Johannesburg - A lot has been made about China Petroleum and Chemical Corporation’s (Sinopec’s) acquisition of its first African refinery after it bought 75 percent of Chevron’s South African assets.
There is no doubt that the deal gives Sinopec access to coveted assets. For instance, Chevron South Africa is one of the country’s largest suppliers of petroleum products, with more than 800 Caltex-branded service stations. Chevron also owns a lubricants plant in Durban, as well as oil storage facilities.
Summing up the significance of the deal earlier this week, Claude Illy, leader of sub-Saharan Oil & Gas Mergers & Acquisitions Advisory at Deloitte, said Sinopec gains entry into a large and growing market with a clear regulatory framework in the form of import parity pricing.
But along with the other assets, Sinopec has acquired Chevron’s crude oil refinery in Cape Town. And this is where the picture becomes less rosy. The fate of oil refineries must be among things keeping chief executives of South African oil companies awake at night.
The Chevron assets have been on the market for more than year. Two of the companies which confirmed initial interest in the assets, chemicals and energy company, Sasol and energy group Puma Energy, have refused to disclose reasons for walking away.
But it will not come as a surprise if upgrading the refinery in preparation for the introduction of cleaner fuels, as required by the government, turned them off.
The Cape Town refinery is South Africa’s third-largest crude oil refinery and produces petrol, diesel, jet fuel and liquefied gas for the Western Cape and for export to other African countries.
Various other companies, including French multinational Total, Glencore and Russian oil trader Gunvor Group, had reportedly put in bids for the assets.
Read also: Sinopec takes 75% stake in Chevron SA
In June 2012, the government gazetted regulations on the introduction of cleaner fuel by July this year.
What has happened since the publication of those regulations has been nothing short of a stand-off between the government and the petroleum industry over who would pay for the necessary investments to upgrade South Africa’s refineries.
Owing to the disagreement on the cost recovery mechanism, the July timeline for the introduction of cleaner fuels is unattainable.
The department has also agreed that the promulgated target date be postponed to an unspecified date. For a long time now, the SA Petroleum Industry Association (Sapia) has been lamenting what it calls policy uncertainty regarding the implementation of the cost recovery mechanism.
Sapia has said that the delays in the finalisation of the timing and a cost-recovery mechanism for the introduction of clean fuels were hampering investment in the refining sector.
Who would foot the bill for the upgrades was a sticking point from day one and the matter remains unresolved up to this day, Sapia executive director Avhapfani Tshifularo confirmed.
The estimated cost for refinery upgrades was previously estimated at R40 billion. The stand-off also worries vehicle manufacturers because a delay in the introduction of cleaner fuels will restrict the introduction of new technology and lower-emission vehicles.