Our refineries must be upgraded to produce cleaner fuel ... Who will pay?

A 2017 target for South Africa adopting Euro 5 fuel standards is already dead in the water, while there seems to be little progress on how to fund the multibillion-rand investments needed to produce this quality of fuel at South Africa’s six refineries.

One obvious problem is that it is still not close to being clear how much the transition would even cost. An old guesstimate of R40 billion to upgrade the refineries was still being thrown around this week.

By now, it is almost a decade out of date, apart from having been very uncertain to begin with.

The industry, represented by the SA Petroleum Industry Association (Sapia), wants the cost factored into the fuel price before there is even a real estimate of how much money will be needed.

In Parliament this week, the industry’s insistence on full cost recovery was described as “holding government policy to ransom” in order to score subsidies.

Rod Crompton, the head of petroleum at the National Energy Regulator of SA (Nersa), criticised Chevron in particular for trying to stop a new fuel terminal in Cape Town from being built by Burgan Cape Terminals.

Crompton told the parliamentary portfolio committee on energy that the oil company simply wanted to shore up its bargaining power against the government on the cost recovery issue – by limiting the availability of imported clean fuels.

Chevron claims the Burgan terminal is just a way for fuel traders to win the South African market away from locally produced fuels.

In her budget speech last month, Energy Minister Tina Joemat-Pettersson also seemed to be taking a dig at the industry, saying that “the cleaner fuels initiative should not be used to entrench positions of some of the companies that operate in the sector to the exclusion of new entrants”.

There is a task team involving Sapia and the department that is meant to iron out these issues in the near future.

The refinery upgrades no one knows how to fund are part of South Africa’s Clean Fuels 2 (CF2) programme.

Clean Fuels 1 (CF1) was the 2006 switch to unleaded petrol and diesel content at the current Euro 2 level.

The cost of CF1 had been estimated at R10 billion by Sapia, although the costs varied widely from refinery to refinery.

At the time, the second phase was supposed to take place in 2010, which got extended to 2017 with a plan to jump straight from Euro 2 fuel quality to Euro 5 quality.

That target has not been formally jettisoned, but is virtually impossible by now and the industry expects an announcement about the target date soon.

Since the previous policy announcements, Euro 6 has been introduced, worsening South Africa’s lag behind cutting edge fuel standards.

A 2011 discussion document from the department of energy took a defensive stance on how to fund the upgrades. It suggested that the actual investment needed at each refinery be established – and that government should be wary of oil companies trying to inflate the bill.

Avhapfani Tshifularo, executive director of Sapia, says that recovering the upgrade costs would probably require a 20c fuel levy on every litre of petrol and diesel over about 10 years – assuming that the R40 billion figure is in the ball park.

This has been the going estimate for at least six years and is based on an industry consultant’s work from 2006 and 2007.

The number Sapia’s consultants came up with then was $3.7 billion, which came to R30 billion at the exchange rates then and translates to R40 billion now.

Tshifularo admits that the figure is “quite dated”, but insists that it is good enough to plan around.

The government had been suspicious of the number from the get go, saying back in 2011 that it was a “broad brush” estimate based on opaque assumptions and probably completely inaccurate.

The industry’s consultants judged the cost estimate to be only “40% accurate”.

Tshifularo says it could be R30 billion or R50 billion, but says it is safe to assume it would still be in that range.

According to the refineries, the principles of who should pay have to be agreed before anyone gets into the nitty gritty of what it will actually cost.

“The number will have to be confirmed after the principles,” said Tshifularo.

The presumably massive investment required “has no return on investment”, he said. “It is investment to comply with legislation.”

According to him, Sapia and the government have not even started talking about what the cost recovery mechanism might be, although he says it won’t be a direct transfer from government.

It has always been understood that it would be an element in the fuel price structure, he told City Press.

The government might be swayed to subsidise the process in other ways like tax incentives in the form of accelerated depreciation on the new upgrades. This would cut the refineries’ tax bill for a few years.

How we got here

The consequence of falling too far behind the rest of the world in fuel quality is not just pollution. As the petrol and diesel we use becomes illegal elsewhere, South Africa risks becoming a “dumping ground for their inferior fuels and consequently old technology vehicles”, said the government’s 2011 discussion document on South Africa’s Clean Fuels 2 programme.

Each new generation of fuels reduces the sulphur content of diesel and other pollutants.

The use of lead in petrol has been more or less universally stamped out, according to the UN, but the progress on getting sulphur out of diesel is far less impressive.

In most of South America, the sulphur content of diesel is still not at Euro 2, the standard South Africa adopted in 2006.

Falling behind on fuel quality limits the availability of new vehicle technology, says Stuart Rayner, fuel and emissions chair for the National Association of Automobile Manufacturers.

“Our parent companies resist allowing these vehicles into the South African market when the fuel is not readily available,” Rayner, who works for Ford, told City Press.

The latest generation of diesel engines can’t run on South African fuel without modification.

This has knock-on effects for the local manufacturing industry as well. If the local market is closed to a model of car, that reduces the case for manufacturing it here.
It also ultimately turns environmental taxes on carbon into a pure penalty because no one is really able to buy and use the cleanest available vehicles.

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