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Liquid fuels in focus

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Liquid fuels in focus

1st June 2018

By: Terence Creamer
Creamer Media Editor

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With so much attention having been paid, correctly, to electricity in South Africa over the past ten-and-a-bit years, other energy subsectors, such a liquid fuels, have been left to evolve in relative anonymity.

That’s not to say they haven’t faced serious policy and existential challenges. The country’s refineries are unable to produce the quality of fuels increasingly demanded by South Africa’s modernising vehicle fleet; the cost-recovery mechanism for facilitating their upgrading has not been finalised; imports of final product have increased materially, along with the need for storage; there have been serious delays and cost overruns in relation to the expansion of the critical fuel pipeline from KwaZulu-Natal to Gauteng; strategic fuel stocks have been sold off cheaply and, most probably, illegally; and the national oil company has imploded financially.

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It is, thus, heartening that Energy Minister Jeff Radebe has taken it upon himself to begin shining a spotlight on liquid fuels, as well as other areas, such as gas and energy efficiency. However, there are some contradictions in his investment-led approach, which could lead to some expensive mistakes unless they are resolved, and resolved transparently.

Without doubt, there are some important and valuable lessons from the electricity sector that should not be ignored when South Africa weighs up solutions to its future fuels challenge.

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The first is that it is extremely difficult to forecast demand. In the electricity sector, demand assumptions have been well off the mark and have proved overly optimistic.

As a result of poor forecasting, the country rushed into building two mega coal-fired power stations, which are not only massively delayed and over budget, but are slowly showing themselves to have been the wrong technology option. South Africa could have met demand, or the lack thereof, far more cost effectively through the deployment of more incremental and cheaper generation solutions. Instead, we are now locked into the projects, notwithstanding growing calls for the curtailment of the Kusile build programme.

Likewise, there are serious demand-side risks to building a mega refinery to produce more and cleaner liquid fuels. South Africa’s liquid fuels master plan cannot depend on past trends to calculate future demand. True, demand could well be more ‘sticky’ than some forecasts, which see the electrification of mobility leading to a decline in petrol and diesel demand. South Africa should not be overly influenced by demand trends in developed economies, which are not likely to drive future liquid fuels growth. However, the trend towards electrification cannot be ignored entirely.

Secondly, scale is a problem for South Africa. Some regions are able to easily justify mega-scale refineries of larger than a million barrels a day, which integrate petrochemicals capabilities to bolster operating margins. It is far from certain South Africa can do the same, however.

The only realistic way of navigating these contradictions is for Radebe to ensure maximum stakeholder participation before pulling the trigger on any new investments. The risks are massive, as are prospects for serious regret.

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