The SA Petroleum Refinery in Durban. The writer says refinery profits have fallen along with the oil price, making them even less attractive purchases than they were. Photo: Reuters
The SA Petroleum Refinery in Durban. The writer says refinery profits have fallen along with the oil price, making them even less attractive purchases than they were. Photo: Reuters

Petrochemical hub is solution to SA’s low oil price issues

By Keith Bryer Time of article published Mar 3, 2015

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INTERNATIONAL oil companies have ways of dealing with a low crude price. The recent drop is not the first time it has happened and the rapid job shedding in the North Sea oilfields is a case in point. But for their wholly-owned subsidiaries, the drop in price poses different, country-specific challenges that may require actions that management, employees, consumers and governments may not like.

In South Africa, the major oil companies are all wholly-owned subsidiaries. To remain profitable for their foreign owners, it is becoming obvious that in the interests of the country, market forces should be allowed to decide which companies survive, and that regulatory shackles be loosened, if not abolished.

The inevitable job losses are likely to be incremental since most local oil companies have been steadily shedding jobs for some time and operate with a fraction of the staff they employed a decade ago.

In an unregulated market, oil companies would be free to deliver petrol, diesel and gas to their customers at whatever price the market will bear.

Tax

Included in such a price would be the cost of delivery. The unfortunate consequences would mean motorists paying more for fuel in Aggenys than in Cape Town, and more in Gauteng than in Durban. As one wag put it, you could drive to Aggenys from Cape Town, but filling up to get back would need a bank loan, so some arrangement to even out the price would still be necessary.

Almost a century ago, the government believed it had the answer to this conundrum by controlling the fuel price and spreading transport costs. In return, oil companies accepted a limit on their profits. It was the thin end of a regulatory wedge.

Successive governments loaded the price of fuel with taxes and levies. In South Africa at one time, as much as 40 percent of the price of every litre of petrol and diesel was taxed. In other countries, notably Britain, the government’s take was and is even higher.

It was from inception a brilliant scheme and it has remained so, especially from a government point of view. It means taxing vehicle owners equally (whatever their incomes) and, since almost everything moves by truck these days, the money rolls in. These additional costs are passed on to every corner of the economy, boosting the price of goods accordingly.

With 20-20 hindsight, it would have been simpler to let the oil industry sort out the geography problem without interference, but it is too late now, the result being a fuel industry strangled by regulations. These govern the retail fuel price in every municipality and even the wholesale price at which refineries can sell petrol, diesel and liquid petroleum gas (LPG).

This cosy price control system pours cash with wonderful regularity into state coffers. The oil companies have become cheap and willing tax collectors who dutifully pay in this cash haul, regularly and on time, to the delight of the Treasury.

However, the system is not as cosy as it once was, for it rests on oil companies continuing to make profits that are sufficiently attractive to prevent them closing shop, selling up and leaving the country. Today, a low oil price means they do not have the same incentives to stay.

They would never pack up and leave, taking their clean fuel technology with them, would they? Well, consider the following:

n BP, Shell, Chevron, Total and Engen are all wholly-owned subsidiaries. Their bosses, in London, The Hague, Huston, Paris and Kuala Lumpur are not wedded to the South African market. In world terms, it is minuscule.

n The entire sales of petroleum fuels by the 5 000 service stations in South Africa are less than that of Los Angeles in the US.

n Would Total and the rest care if they left the country? BP, for example, has withdrawn from Nigeria. Recently it left Zambia, Swaziland and Lesotho. Engen has tried and failed to sell itself to PetroSA. It is still on the market.

n In the last decade, the Saudis have built new refineries, betting on selling their products to a Chinese market that has, meanwhile, built its own refineries.

n There is also a new 600 00 barrels a day refinery north of Bombay. It is six times bigger than SA Petroleum Refineries (Sapref). The result is a large surplus of petroleum products at discount prices looking for a market, making South Africa refineries uncompetitive, and making it cheaper to import fuels.

n The Saudi and Indian refineries produce fuels far cheaper than the Chevron refinery in Cape Town and the Engen refinery in Durban, both of which are small and more than 50 years old.

A high world oil price kept our old refineries profitable, the Sapref refinery in Durban that produces 40 percent of the economy’s petrol and diesel requirements, doing best of all. But, now that the oil price is around $60 (R700) a barrel, even Sapref is being squeezed. Our oil industry is at the mercy of regulators whose permissions are required at almost every turn, and while governments everywhere are notoriously slow to make up their minds, when it comes to ours, decision-making is glacial.

So, with the fuel price at the pump controlled and the refinery gate price for fuels and gas set by Pretoria, what are the oil companies’ options?

n They can negotiate with the government to allow them to charge a realistic price for fuel and gas.

n They can cut operating costs.

n They can sell assets.

n They can try to persuade their owners to invest in modernising their refineries.

n They can reduce staff costs by cutting performance bonuses.

n They can halt annual pay increases.

n They can cut staff.

n They can cut and run, selling to whomever they can.

These options are all being considered. Some have already been implemented.

Oil companies are taking action while the government makes up its mind. Cost-cutting is under way, advertising and social investment no doubt first in the queue for the guillotine. Assets (particularly LPG divisions) have been sold to shrink staff numbers. BP once had 3 000 staff in South Africa. It now has less than 1 000.

But who would want to buy 50-year-old refineries like Engen’s in Durban, Chevron’s in Cape Town or National Petroleum Refiners of SA on the Highveld, in which Total is a major shareholder? Local new entrants to the local industry? Perhaps. Minor oil companies? Again, perhaps.

Less attractive

Refinery profits have fallen along with the oil price, making them even less attractive purchases than they were. Should someone take the plunge, South Africa would lose much technological expertise and quite possibly fuel quality could drop.

South Africa’s oil refining and marketing industry is a downstream industry. As its name suggests it refines imported crude oil into petroleum products, mainly petrol, diesel and gas. It sells these to industry and commerce, and through service stations. A low crude price may drop the price of fuels, but it does nothing positive for profits.

Until recently, each of the major oil companies had bottled gas divisions but government controls over the price of gas and the low levels of deposits permitted on gas cylinders had made the business barely able to meet its overheads – the expense of gas bottles the main one tying up capital.

Managers of the local subsidiaries are aware that the service stations in South Africa sell less fuel than one major US city – Los Angeles. It has never been easy to argue for more investment. With a low oil price, it is all but impossible.

The above are compounded by public and political attitudes towards the industry. These are characterised by various degrees of distrust, envy, jealousy, ignorance and the ideological mindset of those who regard the industry as the epitome of evil.

Is there a solution to all this that will protect the strategic necessity of a local refining capability? Some say now is an opportunity to expand the Sapref refinery to supply 60 percent or more of South Africa’s needs. The money could come from Chevron and Engen’s sale and closure of their old refineries, getting shares in an expanded Sapref in return. Such a large refinery could form the hub of a petrochemical complex able to compete with the Saudi and Indian refineries.

Such a petrochemical hub would benefit from the tankage and pipelines in place. It might persuade major oil companies to overcome reluctance to invest the necessary millions to comply with new fuel specifications demanded by motor manufacturers.

Sasol’s nose might be out of joint for a while, but the free ride it has been getting all these years, thanks to the regulated market, has to end sometime – at least it would, in a perfect world.

Keith Bryer is a retired communications consultant.

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