Any future oil crisis we may face as a country will be caused by shortages of petrol and diesel rather than crude oil, and the costs are likely to be bigger than the R1 billion a day the 2005/06 shortages cost the economy.
That is one of the conclusions of a strategy review carried out by the Strategic Fuel Fund (SFF), and the thinking behind the ministerial directive to rotate 10 million barrels of old crude oil stock, a decision which has morphed into a media and political outcry against “selling the family jewels”.
To place this into perspective, some history of the SFF is required for the sake of balance and objectivity.
When UN oil sanctions were still in place, a vast quantity of crude oil was stored by the SFF, which also bought and supplied most of the crude oil needed by domestic refineries.
At that stage, our oil stockpile amounted to five years of domestic need and our refineries had excess production capacity. This meant that the SFF had a huge amount of working capital tied up for very long periods (15 years). This decreased rather than increased the economic value of the crude oil due to an erosion of its quality. But this changed when the oil majors were allowed to import crude oil, and since then, the SFF has not imported crude oil to supply local refineries.
The last time strategic crude oil stock was rotated was in 1999. Then too it was done according to policy and by ministerial directive. The crude oil held in the Ogies Mine was sold to fund the rotation and repurchased in 2001 for relocation to the SFF Saldanha Terminal.
No crisis
So for three years the country had no strategic crude oil stocks. There was no crisis. Concerns about the strategic oil reserves then moved from the threat of economic sanctions to the possibility of major supply disruptions in exporting countries.
The government was confident that the country’s refining system could safeguard the local demand for refined products and, therefore, the decision to continue stockpiling crude oil made sense at the time.
Indeed, since 1994 there has never a shortage of crude oil in the country. Oil companies buy their own and keep three-to-six week’s requirements, depending on their refining cycles. Procuring crude oil for local refineries in South Africa by multinational oil companies is centralised outside South Africa. To repeat, the strategic crude oil reserves in Saldanha have never been released because of an emergency shortage of crude oil.
When crude oil prices hit record levels, marginal oil fields came into production, oil-rich countries increased production to take advantage, and inevitably, the international crude oil market became oversupplied. Notwithstanding the political conflict in the Middle East, over-production of crude oil continued.
At the same time, the US being the biggest consuming country of crude oil became almost self-sufficient. This added to the imbalance in the international supply and demand for crude oil. Moreover, Opec countries could not agree to a reduction in the crude oil production. The result was a steep fall in crude oil prices.
Major consuming countries have reacted to the new situation. They have changed or are changing their strategic crude oil stock strategies. They no longer replace rotated immediately, adding to an oversupply on world markets and more downward pressure on prices.
What this means is that South African refineries will be able, for the foreseeable future, to source all types of crude to supply the domestic market. Furthermore, we have good relationships with west African countries that produce crude oil of a highly desirable type for meeting higher product specifications.
The oil market disruptions experienced in South Africa since 2005 related to petrol and diesel shortages occurring through overlapping and extended unplanned shut downs at refineries. These shortages indicated that the domestic refineries were not as robust as was thought.
Refined products
The risk to the economy is a shortage of refined products, such as petrol and diesel, due to refinery shut downs, inability of refineries to produce optimally, production challenges and a lack of investment in refinery hardware.
The economy has grown and demand now exceeds domestic refinery supply. The result is that importation of petroleum products has increased every year. This is true for all refined products apart from paraffin. Diesel demand alone has risen by an extra 4 billion litres.
The shortfall in local diesel production is double that of the country’s biggest refinery and the total main fuels shortage is more than the total production of the country’s biggest refinery. The SFF, as the state entity mandated to manage strategic stock, is not prepared to deal with a sudden lack of liquid fuels as it does not hold any petroleum product reserves.
There is another problem the country must face. It is the inability of our refineries to produce fuel to the new higher specifications without a volume drop. How to fund the multibillion-rand investments needed to produce this quality of fuel at South Africa’s six refineries has not been resolved.
The costs for our refineries to produce the new fuel specifications in the volumes required are guessed at R40 billion – without any guarantees that such investment may supply enough to the domestic market. To make matters worse from a strategic point of view, even more stringent specifications are in the pipeline.
South Africa’s oil refineries are not ready and will not be ready to produce Euro IV (CF2) standard fuel, let alone Euro VI, which the world is moving to by 2017 or 2020 in preparation for the introduction of more fuel-efficient vehicles.
Our present crude oil stocks are suitable for producing products of lower specifications, which means we need to stockpile higher quality grades of crude oil.
Quite simply, the country needs to invest in upgrading our refining technology and, as the entity tasked with managing strategic stock, the SFF will have to hold refined petroleum products as part of our strategic programme.
* Sibusiso Gamede is the chief executive of the Strategic Fuel Fund.
** The views expressed here do not necessarily reflect those of Independent Media.
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