It was inevitable that politics would add to the kerfuffle over the decision of the Strategic Fuel Fund (SFF) to sell 10 million barrels of crude oil that has been sitting in its tanks for almost a decade, especially as there is nothing like the oil business to flush out conspiracy theorists.
To those who are closer to the oil business there is nothing peculiar about the SFF decision. The wonder is that it has not flogged off its stale crude sooner.
This is not a case of disposing of the national family silver. It is part of a fundamental rethink of an out-of-date policy to store vast quantities of crude oil at great taxpayer expense, as if South Africa was still under a state of economic siege.
We are no longer the polecat of the world. Oil sanctions were lifted decades ago. True, we are not the flavour of the day. We have a pathetic growth rate compared to our potential. But if we want it, there are crude suppliers aplenty willing to sell us crude oil when we need it. And, despite all predictions to the contrary, the world is not running out of oil anytime soon.
Cheaper imports
As it is, thanks to the abundance of refined petroleum products like petrol and diesel pouring out of modern refineries in India and the Middle East, oil companies can import such fuels more cheaply than they can make them. Why then, should the State tie up billions storing crude oil?
The SFF is no longer the sole supplier of crude oil to the Sapref, Engen, Chevron and Natref refineries. In fact, oil companies have been importing their own for almost 20 years and have not once asked to tap into the national crude oil stockpile.
What seems to be driving the headlines on this is a hangover from the crude oil shocks of the 1970s, the temporary disruptions of the Gulf Wars and fears that turmoil in the Middle East could lead to a crude shortage. The facts are that the petrol and diesel shortages we have experienced since 1994 have nothing to do with a shortage of crude oil. It was labour disputes, unco-ordinated refinery maintenance, unplanned refinery shutdowns, a lack of liquid fuel storage facilities, and reluctance by the refineries to tie up capital when they were available.
Similarly, periodic liquefied petroleum gas (LPG) shortages occurred because demand outstripped supply available from local refineries, a chronic lack of import terminals, gas storage tanks, and regulatory barriers to import LPG ship-to-shore.
In short, our refineries could not cope when demand was high so they imported finished product, and when demand was normal, it was cheaper to do so anyway. Some even allege that the inordinately large number of times our refineries have closed down for various reasons may have more to do with this than anything else.
Then there is another factor that makes State crude oil reserves no longer as necessary as before. Underlining the shortcomings of our local crude oil refineries is their inability to manufacturer motor fuels to the higher specifications demanded by modern motor manufacturers, exacerbated by the oil companies’ extreme reluctance to make the huge refinery investments necessary to meet the new fuel requirements.
Add all the above together and it makes perfect sense to re-examine the rationale behind strategic stocks of crude oil as opposed to liquid fuels. This is exactly the conclusion of the SFF and the prime motivation for selling 10 million barrels of its aged crude stock. It still leaves the SFF owning 300 000 barrels.
The sale is in reality not what the word implies. The crude remains in South Africa and is accessible whenever a crisis demands it – and at a price it would get in the market at the time.
In addition, the purchasers have to pay the SFF a rent for storing it, giving a handy $15 million (R236m) a year for five years. It is not quite the simple sale at a giveaway price reports have suggested.
Ahah! Say the critics. What about the money? Who takes a cut of the deal, and why was it all secret if there was nothing untoward? And why was it sold at such a low price?
Well, consider this: what would be the point of having a “come one, come all” tender call, when only a very few oil traders can come up with the $10m in cash. Why not restrict potential buyers who have the financial resources and can prove it, upfront? Especially when an SFF condition of sale was a direct transfer of the US dollar from bank to bank – with no stops in-between.
None of the preferred bidders were unknown. All were established traders. The fact they had partners who were relatively new entrants to the business is a cause for some concern, but since a bank-to-bank transfer of money was a prerequisite, it should nullify cries of “Wolf!”.
Crying “foul!”
Of course, when four sellers are competing there have to be three losers. One dropped out immediately when it found that the crude had to remain in SFF tanks. The possibility that one of the two other losers is now crying “foul!” cannot be ruled out, especially since the sale was announced in Parliament in February this year – three months before the media discovered it.
Ah, say the critics, what about the windfall profit the happy buyers would make if the price of crude rockets upwards in the next five years? Surely there is something dodgy going on? And what about the fact that the invitations to tender to buy the old crude was restricted and secret?
Indeed, on the surface, there is a common sense suspicion that justifies such questions. No doubt the State auditors will soon be ferreting around to find out – if they have not already started. But does anyone have an infallible crystal ball that accurately predicts the oil price five years into the future?
But until evidence of malfeasance emerges, the SFF sale seems sensible. It creates a steady income stream with the buyer taking the risk that crude prices will go up sufficiently to compensate for the rent it will pay and the steadily deteriorating quality (and therefore fall in the price of the crude).
And, if there is a sudden shortage of crude in the next five years the SFF can buy it back at whatever it is then worth on the open market. Any loss will be offset by the income SFF accrues from the storage rent it has received and will not therefore be a drain on the treasury.
Much has been made of the low price per barrel of the transaction and the alleged rush of the sale. In fact, the SFF did so when the price was see-sawing below $40, and clearly on a downward curve. It would have taken a very clever crystal ball to know it would – six months later – reach the $50 per barrel.
Meanwhile, the SFF can change its modus operandi, and redefine the meaning of strategic fuel reserves away from an emphasis on storing crude oil towards refined products like diesel and petrol.
It will not be easy. It is trickier to store diesel and petrol but it can be done.
There is one other thing that needs to be put into context: The 10 million barrels of crude will be replaced eventually – just in case, but the drain of the Treasury will be less, since the SFF will have money of its own to help pay for it.
* Keith Bryer is a retired communications consultant.
** The views expressed here do not necessarily reflect those of Independent Media.
BUSINESS REPORT