Additional future considerations, which could further challenge in-country refining margins will be new regulations around carbon tax and clean fuel regulations.”   

READ: SA needs to get out of its petrochemicals cul-de-sac 

Roux said security of oil supply is an extremely important mandate and there are various ways of achieving this.

“Global leading practice in developed countries suggests a strategy to ensure sufficient holdings of crude and refined product and it is therefore paramount from a security of supply point of view that South Africa has in-country refining capacity.”

The key however is that any new investment in oil refining infrastructure would have to be as cost competitive as possible, have competitive nameplate capacity and be able to produce clean fuel according to the latest original equipment manufacturer (OEM) specifications, Roux said.  

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