Sipho Maseko
Sipho Maseko

HE current debate on whether the South African government should build an oil refinery at Coega in Eastern Cape has once again put the issue of the country's future energy supply in the spotlight.

Project Mthombo is an initiative to build a refinery capable of meeting South Africa's future energy needs.

The planned refinery - named Project Mthombo - is to be built at a cost of $9billion (about R65billion) and is expected to produce 400000 barrels a day. It will have the potential to address the shortfall in locally produced fuel for at least 20 years.

State-owned PetroSA received a manufacturing licence in October 2008 from the Department of Minerals and Energy for the project.

A few years ago Eskom presented a business case to the government for a new power plant and asked shareholders for approval to go into the FEED-stage of the project.

In the FEED-stage the uncertainties of a project are reduced as technical specifications and cost estimates are further clarified.

Finally it was decided that Eskom should stop with the project. The results are known. The country ended up with an electricity crisis.

In the end Eskom was instructed to execute the projects under severe time pressure in an "emergency mode" without proper planning.

Unless South Africa takes the bold step and goes ahead with Project Mthombo there is another energy crisis in the making.

Remarks by BP South Africa chief executive Sipho Maseko seems to be discouraging our government and PetroSA from going ahead with Project Mthombo.

He is quoted as saying that "there is enough surplus refinery capacity in the world and it is likely to remain so beyond 2020. It therefore makes no sense to burden South African taxpayers when better and cheaper options are available than building a new expensive refinery".

Maseko's views were contradicted by Tony Hayward, chief executive of BP in London, in February in a speech on energy security at the London Business School.

Hayward said the world would need about 45percent more energy in 2030 than it consumed today - "and double what we consume today by 2050. That's going to require investment of more than $1trillion - about R7trillion a year - every year."

While acknowledging the need for more efficient energy use, Hayward argues that "there is no magic solution, and we will need a wide mix of energy types in 20 years' time".

The SA Petroleum industry has been heavily protected by the government since the detested apartheid days.

The supply and demand balance was managed through a sophisticated regulatory framework. This resulted in a very narrow focus of industry players on the SA market.

The world has in the meantime moved on and corporate strategies of the Independent Oil Companies (IOCs) have significantly changed.

Active portfolio management with limited investment in highly efficient downstream assets in mainly growing Asian markets are the consequence.

This has resulted in an exit strategy from Africa by oil companies such as Caltex, Shell and BP - except within the regulated downstream market in South Africa.

This has led to the closure of a number of refineries without regard about the potential impact to the economies of these countries.

According to the Business Day of March 5 2010, BP is planning to pull out of five countries in Southern Africa: Botswana, Malawi, Namibia, Tanzania and Zambia and refocus its business operations on South Africa and Mozambique.

The strategy is to utilise its strategic terminal infrastructure that runs through Mozambique for its future trading and supply operations and to use Mozambique as a point of entry into the growing SA market.

In this regard, BP has also decided to dispose all other assets/operations in other African countries that do not support this new strategic framework.

Total and Engen are the only two IOCs who have opted to grow their downstream business mainly through the acquisition of more downstream assets.

Domestic demand for fuels already exceeds the country's refining capacity, forcing SA to import fuel. It is estimated that if there's no significant investment in local refining capacity SA will have to import 150000 barrels of refined fuel a day within the next five years.

This is considerably more costly than refining crude oil domestically and makes us reliant on the international supply.

Besides exposing SA to the vagaries of international supply, importing this much fuel will have a negative impact on the country's Balance of Payments (BOP).

According to PetroSA, Mthombo will be commercially sustainable.

Coega has a modern, deep-water harbour on an international trade route and readily accessible to major crude fields in South America and Angola.

Sourcing crude from these markets will also enable the country to reduce its 80percent reliance on light-sweet crude oil from the Middle East.

During the three-year construction phase PetroSA estimated that it will create in excess of 27500 temporary jobs and a further 18000 sustainable jobs during operation owing to direct and indirect impacts on the SA economy.

Once operational, the project will generate a BOP savings of at least R18,5billion a year. Mthombo also fits with the government's plan to scale up production in value-added sectors by replacing imports and creating growth and employment opportunities.

The writer is chairperson of The Lobby Corporation of South Africa