Fuel crisis looms

2008-03-01 00:00

Another key commodity — diesel — could run short if government does not invest in critically needed infrastructure, economists have warned.

They said this week that demand for diesel already outstrips SA refineries’ output and said that there are no concrete plans to increase capacity in the near future. Instead, for the past two years, South Africa has been importing more and more diesel, and the huge increase in price announced yesterday will hit industry, farmers and motorists hard.

Electricity cuts have led to a massive surge in diesel-fuelled generators, diesel cars are becoming more popular and the steady growth in the numbers of vehicles on South Africa’s roads all mean a steep increase in diesel use. Year on year growth in demand usually averages 4,5% (in line with economic growth), but last year this peaked at 12,5%.

At first sight, using more diesel is not serious, according to EcoQuant’s Christo Luus. Increasing imports would do little more than upset the balance of payments. The quality of the diesel would be equal to or better than our own and prices much the same as those paid to local refineries (excluding the freight).

So, all would be fine if you lived on the coast. But motorists in the hinterland could still see pumps run dry due to critical supply constraints. An inadequate and ageing pipeline network between already bottlenecked ports (especially Durban) and Gauteng is the biggest concern. Transnet’s plans to begin construction on a new R11,2 billion multi products pipeline between Durban and Gauteng within the first quarter of this year have not materialised although work on a pipeline from Mozambique by privately owned Petroline is on schedule for completion in 2009.

This takes South Africa straight back to square one: it might be easier to produce diesel closer to home.

However, inland refineries would still need to access crude oil via the problematic pipeline and the country would have to would again have to eke out an existence during the delays between investment and actually bringing new plant on stream — a gap of between four and five years, according to Luus.

Even more concerning, according to Dave Wright, general manager of corporate planning for Engen, is that refineries are unlikely to invest in increasing capacity.

Wright said that importing additional diesel is "not a catastrophe" as it is readily available on global markets. An additional 10% of total world capacity has come on stream since 2005.

Both local and imported diesel prices hinge on prices in key markets, such as the Persian Gulf and the Mediterranean, and any differences would be absorbed by the petrochemical companies rather than consumers.

The real problem is that even though the price of imported diesel is higher than the price of crude oil, the difference is not big enough and the margins not high enough to provide a return on the substantial investment needed.

He said that a proposed new refinery at Coega that could produce an additional 250 000 barrels per day was more than R40 billion. It would be cheaper to upgrade existing refineries.

The country’s four major refineries have already pumped billions into phase one of the clean fuels programme (sulphur in diesel was reduced to 500 ppm from 3 000 ppm) and will spend a further R4 to R6 billion to meet phase two specifications (reducing sulphur content to 50 ppm).

He said it would be extremely surprising if refineries didn’t up capacity in the process, but this would not amount to more than an extra five percent. A bigger increase would mean greater investment (about R2,8 billion at Engen alone) and still no meaningful returns.

The latest price hikes announced yesterday mean that the wholesale price of diesel will increase by 78 cents a litre to R7,96 a litre from Wednesday.

Robin Barnsley, president of the KZN Agriculture Union, warned that the impact of the diesel price increase on farmers will be severe.

"We are close to the harvesting season of maize and grain. Farmers are price-takers, not price-makers, and there is only so much a farmer can absorb in cost."

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