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Who will pay for clean fuel?

Local oil refiners have issued a veiled warning that job losses could result from a long-lasting standoff with government over how the ­billions in investment required to produce cleaner fuel will be paid for.

Maurice Radebe, SA Petroleum Industry ­Association (Sapia) chairperson and vice-president of Sasol’s energy business, said the country’s six local refineries were estimated to employ 10 000 people and also created 100 000 indirect jobs.

Without the investment in clean fuel specifications, the local refineries face a “serious threat” from imports from refineries elsewhere in the world that had the specifications, which match the Euro 5 standards.

Local fuel specifications match Euro 2 standards.

Department of energy spokesperson Thandiwe Maimane didn’t respond to a set of questions about clean fuels and government’s position in that regard.

Joe Willis, a London-based analyst for consultancy Wood Mackenzie, which counts local oil refiners among its clients, said South Africa’s refineries could produce diesel with a sulphur level of either 500, 50 or 10 particles per million.

Willis said that on the international market, there were a lot of refineries that could produce diesel with a sulphur level of 10 particles per million.

Over the next five years, South African demand for diesel and petrol is set to increase, and with no investment in local refinery capacity planned, this would result in greater fuel imports.

With no investment in the refineries and increasing ­imports, Willis said that the local refineries, with their dirty fuel, were likely to see shrinking demand and falling profits, which would place the refineries’ viability at risk.

Sasol joint CEO Bongani Nqwababa said government needed to clarify how the regulation mechanism for the clean fuel specifications would work.

“The local refinery industry could be completely ­destroyed, just like in the local textile and steel industries.

That would be very sad,” Radebe said.

The number of people employed in the textile industry has dropped from more than 200 000 to less than 100 000 over the past 15 years due to reduced import duties on ­textiles and cheap imports from China.

The steel industry has been hit by cheap imports, ­especially from China, which have shut Evraz Highveld Steel and Vanadium and have partly contributed to ArcelorMittal SA reporting losses since 2010.

“If refiners cut back, there will be a contraction in this area with implications for South Africa’s balance of ­payments, security of liquid fuels supply, jobs and tax ­receipts,” he added.

Alan Gelder, another Wood Mackenzie analyst, said that the main difference between Europe and South Africa was that the local fuel price was regulated by government, while the fuel price was deregulated in Europe.

In the UK, in contrast to what local oil refineries are ­advocating, the refineries paid for the upgrading to meet the clean fuel standards and recovered their costs over time, he said.

In the US, the small refiners were given longer to ­implement a new set of fuel specifications compared with the large refiners, Gelder said.

Radebe said that KPMG was doing a detailed study into the economic effect of the local refinery sector.

In 2009, global engineering group Foster Wheeler ­estimated that it would cost $3.9 billion (R53 billion) to ­reconfigure the local refineries for the new clean fuel specifications, he said.

Radebe said that in the seven years since 2009, the costs of reconfiguring the oil refineries had escalated. Gelder said that updating the previous estimate would take quite a bit of work.

The members of Sapia want the multibillion-rand ­investment in clean fuels to be recovered by a charge to be included in the fuel levy.

However, National Treasury had proposed that the ­investment in the clean fuels specifications be compensated for by accelerated depreciation and, instead of being written off over five years, be written off over three years.

“The accelerated depreciation was inadequate to cover the costs,” Radebe said.

National Treasury had put the idea of accelerated ­depreciation on hold, he added.

Accelerated depreciation is a method of depreciation used for accounting or income tax purposes that allows greater deductions in earlier years of the life of an asset.

“We continue to engage the department of energy to look at different approaches to funding the clean fuels ­investment, and a joint government and industry task team has been set up,” Radebe said.

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