How relying on imports could lead to South Africa running out of fuel

South Africa’s reliance on cheap imports of refined fuel products has left the local refining industry capacity at dangerously low levels.

The country’s refining capacity has halved since 2020, due to local regulations and operating costs that have made refineries uneconomical.

Consequently, South Africa has only three operational refineries left, these being Atron Energy’s in Cape Town and Natref and Secunda, which Sasol owns.

The combined capacity of these three refineries is around 350,000 barrels per day, which has left the country heavily reliant on imported fuel.

This means that South Africa has little to no flexibility to change its import sources and feedstock, as there is no means to make up for the shortfall during the changeover.

Siya Mbatha, Old Mutual Investment Group (OMIG) analyst, noted that this makes the country highly vulnerable to the worst kind of energy shocks.

Mbatha also explained that refined product prices tend to be more volatile than crude oil prices and, during the current supply shock, have risen the most sharply.

A key reason for this is that the global refining capacity has become increasingly concentrated in the Middle East and Asia due to ESG considerations in the West and the economies of scale on offer in these regions.

Additionally, most countries now find it more cost-effective to outsource refining to a few mega-refineries in the Middle East and Asia.

However, this now means that, as refineries in the Middle East cannot deliver to market and Asian refineries cannot obtain crude from the Persian Gulf, global energy security is under threat.

South Africa, due to its limited local refining capacity, is particularly vulnerable to the impact of this situation.

This leaves the country with little to no domestic optionality to diversify supply away from refined products to crude oil from Nigeria, Angola, or other regions.

Even if South Africa were able to source crude oil from outside the Middle East, it could not refine enough to make a difference to local supply.

Mbatha’s data also showed that South Africa’s fuel imports have shifted dramatically since 2018, when crude oil was the dominant import. Now, nearly 70% of all imports are refined products.

Returning to local refining

Mbatha has noted that disruptions to petroleum supply from the Middle East will force countries to reconsider their energy policies.

This will potentially include energy security, taking primary focus over ESG and carbon taxes.

For South Africa, this conversation will most likely focus on Sasol – the only major domestic petroleum producer and refiner.

Sasol can also produce petroleum products without any reliance on crude oil networks through its coal-to-liquids facilities at Secunda.

That said, years of increasing government pressure on refineries to reduce carbon emissions, onerous regulations, and investor pressure have led Sasol to avoid expanding its domestic capacity.

Instead, the company has mainly engaged in subsistence investing to keep its facilities operational rather than expand them over the past few decades.

Consequently, Sasol went from being able to supply 40% of South Africa’s refined fuel needs in the 1980s to now meeting only around 20% of those needs.

This is partially due to the uncompetitiveness of producing petroleum products from coal and gas, which is very expensive.

To this day, Sasol is the only commercial producer of petroleum products from coal worldwide.

Mbatha has stated that restoring South Africa’s refining capacity to the extent of providing a buffer against external energy shocks will take billions of rands and a decade of sustained investment.

With regard to securing South Africa’s own oil supply via gas-to-liquid or coal-to-liquid facilities, the time horizon would span decades and likely require government investment.