The world’s biggest economies have one thing in common: they are self-sufficient in terms of energy and can refine oil to turn it into a finished product. While a strong manufacturing sector is also a significant component of self-sufficiency, countries like the United Arab Emirates import almost everything but have rich oil reserves.
South Africa has long been one of Africa’s largest economies. However, we have fallen behind the likes of Nigeria and Egypt, which have rich oil reserves. It is, therefore, heartening to read an article that points out that South Africa is improving its capacity for oil refinement.
A multitude of partners
The article points out that the government’s Central Energy Fund plans to bring private and other partners on board as it proceeds with an ambitious plan to revive and expand the shuttered Sapref refinery.
“Our strategy is inclusive participation,” said Sesakho Magadla, CEF’s transaction lead, who spoke to News24 in an exclusive interview. “The idea is to have a public-private partnership. Ideally, it must be majority South African – but it can be a combination of government and private,” she said.
Magadla said this would enlist the efficiency of the private sector while leveraging on government-to-governmental bilateral relations.
“This is an opportunity of a lifetime,” she said. “There are other oil majors that see an opportunity here, and if we can’t get our act together, they will move in, and we can kiss it goodbye for another 30 to 50 years.”
The article adds that the Government’s Central Energy Fund (CEF) first made its interest in acquiring Sapref known in February 2022, when Shell and BP announced they would freeze operations at the jointly owned refinery. However, the proposed deal had to be restructured after floods ripped through KwaZulu-Natal in April of that year, causing significant damage to the plant.
At the weekend, Shell and BP put pen to paper and agreed to sell Sapref to the CEF for just R1.
The article points out that, included in the sale are the process units – aka the refinery – the tank farm, pipelines to and from Sapref to Island View terminal, and the Single Buoy Mooring where crude imports are landed. The first milestone for CEF is simply to close the transaction and for the assets to transfer into the hands of the state. Thereafter, CEF will be in a position to select partners and work on a new design and business model for the operation.
Clear rationale
The article adds that the strategic rationale for the deal is clear, as the state grows increasingly concerned over security of supply as refined fuel imports have surged amid dwindling oil refining capacity in SA.
The ability for the state to procure oil through long-term supply contracts and store and refine it itself offers more comfort than private players buying refined fuel at spot prices off the global market, leaving SA vulnerable to price shocks.
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The article points out that Magadla said the deal will also make commercial sense, because the plant will be expanded.
“If you don’t expand the capacity, you won’t be cost competitive,” she said.
This is not least because any new refinery will have to comply with modern-day emissions regulations and will also have to produce fuels compliant with incoming Cleaner Fuels II specifications.
“One of the big debates around Cleaner Fuels II is the cost of capital,” Magadla said. “If you do it like for like, then your return on investment is reduced. But if you do it for a bigger refinery, then it’s a different conversation.”
With a production capacity of 180,000 barrels per day, Sapref was southern Africa’s largest refinery. The Durban South basin, which also served Engen’s now-closed Wentworth refinery and also facilitates the movement of crude up to Natref, is fitted with infrastructure which can handle up to 400 000 barrels of crude per day.
“So we will consolidate that Durban South Basin. It’s obviously going to require applying for new licenses,” Magadla said. “And it’s going to require the communities to support it.”
The article adds that Magadla could not speculate on cost at this stage but conceded it would not be a cheap exercise. Still, rebuilding the Sapref site will be more cost-effective than starting from scratch, as would be the case in the previously proposed Richards Bay and Mtombo refineries.
“On that specific [Sapref] site, the bulk of your infrastructure is already there. So you would [mainly] be replacing the process units [which CEF assumes are not functional], which would shorten the time for you to rebuild the refinery and will also help in terms of the cost.”
Existing connection
The article points out that the site is also already connected to the market, notably through the Transnet multi-product pipeline, which moves fuel up to Gauteng. As part of the deal, CEF must take on the environmental liabilities of the Sapref site, which has been operating since the 1960s. Magadla, however, said these liabilities did not appear to be particularly onerous and were in line with expectations.
“We looked at the independent report that was done in terms of the environmental issues and we looked at the cost of demolishing, in terms of preparing the site, and it has a net positive asset value,” she said.
CEF sees a number of options for funding. “We’ll leverage on government-to-government, bilateral [relations]. We’ll also be open to capital raise options that are quite wide – whether it’s government to government, foreign direct investment, private South African investors through the Public Investment Corporation or any other funders,” Magadla said. “Ideally, it would be best if we could get maximum funding from South Africa.”
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The article adds that CEF also hopes to leverage on long-term relationships for feedstock, which Magadla notes could come from a range of sources, possibly even from neighbouring Namibia, where there have been 11 offshore oil discoveries in the past two years.
“So there will be a multitude of partners, whether technical or financial,” Magadla said, adding that she expects the project to be “hotly contested” as it’s already attracting interest from global governmental and private sector players.
More to this story
South Africa is not known for its oil reserves. This is one of the primary reasons petrol and diesel are so expensive and prone to significant price increases as the price of Brent Cruise Oil fluctuates.
However, there is more to this story than meets the eye. One of the main reasons Shell is planning a strategic exit from South Africa is that the Government will not grant them a licence to drill for oil off the coast of South Africa. Mozambique and Angola (both strong economic allies) also boast rich oil reserves. It would be prudent for the Government to extend its existing trade agreements and ties with these countries.
The pieces of South Africa’s future economic puzzle are coming together. With significant private sector involvement and working alongside the public sector, we can address our challenges.
The Mystery Practitioner is an industry commentator focusing on the shifting dynamics and innovative thinking that BRPs and turnaround professionals must embrace to achieve business success.
