Thank you, hon Chairperson. Hon Minister, hon Deputy Minister and hon Members of Parliament, the Energy Security Master Plan places great emphasis on the centrality of energy in economic development. It correctly depicts energy as the lifeblood of the economy and underlines the consequences of disruptions in the supply of fuel in the economy.
It was estimated in 2007 that a total fuel disruption in the South African economy could cost the economy at least R925 million a day at 2000 GDP prices. This sobering observation requires of us to continuously investigate all possible risks and threats to the whole fuel supply value chain.
Today, I want to focus on the risks present in the increasing mismatch between demand and supply of fuel products, the risks in the sources of supply of crude oil, and the risk posed by the use of a single facility, SBM, to carry crude oil from the oil tankers at sea to refineries.
We are faced with the persistent mismatch of demand and supply of fuel. Our existing refineries are unable to meet the local demand for fuel, and hence the gradual increase in the amount of fuel being imported. According to some conservative estimates, South Africa will have to import in the region of 180 000 barrels per day by 2020 - that is eight years from now - if there is no decision on investment in additional refining capacity. It should be noted that this is equivalent to the nameplate output of SA Petroleum Refineries, Sapref, a refinery owned by British Petroleum, BP, and Shell.
The National Development Plan, NDP, acknowledges that South Africa has run out of refining capacity and hence the country has to import a share of its refined fuel needs. It notes that there are no easy answers to this challenge, and proceeds to present five options with their associated risks, advantages and disadvantages.
The plan requires us to reflect on where the refining margins will be in the next 15 years. This is a very important point, given that refining margins are a good indicator of the profitability of the refineries. The National Development Plan maintains that refining margins are quite low, and are likely to remain so for at least another decade, given a surplus in refined product.
The National Development Plan then recommends the continuation of importing refined products until the country reaches a stage where it can absorb the output of a new refinery and/or a major upgrade of an existing refinery. It recommends that a decision on whether to invest in a new refinery be taken by 2016, or 2017 at the latest.
The National Development Plan emphasises the need for timing this decision properly, as the building of a new refinery is estimated to need 8 to 10 years. I indicated earlier that South Africa will be importing in the region of 180 000 barrels per day by 2020 if no decision is taken to invest in a new refinery.
Indeed, timing is critical, and we need to take into consideration a lot factors prevailing in the market that influence the direction of the refining margins. Understanding the context of the NDP statement on refining margins is critical, as it will assist us to arrive at timeous and proper decisions.
Andy Steinhubl and Jos de S, authors of a document entitled "Global refining: fuelling profitability in the turbulent times ahead", stated the following, and I quote:
The global refining industry will continue to experience cyclicality, but with the ups and downs increasingly dictated by the overall global economy, global crude markets and major refinery disruptions. Between 2000 and the period just prior to the onset of the financial crisis refineries enjoyed a favourable margins environment. The economic developments after 2009 had an adverse impact on the refining margins, particularly in the US and Europe. There is currently a rationalisation of refineries in the US and Europe to cope with financial losses on their refineries. These developments are definitely related to the economic situation in Europe and the US.
The KPMG Global Energy Institute, in a paper entitled "Challenges and opportunities for today's global refining industry", indicates the following, and I quote:
The last time a completely new refinery went operational in the US was in 1976. In fact, from 1981 to 2008, the number of US refineries declined by over 50 percent ... Nevertheless, the period saw a 20 percent increase in US demand for refined oil products, much of it met by importing refined products.
Actually, the US may soon be desperate for new refineries, and opportunities can possibly emerge for investment and development. The KPMG study continues and states the following, and I quote again:
Older refineries cannot refine the heavier and cheaper crudes that are becoming more common as reserves of sweet crude are depleted. Old refineries also have more difficulty complying with environmental standards. In addition, other parts of the world such as China and India will require more refining capacity as their economies grow.
Asian and African economies have been experiencing positive economic growth; hence their increasing thirst for crude oil and fuels. Therefore, the centre of gravity in the global refining industry is shifting away from developed nations to emerging economies.
Clearly refining margins are cyclical, and have a positive relationship to the performance of the economy and other refinery-specific factors I will deal with later.
The second set of risks we are faced with relates to the current state of our existing refineries. South African refineries are outdated, with an average age of 40 years. They desperately require upgrading to enable them to produce cleaner fuels. Their inability to produce cleaner fuels poses environmental and health hazards to adjacent communities, and adversely affects the car manufacturing industry. We welcome the department's initiative to audit the state of our refineries and develop cost-recovery mechanisms relating to the upgrading of refineries.
Domestic car manufacturers produce cars that require low sulphur content fuels. The higher sulphur content fuels affect the efficiency of the catalytic converters in cars. These refineries have high maintenance costs and experience periodic unplanned shutdowns. This poses risks to the security of supply in South Africa.
The third set of risks relates to the inability of these refineries to process heavy sour crude. They have been configured to process light sweet crude. The study by the KPMG Global Energy Institute indicates that there is a price differential between light sweet crude and heavy sour crude. Heavy sour crude is cheaper and the refining margin will definitely look attractive when a complex refinery is utilised. As a country, we need to give serious consideration to investing in a complex refinery that can process heavy sour crude. We need a refinery that is complex to process crudes from various sources.
I agree with you, Minister, that with the tensions highlighted in the Middle East we definitely need good diversification of our resources. The challenge, however, is that our refineries are old and cannot refine heavy sour crude.
We also need to reach finality in the discussion of who must pay for the upgrading of these old refineries. The shareholders of these old refineries are not giving any signal as to whether they are prepared to invest in the upgrading of their facilities. I have always assumed that it is common practice in business to strive to preserve retained earnings in the good times, so as to be able to invest in the company when the need arises and deploy more efficient technologies. The world of oil is strange and murky indeed. Ironically, the amount of money needed to upgrade these refineries is equivalent to an equity injection in a new complex refinery.
The fourth set of risks relates to the rationalisation that has been taking place in oil companies. I assume that this decision was taken by their headquarters, based in London and other international capitals.
I am stating these facts so that we can make an objective determination regarding the need for new refineries, without being dictated to by vested interests. It is about deciding the future of our national interests.
The shift in the centre of gravity in the global refining industry requires us to seriously think strategically about the role of our national oil company, PetroSA. National oil companies, globally and in emerging markets, engage in business because of security of supply concerns and dictate the pace of the development of their own country. It has nothing to do with soviet-type state-led development.
The paper by Steinhubl and De S on the global refining industry asserts that oil companies that focus on operational excellence and have a continuous improvement mindset are those that will separate the leaders from the rest of the pack. This is a mandate that we are giving to our national oil company, PetroSA. It must improve its production and operations, and focus on excellence. It should not allow the opportunities that arise from this shift in global refining from developed countries to emerging markets to escape its attention.
In conclusion, the ANC supports this budget. Thank you.