Petroleum regulations need to change in a structurally changed industry
|Published
South Africa does not just get petrol and diesel from refineries, but also by-products such as bitumen, which is used to make tar for the construction of roads, and other chemicals used in the construction sector. Photo: Armand Hough/ANA
The closure of petroleum refineries and outdated regulations pose serious economic challenges and jeopardises more than just the security of supply of products such as petrol and diesel, the Liquid Fuels Wholesalers Association (LFWA) said.
CEO Peter Morgan said the country does not just get petrol and diesel from refineries, but also many by-products that have linkages to other economic activities. He said this includes by-products such as bitumen, which is used to make tar for the construction of roads, and other chemicals used in the construction sector.
“When you are not refining as an economy, you must start importing these by-products. Imagine the repercussions of having to import the tar that is used to build new roads,” Morgan said.
He said a major headwind for local oil refineries were new rules published by the government last year that lowered the sulphur content allowed in the country’s diesel fuel, by July 1, 2027.
To comply, he said some oil refineries would have to upgrade their facilities at costs that could run into billions of rands.
“The more reliant SA becomes on petroleum imports, the more exposed it will be to potential disruptions in supply,” he said.
Accordingly to the LFWA, the context of energy security is a concern for them, as the refining capacity, most of it, is being converted into storage and handling facilities for imported finished product, yet at the same time there is no agreement between the regulator and the major oil companies on the need and cost recoveries for strategic stocks.
Global geopolitical issues at the start of this year again brought into context several issues that needed to be addressed in the South African liquid fuels industry. The association said that it is widely accepted that the petroleum sector is a strategic one, and is a fundamental provider of inputs into other areas of the local economy.
Morgan said prior to 1994, the oil majors benefited from “special pricing models” from the apartheid government for reasons of security of supply and national security.
Following the democratic transition, greater emphasis was placed on transforming the sector to be more inclusive at different levels of this value chain. However, he said the pricing models had not been amended to the changes necessary to support this transformation.
"As an economy, we are a net importer of finished products and this links to the current severe difficulties in the importation of fuel’s (storage / handling and financial) and the extremely low levels of strategic stocks, which creates a situation where as a market, we are always ‘product short’.
“Most refineries have ceased to operate. Whatever stock used to be stored in the form of crude oil now has to be stored as refined product, but little replacement final product storage has been built,” Morgan said.
The LFWA said the current system ensured outlying rural and poor communities paid the same amount for fuel, as the affluent metropoles, including for the transportation of petroleum products to their communities from local depots, notwithstanding longer distribution distances and higher cost.
Morgan said the dispensation that ensured that rural and poor communities paid the same amount for fuel, and were paid the same amount for storage was admirable, however, the higher costs associated with these services needed to be recognised and compensated.
He said to allow this, the current pricing mechanism only recognised one average price for secondary storage-handling and secondary transport.
“This use of one average was workable when each oil company did all the transport from the refinery gate to the customer, (as over and under-recoveries typically balanced out without negatively affecting profits), however; the oil majors simply pulled out from the areas where the actual costs are above the level of recovery and the new independent wholesalers filled this gap,” Morgan said.
He said these two separate economic realities as specified above, caused by averaging, had an unintended consequence when it came to the issues of security of supply/ transformation and both the need for supporting small business development as well as the need for infrastructure development.
The LFWA said over recent years, the Department of Minerals and Energy had focused entirely on the oil majors – completely ignoring the role of wholesalers in the industry.
He said the notion of sustainability and particularly new entrants had also not been recognised as a separate and important issue.
“We argue that the use of many terms by the department has the effect of obfuscating the real situation regarding the effect of new entrants’ sustainability, especially in analysing the external trading environment and the consequent implications for the future,” Morgan said.
He said one of these barriers to entry into the industry was an untenable situation where the department had a constant stream of new wholesale licence applications, yet the LFWA's experience showed only a small portion of these licences were being used correctly.
BUSINESS REPORT