Clarity needed on supply, energy plan

Local industry stakeholders need clarity on how the decision by multinational companies Shell and BP’s South African Petroleum Refineries (Sapref) to freeze spending and pause refinery operations at the end of this month will impact on security of supply of petroleum-based products, and the local energy sector, says local petroleum and petrochemical products manufacturer African Oil Blending Corporation (AOBC) CEO Dr Franck Naidoo.

He also adds that the South African government’s geopolitical stance and existing bilateral agreements in the oil sector are critical in determining how the country’s local energy sector will develop in the years to come.

“If we want energy security, local refineries are crucial. While we could look at imports to secure supply of petroleum products, we cannot build an economy while being energy dependent.

“We need to look at the remaining local refineries and decide what energy policy will be needed going forward, as there is little policy framework certainty as the last White Paper that local government published on energy was released in 1986.”

Naidoo highlights that Shell was legally prevented from conducting seismic activity on the Wild Coast, in the Eastern Cape, and shale gas drilling exploration in the Karoo, in the Western Cape. This might have influenced the decision by Sapref to suspend refinery activities, he adds.

“As Shell was not able to conduct these activities, the company will look to invest elsewhere. Recovering these investments takes significant projects, such as drilling and other upstream projects, to support the downstream industry.

Additionally, the fact that local refineries have been ageing cannot be ignored, as maintenance of refineries, such as Sapref’s, is costly.”

Naidoo stresses that Sapref’s refinery is the largest local refinery, and the only one that has been working optimally for the past 18 months.

Therefore, suspending activities at the refinery could result in a loss of 30% in revenue for the local petrochemicals sector, in addition to other challenges, such as rising petrol prices, raw material shortages in industrial sectors and currency fluctuations, he adds.

Securing Supply

The need to ensure security of supply of petroleum products could prompt South Africa to secure supply from other countries such as Iran and Russia, Naidoo argues.

Although Russia is a Brics trading partner of South Africa, he adds that securing supply from that country could become more challenging amid Russia’s invasion of Ukraine earlier this month.

“South Africa can also look at other refineries in Europe for supply, with petroleum products refined according to advanced European standards. We need to consider imports, ensure there’s security of supply and try to reduce petrol prices. The industry is, however, going to have to work with government to adjust certain tariffs and rebates.”

Further, he highlights the need to find alternative local investors that understand the dynamics of the South African economy and are willing to invest for the long term to take advantage of the petroleum refining capacity and skills that Sapref has acquired in terms of its infrastructure and employees.

“There’s no reason why we can’t look at having a locally owned refinery. This is a strategic decision, and if local supplier the Central Energy Fund is looking to purchase Sapref’s refinery, it needs to look at financing it with local investors and use the already trained labour and knowledge to upskill the younger generation.”

Upgrade Perks

Last year, AOBC upgraded its Harrismith lubricant blending production facilities, in the Free State, after securing about R130-million to repurpose and upgrade the plant.

This was done to pivot to the manufacturing of water-based products for the automotive and industrial sectors locally and in sub- Saharan Africa.

The repurposed plant began manufacturing coolants in the first quarter of this year.

Naidoo emphasises that this upgrade also helped the company to secure a contract with Shell to manufacture and supply up to six car care products which are part of the Global Shell Car Care Portfolio.

“The business has been doing well from this supply contract, as our cash flow has improved despite pressures from Covid-19. Shell has asked us to start supplying another 15 products, which are more water-based and water-less car care products. This demonstrates the capacity that black small, medium-sized and microenterprises – thorough government’s financial empowerment schemes – can successfully service stable offtake contracts from companies like Shell.”

AOBC has also secured a supply contract, worth R12-million a year, with State-owned power utility Eskom this year, and is working on securing two other supply contracts.

Further, oil and gas companies are aiming to reduce dependence on products derived from fossil fuels. Owing to this, many companies are driving the development of water-based coolant compounds, which will help AOBC and its customers pursue more sustainable solutions.

“We’re following the sustainable just energy transition insofar as there is a template showing what companies should be doing, and we’re going to be enforcing that with our customers, thus also helping us to service oil and gas companies. While we do need oil and gas products, companies need to lower their environmental footprint in the manufacturing of these products, so this has a ripple effect on the rest of the economy and global climate agenda,” he concludes.