The Mthombo refinery will need a system to transport fuel to Gauteng, SA’s largest market, to prevent it from becoming a white elephant.
When construction gets under way for PetroSA’s Mthombo refinery project, possibly by 2014, it will be SA’s third-largest investment, conservatively estimated at R81bn. As single capital expenditure projects go, it will only be smaller than Eskom’s new power stations, which are under construction.
To make the project practical and efficient, the cost may rise by another R40bn, at the minimum, if a pipeline is to be added.
Mthombo will be built at the Coega industrial development zone in Port Elizabeth, at least 1100km from the major market of Gauteng, where more than 40% of SA’s fuel is consumed. That distance is more than twice the length of Transnet’s multiproduct pipeline between Durban and Heidelberg, southeast of Johannesburg.
In the Eastern Cape there is neither sufficient demand nor infrastructure, and if PetroSA is to make a success of the Mthombo investment, it will have to build other infrastructure for easy reach to the market. PetroSA’s competitors have already said the refinery will be a white elephant that SA cannot afford and doesn’t need.
Its options would be to build a new pipeline all the way to Gauteng, or to build a 900km connection to the existing multiproduct pipeline in Durban. Either of those would cost more than Transnet’s existing pipeline, the price of which ballooned from the original R9,5bn to about R24bn after several delays.
To ensure Mthombo’s success, PetroSA has little choice but to invest in costly additional infrastructure if it is to get its products to the inland market.
The Eastern Cape, where the refinery will be based, is one of SA’s poorest regions, which lacks infrastructure and any economic activity of significance.
An official who has worked for the Coega Development Corp says part of the motivation behind the industrial zone is to help the province overcome its infrastructure backlog and to encourage economic development. The province had the highest unemployment rate, at 37,4%, against SA’s 25,5%, in the third quarter of 2012. It also has the country’s highest illiteracy rate with 26,5% of its residents having less than a grade 7 education, said Statistics SA in the 2011 census report.
That means if the Mthombo refinery is to stand a chance of avoiding the “white elephant” tag, it must access the market in Gauteng. But without existing plans for a pipeline, questions remain about how the fuel will be transported.
“That’s a tricky question,” says Marc Seris, a senior director at consultancy PFC Energy.
That’s because the next busiest economic centre, the Western Cape, is well supplied by Chevron’s refinery in Cape Town, while KwaZulu Natal has more than one refinery and infrastructure for imports. PetroSA must, therefore, build a pipeline to Gauteng, as trucking the fuel in would be more expensive, and would put pressure on the road system and be unsustainable in the long term.
Another option would be to ship the fuel up the coast to be injected into the Durban pipeline. That would create SA’s own domestic-focused shipping industry and, during a global slowdown in the industry, may prove a lot cheaper than road haulage. But shipping is cyclical and rates naturally respond to the level of global economic activity, whose costs may rise significantly as the global economy picks up.
PetroSA has itself highlighted limited port infrastructure as another reason to build a refinery at Coega.
The question then is what is the cheapest and most feasible option for Mthombo’s fuel? The Transnet pipeline was commissioned in January 2012 and had delivered 2,2bn litres of fuel to Gauteng by the end of October, replacing 200 trucks a day on SA’s busiest highway, said Transnet CEO Brian Molefe in November. The pipeline’s R24bn price tag promises 70 years of reliable service.
Seris says it would be better to build a Port Elizabeth-Johannesburg pipeline as having two separate sources of supply lowers the risk of fuel contamination.
“From a security of supply point of view, it would be desirable to have the two pipelines,” he says .
In November the inland market ran short of fuel after contamination at Sasol’s Natref refinery affected 7Ml of jet fuel supplied to OR Tambo International Airport. At some point stocks ran at just 1,4 days’ supply, threatening to ground airlines before supplies were sourced at the last minute from Durban. The airport normally retains a seven-day supply of fuel in storage tanks. Some service stations in Gauteng had to do without certain types of fuel until after the first two weeks of December.
The National Energy Regulator of SA (Nersa), which regulates the transportation of liquid fuels and pipelines, says it has not received an application for the construction of a new pipeline. Transnet has not been approached by the energy department or PetroSA to consider investing in a new pipeline. “Normally the application goes to Nersa, which will then launch a competitive process to get bidders for the project,” says Transnet spokesman Mboniso Sigonyela.
The Coega Development Corp, the state-owned company tasked with developing and operating the industrial development zone, referred questions on a pipeline to PetroSA.
Though PetroSA did not answer specific questions as to whether it would build a pipeline, it says Project Mthombo cannot be the only solution to the country’s liquid fuels supply challenges.
“Upgrading of existing refineries and logistics are complementary projects to enhance security of supply,” says Jörn Falbe, a PetroSA vice-president.
Victor Sibiya, deputy director-general at the energy department says a pipeline would be the “best option” as it is a long-term investment and pipelines are best for bulk transportation of fuel.
PetroSA could also ship fuel to Durban or Cape Town, which would also be economical, he says.
What it means
New refinery needs supply system to Gauteng
Pipeline will push up costs