Two of the world’s largest petroleum companies are among the bidders lining up to purchase Shell Downstream South Africa’s (SDSA) assets.
This includes the Abu Dhabi National Oil Company (Adnoc) and Aramco, which are the state-owned oil and natural gas enterprises of the United Arab Emirates and Saudi Arabia, respectively.
Seizing the opportunity
The petrochemical giant Shell made headlines in May when it declared that it is pulling out of South Africa and that it would sell its 72% stake in SDSA.
The Anglo-Dutch petroleum company has operated in the country for over 120 years, and its local assets are estimated to be worth more than $800 million (R14.7 billion).
These assets include approximately 600 service stations, as well as retail, transport, and refining operations.
At one point, it also had a stake in the South African Petroleum Refinery (Sapref), but this was sold to the Central Energy Fund earlier this year for the symbolic sum of R1.
The proposed sale of Shell Downstream business has managed to attract the attention of the world’s largest oil companies, including Saudi Aramco and its regional competitor Adnoc.
Aramco and Adnoc were reportedly in early discussions to acquire Shell assets and are among the list of bidders, which also includes Sasol and commodity traders like Trafigura and Glencore, according to Daily Investor.
Investment from either of these two oil giants would significantly impact the industry in South Africa, as both have the capital to reinvigorate the country’s refining capacity.
The interest displayed by the two Middle Eastern oil giants comes at a time when other petroleum companies are downscaling their operations in South Africa.
TotalEnergies, which is Europe’s largest oil enterprise, announced earlier this month that it intends to withdraw from its offshore oil and gas ventures in South Africa, Reuters reports.
The French company invested more than R7.4 billion to find gas reserves off the South African coast, but is pulling out due to the country’s relatively small market, slow economic growth, and regulatory hurdles.
Shell’s exit from South Africa
Following Shell’s announcement that it would exit South Africa, reports began to circulate that the oil company was leaving due to a dispute with its B-BBEE partner, Thebe Investments Corporation (TIC).
The early story was that TIC wanted to cash out on its 28% stake in SDSA, which prompted Shell to re-evaluate its local operations altogether.
However, TIC Chief Investment Officer Rapulane Mabelane later clarified that Shell had confirmed its plan to leave more than two years ago and that the disagreement was actually about the size and value of TIC’s shares.
TIC first invested in Shell in 2002 with a 25% stake in what was then known as Shell SA Marketing (SSAM).
In 2008, Shell approached TIC asking it to partner with the oil company once again, which led to TIC acquiring an additional 25% share in Shell SA Refinery (SSAR).
Fast forward to 2015, and Shell informed TIC that it wanted to merge SSAM and SSAR to form one business unit, what we know now as Shell Downstream South Africa.
As a result, TIC’s 25% stake in both SSAM and SSAR was combined into a 28% stake in SDSA, and a formula to determine the monetary value of these shares was included in the contract as an exit mechanism in the event that one of the entities wanted to withdraw from the partnership.
In 2022, TIC issued a notice to Shell that it wanted to sell its stake, and a dispute arose regarding the fair value of the shares.
The actual reason for Shell’s exit is likely due to its global business strategy, including its carbon emission targets and its return on local investments.
The petrol company is exploring more eco-friendly avenues in preparation for the global shift to new-energy vehicles, while South Africa has been sluggish in its response with low electric vehicle adoption rates and a lack of government support for local manufacturers.
Local fuel regulations may also be hampering profitability, as the national government sets the price of petrol, and stations must set their retail margins in a narrow price zone with no discounting allowed.
Experts believe that these practices undermine profits and create a meagre return on investment that discourage legacy oil companies from continuing operations on local soil.
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