Greater investment for further development required

Oil refineries lack the ability to provide sufficient base lubricants and are unable to keep up with the local demand from local lubricant blenders.

Oil refineries refine base oil to make petrol and diesel, and several by-products such as lubricant base oils. Lubricant blending and bottling manufacturers use these lubricant base oils to create automotive lubricants, among other products.

This, according to lubricant blending and bottling manufacturer Oilflow director David Coughlan, is why most local blenders use imported base oils.

According to Coughlan, the reasons why South Africa oil refineries are unable to provide sufficient lubricants and keep up with demand is because there is a need for investment to keep up with international standards.

Another issue pertaining to investment into refineries is that there is increasing global political pressure for more investment in cleaner energy. However, oil refineries in South Africa are not producing clean energy or using energy efficient technology and are therefore not seeing the investment that they require.

He also believes that the lack of investment in local oil refineries is because the oil refineries are focused on the bigger markets and countries that have the biggest compliance risks.

Moreover, the local market is not only small but also has to compete with global markets, such as those of Europe, where governments are constantly driving legislation for cleaner energy, which gives oil refineries in other countries with bigger compliance risks a greater chance for investments, he adds.

Therefore, it makes sense that multinational oil refineries will spend money in markets such as those in Europe and the US as opposed to that of South Africa, says Coughlan.

The focus is now on future-proofing these multinationals against the tide of electric transport, which is a high priority for fossil fuel companies.

“Investment in wind and gas is attracting the most attention right now, leaving old refineries to slowly become obsolete, while they are trying to make the most profit from them now, while they still can,” highlights Coughlan.

Without the investment, oil refineries are unable to keep up with demand owing to the fact that their plant and machinery need upgrades and ultimately, if there is insufficient local stock or the price is not competitive, imports will grow, says Coughlan.

Inadequate supply locally means that base lubricants are more expensive in South Africa.

Lubricant base oils are imported from all over the world and are typically sold by commodity brokers.

Coughlan says “currently, we can expect to pay 5% to 10% less to import these base lubricants because of the volatility in high pricing, which, in turn, has created an opportunity for commodity traders to buy up well priced stock and resell when prices rise”.

This is significant, as the automotive lubricant industry is a high-volume, low-margin market, he adds.

Coughlan says one of the solutions to the import problem that lubricant blending and bottling manufacturers face is a more transparent buying process and “a full arm’s length relationship between the oil refineries and the lubricant brands that acquire their base oils”.

Knock-on-Effect

The lack of investment in oil refineries can have a major effect on the market, as slowly South Africa has moved from being world renowned in terms of the oil refinery production to being a nonparticipant, he explains.

“Energy and chemicals company Sasol, once considered a premier South African icon of chemistry, is now investing mostly in the US.”

He predicts that, over the next 10 to 20 years, electric transport and cleaner energy alternatives will reduce the need for oil refineries and they will probably be sold to help the multinationals meet their commitments to European governments.

“This, in turn, will lead to the demise of local refineries even faster and, at some point, they will no longer be viable, and jobs will be lost,” adds Coughlan.

“Moreover, this issue has a knock-on-effect on mining, farming, transportation, logistics and construction, effectively hurting the public, owing to inflated costs.”

Coughlan mentions that the oil refinery industry “has been great for local communities”, as it provides not only employment but also bursaries, and invests in developing young engineers.

If oil refineries were able to supply enough base lubricants according to market demand, they would grow significantly and, ultimately, be in a position to create further employment, he says.

Coughlan notes that local taxation would also benefit and help strengthen the rand. This is owing to value added tax being charged for locally produced goods and creating an opportunity for South Africa to export automotive lubricants to various Southern African Development Community countries.

There is, therefore, need for continued investment in oil refineries to keep up with high international standards while reducing emissions using better refinery processes, which is vital to meet international commitments, he concludes.