One government decision can make South Africa run out of petrol and diesel

South Africa’s decision to capitalise on relatively cheap, reliable imports of refined fuel products has left the country with dangerously low levels of local refining capacity. 

This gives the country little to no flexibility in switching import sources and feedstock, with it having to import the majority of its refined petroleum products.

The country’s refining capacity has halved since 2020 as local regulations and operating costs made refineries uneconomical businesses in the country. 

As a result, South Africa only has three operational refineries. Astron Energy’s in Cape Town and Natref and Secunda, which are owned by Sasol. Combined, these refineries have a capacity of around 350,000 barrels per day. 

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

Mbatha 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. 

This is because 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. 

Effectively, with globalisation, countries found it more cost-effective to outsource refining to a few mega-refineries in the Middle East and Asia. 

Now that production from the refineries in the Middle East cannot make it to market and Asian refineries cannot get crude from the Persian Gulf, global energy security is under threat. 

South Africa is one of the most vulnerable to this, with its already small refining capacity being cut in half over the past five years. 

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. 

Thus, a decision based on financial gain over the past two decades is now coming back to haunt South Africa in the form of poor energy security. 

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

Mbatha’s data 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. 

This can be seen in the graph below, courtesy of Mbatha and OMIG. 

Refining renaissance

Mbatha explained that the current crisis, which comes after several disruptions to petroleum supplies from the Middle East, will force countries to rethink energy security. 

Energy security will become the priority once again, with ESG and carbon taxes likely to take a backseat in the minds of politicians. 

In South Africa, this conversation will centre around Sasol, as it is the only major domestic petroleum producer and refiner.

It also has the ability to produce petroleum products without any reliance on crude oil networks through its coal-to-liquids facilities at Secunda. 

However, years of increasing government pressure on refineries to reduce their carbon emissions, onerous regulations, and pressure from investors have led Sasol to avoid expanding its domestic capacity. 

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

From being able to supply 40% of South Africa’s refined fuel needs in the 1980s, Sasol can only meet around 20% today. 

This is partly because of the uncompetitiveness of producing petroleum products from coal and gas, with it being very expensive. To this day, Sasol is the only commercial producer of petroleum products from coal in the world. 

With regard to refining capacity, this does not hold to the same extent, with both Glencore-owned Astron and Sasol saying their local refineries are cash-flow positive and key parts of their business. 

However, Mbatha explained that the margins of these operations are so thin due to the South African context that it is very difficult for businesses to justify investing billions in upgrading or expanding their facilities. 

Sasol and Astron can add modular components to their refineries to boost capacity to a limited extent, but this will not make a meaningful difference to the country’s energy security. 

Some refining capacity can be restarted, with the Central Energy Fund looking to restart operations at Sapref in Durban. 

This is the country’s largest refinery, with a capacity of 180,000 barrels per day. However, it has been shut since 2022 after Shell and BP stopped operating the facility. 

The Engen refinery, also in Durban, has been permanently shut down since a fire in 2020, with 135,000 barrels of capacity offline. It is now a fuel storage and import terminal. 

Apart from these two major facilities, the smaller PetroSA gas-to-liquids facility in Mossel Bay was mothballed amid a lack of feedstock.

Mbatha explained that restoring South Africa’s refining capacity to a level where it provides a significant buffer to 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 run into the decades and would likely require government investment.