Fuel price prompts historic energy sector reforms - TimesLIVE

Faced with dwindling refining capacity and excessive fuel import costs of nearly R80bn over the past five years, the government has moved to formulate a petroleum sector development plan to improve increasingly precarious national fuel security.

The mooted plan, championed by the department of mineral and petroleum resources (DMPR), looks to build an integrated framework for petroleum security, downstream industrialisation, infrastructure planning, market reform and energy-transition management.

The proposed petroleum infrastructure blueprint will function as the sector’s equivalent of the integrated resource plan by providing a structured roadmap for national fuel supply security, refining and import strategy, infrastructure expansion and market regulation.

To take a credible plan to market, the Central Energy Fund (CEF) will hire experts to develop the plan, which will incorporate a national petroleum infrastructure master plan which, if implemented as suggested, would introduce the deepest reforms in a generation in the petroleum sector — including fiscal and regulatory incentives for oil and gas projects.

The plan, whose formulation will be led by a steering committee chaired by the DMPR, is also expected to outline a blueprint to reduce import dependency, modernise logistics and storage infrastructure, and increase exploration and production.

One of the priority areas will be creating incentives to accelerate investment in the exploration and production of oil and gas, while tapping into the rail network for increased petroleum transport and reducing reliance on road freight in a bid to lower logistics costs.

One of the key issues the plan must address, according to the CEF, will be a blueprint to modernise fuel pricing to improve transparency, affordability, efficiency and market stability while reducing volatility and pricing distortions across the value chain.

“One of the strategic objectives is to streamline petroleum licensing, compliance and approval processes to reduce delays, eliminate regulatory fragmentation and improve investor confidence [and to] introduce digitised licensing systems, automated compliance monitoring and integrated regulatory co-ordination mechanisms,” the CEF said in its tender document.

“[Another objective is to] develop policy interventions supporting refinery rehabilitation, modular refinery development, petrochemical expansion and domestic fuel processing capability.”

The multi-disciplinary team will first be required to conduct a refinery capacity assessment, an import dependency assessment, an infrastructure audit and a fuel-demand analysis.

South Africa’s poor refining capacity was laid bare by the outbreak of war in the Middle East, which sent the price of oil soaring — with South Africans now paying a record R30 for a litre of petrol.

With South Africa’s economy consuming about 27-billion litres of fuel annually, the surge in oil prices has exposed the country to external shocks after it allowed its refining capacity to wither.

That has been underlined by two sets of recent data. First, the Reserve Bank said the country spent about R76bn more on refined petroleum products between 2021 and 2024 than it would have had its refining capacity remained stable.

South Africa’s imports of refined products remained relatively stable at about 25% from 2010 to 2019. That changed in 2020 when refineries responsible for almost half of the country’s refining capacity closed. Imported refined products filled the gap, increasing exposure to global price shocks and shipping disruptions.

South Africa’s active fuel refining capacity now sits at roughly 208,000 to 250,000 barrels a day, down from a peak of more than 720,000 barrels a day a decade ago.

Second, the country posted a current account deficit of R205bn in the second quarter — the widest gap since the fourth quarter of 2015 — largely due to a surge in fuel import costs of 82%.

The second-quarter data was the first current account print that fully accounted for the impact of the Middle East war on local trade.

A study by the Finland-based Centre for Research on Energy and Clean Air shows South Africa’s fuel importers have incurred at least R56bn in extra costs since the outbreak of conflict in the Middle East in February created the largest and most sustained price shock since the 1990 Gulf War.

The CEF has floated plans to revive the Sapref refinery, a move that could more than triple the country’s overall oil refining capacity.

Once the largest refinery in South Africa, Sapref has remained idle since early 2022 when Shell and BP halted operations. However, the associated costs of between R100bn and R117bn have raised questions about where the funding would come from.

CEF CEO Tshepo Mokoka this week told the Africa Energy Week that large-scale energy projects can only succeed when supported by strong commercial fundamentals and disciplined investment frameworks.

“Strategic importance does not replace commercial discipline. It makes commercial discipline even more important. You do not finance a $7bn project by starting with $7bn. You derisk it in stages until it becomes bankable,” he said.

“Bankability begins with commercial reality. It requires feedstock security, credible offtake, logistics, infrastructure, regulatory certainty, competitive operating costs and appropriate risk allocation.

“Our upstream and downstream strategies cannot be developed in separate silos. Feedstock security and refining capacity are two sides of the same investment equation.”