NATREF IN DURBAN

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NATREF IN DURBAN
2
History

• Economic boom in SA post World War 2 resulted in
  petroleum demand reaching about 210 000 bbls per
  day in the early 1960s.
• By 1966 five refineries in operation in South
  Africa and a recently completed refined products
  pipeline to Sasolburg was nearing saturation
  (see appendix 1).
• In 1966 a crude line was commissioned for
  strategic crude oil storage at Kendal in present
  day Mpumalanga (SATS).
• In 1966 SA Government took decision for
  establishment of a new refinery to cater for
  growth - but where?
• Total was at the time considering investment in a
  refinery in South Africa with Mobil.
• Total felt that an inland refinery would
  disadvantage them compared with a refinery at the
  coast (appendix 2).

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History

• TSA and Sasol approached SAR/SARH and Department
  of Commerce and Industry for assurances that
  investment in a refinery would not disadvantage
  Total relative to a coastal refinery.
• These assurances, provided by Government, paved
  the way for the construction of Natref with NIOC,
  Total, and Sasol as shareholders (appendix 3).
• The location of Natref was to be in the Free
  State near Sasolburg because of (among others)
• Strategic concerns
• Located near the heart of highest demand for
  fuels
• Refined products line capacity close to
  saturation
• Existing infrastructure supported investment
• Business opportunity for upgrading of crude oil
  to saleable fuels

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Natref in Durban principle

• Government assurances were primarily given around
  transport economics.
• This gave rise to the principle of Natref as if
  it were located in Durban from a transport
  perspective. This would then not disadvantage
  Natref relative to a Durban refiner.
• This means that the total cost of transport of
  crude oil and the transfer of refined product
  from Natref to a depot would be equivalent to
  transport of the same product from Durban to the
  depot after adjustment for yield.
• The creation and subsequent management of the
  tariff structure between crude and refined
  product has generally been in line with
  Government assurances provided at the time of the
  negotiations for the establishment of a new
  refinery and the Natref in Durban principle
  (appendix 4).

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Total South Africa today

• Since democratic elections in 1994 several
  milestones have been reached or are in process of
  being attained
• Publication of the White Paper in 1998
• The BEE Charter in 2000
• The change towards better methods of petroleum
  product pricing
• The start of a framework towards the provision of
  Cleaner fuels
• Total recently completed the opportunity related
  to the BEE Charter in providing 25 of its
  shareholding to a BEE Consortium, TOSACO.
• TOSACO through its stake in Total South Africa
  now has a direct interest across the entire
  downstream petroleum value chain including crude
  oil refining and Natref in particular.

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Natref Long Term Strategic Positioning?

• Natref could be considered a strategic refinery
  due to, amongst others, its inland location and
  as a primary, reliable supplier of jet fuel to
  JIA. This has been proved over many years.
• There is nothing more in the way of capital
  expenditure or otherwise that Natref can do to
  minimise any threat to its transport economics.
• Any such threat to its transport economics has
  the potential to seriously damage its long term
  viability.
• For coastal refiners this is not the case, as
  adverse changes to the tariff structure would
  ultimately be carried by the consumer in both
  regulated and deregulated environments. This is
  because they have direct control over the
  management of these costs.

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Natref Long Term Strategic Positioning?

• This is not the case for Natref which is
  dependent on a third party owner / operator for
  the supply of its feedstock. This third party
  (currently Petronet) can charge tariffs out of
  proportion to those charges ultimately
  recoverable from the customer putting Natref at a
  transport disadvantage relative to a Durban
  refiner.
• Thus firm arrangements on an appropriate tariff
  structure by Petronet can be viewed as crucial
  for maintaining the medium to long term viability
  of Natref.
• Without assurances future investments can be
  compromised and the medium to long term viability
  of Natref can be questioned.

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Natref Pipeline Bill Implications

• It is recognised that some form of regulation of
  the pipeline industry in South Africa is
  required. Unfortunately the current Pipeline Bill
  does not provide sufficient security for Natref.
• An unintended consequence of the Bill could
  render Natref economically unviable with a
  negative effect on the regional economy,
  employment, consumers, reduced income to the
  Natref shareholders and subsequent loss of tax
  revenues to the state.

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Natref Pipeline Bill Suggestions

• It is suggested that the Pipeline Bill creates a
  reasonable tariff differential between crude oil
  and refined product so that any existing or
  future inland refinery would not be disadvantaged
  relative to a coastal refiner from a transport
  cost perspective. This would require changes to
  Sections 21 and 33.
• It is further suggested that the Bill provides
  that should State- owned entities dispose of
  pipeline assets, these assets are first offered
  to affected parties who would also have
  pre-emptive right over such issues.

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Natref Pipeline Bill Suggestions

• It is recommended that Clause 21 be amended to
  read
• 21. Licensees may not discriminate between
  customers or classes of customers regarding
  access, tariffs, prices, conditions or service
  except for objectively justifiable and
  identifiable grounds, which grounds may include
  the geographic location of a refinery.
• It is recommended that Clause 33(1)f be amended
  to read
• (f) the methodology to be followed by the
  Authority in setting and approving tariffs, price
  regulation principles and applicable procedures,
  provided that this shall include a mechanism to
  ensure that there is no discrimination in
  transport charges between an inland refinery and
  a coastal refinery, with the effect that such
  refineries are charged the same amount for the
  transport of an equivalent amount of petroleum
  (taking into account the actual yield of crude
  oil to petroleum products) to the same
  destination.

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APPENDICES
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1. South African Refining History

• 1954 - Commissioning of Sasol 1 in Sasolburg.
• 1965 - Refined product line from Durban to
  Sasolburg commissioned.
• 1966 - Crude line had already been commissioned
  for strategic storage at Kendal in present day
  Mpumalanga. The coal mines would, at its peak,
  hold about 118 million barrels of oil.
• By 1966 the following refineries were in
  operation
• Satmar (1934 in Boksburg) - Satmar(Anglo-Vaal)
• Enref (1954 in Durban) - Mobil (Engen)
• Sapref (1963 in Durban) - Shell BP
• Calref (1966 in Cape Town) - Caltex

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2. Total concerns about inland refinery

• Total was keen to invest in a refinery and had
  discussions with Mobil to set up refinery at the
  coast.
• Total felt that location of Natref would
  disadvantage them compared to a coastal refinery
  for numerous reasons
• Additional pipeline cost for crude to the inland
  refinery and then transport cost of product from
  this refinery to the end destination.
• An inland refinery could not benefit from export
  opportunities which were available at the coast.
• There was no bunker market inland to absorb fuel
  oil production.
• The only way to accommodate fuel oil production
  was either through crude selection or through a
  complex refinery processing scheme either
  option being very expensive.
• Accordingly TSA required an undertaking from
  Government that it would not be disadvantaged
  vis-à-vis a coastal refiner should it invest in
  Natref.

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3. Assurances from Government

• Internal SAR memo dated 24/04/1967 from GM ?
• negotiation mandate
• that in principle the tariff for crude oil shall
  be determined so that transport income for crude
  oil from the coast to Natref and of refined
  product from Natref to destination must be the
  same as if refined product was transported
  directly from the Coast
• further confirms that discussions with Sasol
  Total must be advanced in this manner.
• Internal SAR memo dated 26/05/1967 from GM ?
• confirms that negotiations on transport cost for
  crude oil and refined product has been settled in
  accordance with negotiation mandate set out in
  memo dated 24/04/1967.
• Letter from MD of Total to Secretary of Commerce
  Industry dated 03/07/1967 ?
• TSA notes the agreed principle and that
  government will ensure that inland refinery will
  not at any time be placed at a disadvantage as
  regards transport cost in relation to a refinery
  at the coast

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3. Assurances from Government

• Letter from Assistant GM of Sasol to SAR dated
  17/01/1975?
• affirms agreement reached in 1967 and that SAR
  would not lose or gain(same for Natref) because
  Natref not situated at the coast.
• also confirms government assurance that Natref
  would not be worse off than refinery at the
  coast.

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4. Tariffs - history

• 1967 - 1981
• SATS principle was that their income would remain
  the same as if Natref product was dispatched from
  the coast. To ensure this a crude tariff was
  defined and a six monthly reconciliation made.
  Adjustments to the crude tariff would be made
  accordingly. This was the start of the Natref in
  Durban principle.
• 1981 1987
• Above difficult to manage and changed to Natref
  paying Natref to Depot leg and full Durban to
  Depot transport cost recovered from SATS. No
  crude tariff charged.
• 1987 1991
• Following the de Villiers report that SATS
  decentralise and become more focused, Petronet
  created. Crude oil tariffs re-introduced with
  differentiated tariffs by pipe or rail. Strong
  resistance from Natref partners to this as it
  compromised the Natref in Durban principle and
  exposed Natref to transport diseconomies.

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4. Tariffs - history

• Post 1991
• Agreement was reached with Petronet on a direct
  linkage between crude oil white oil tariffs.
  This linkage governed by the yield of white
  product.
• The history of white oil / crude oil tariff
  structure has thus been more or less in the
  spirit of assurances previously made by
  Government or its agencies.
• Based on the 1991 agreement the expansion of
  Natref in the early 90s was approved.

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5. Natref Characteristics

• Complex refinery with high capital and operating
  costs.
• However this is offset by having a very high
  refined product yield compared to a coastal
  refinery (89 compared to 70 for a coastal
  refinery).
• The high white oil yield means the production
  of fuel oil is relatively low and the costs
  associated with railing this fuel oil back to
  Durban are minimised.
• Even though the refinery is expensive to operate,
  the high white oil yield makes it cost
  competitive compared to its Coastal neighbours.
• Natref is unable to dispose of undesirable
  products in the local or export market due to its
  location. Thus all projects (for example, Clean
  Fuels) are geared to making the refinery self
  reliant.
• Natref cannot take advantage of opportunities
  offered in the export market because of its
  inland location.

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5. Natref Characteristics

• Inland refineries by their very nature are always
  under threat by coastal companies because of
  transport economics.
• Coastal companies can always recover the cost of
  transport from their clients in both regulated
  and deregulated markets this is not the case
  for inland refineries who have to pay for the
  cost of crude and then the cost of moving product
  to the market.

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6. Natref Investments

• R1.4 billion investment in Natref over the years
• intent to increase white product yield from
  original 79 to 89 (to date)
• achieved through advanced bottom of the barrel
  processing and state of the art distillate
  hydrocracking unit
• These processes steadily increased petrol
  diesel yield from black products
• Further the processes allowed for the purchase of
  heavier crude oils from which Natref could
  produce more petrol and diesel than a normal
  refinery increasing the profitability of the
  refinery through lower feedstock cost with higher
  end product margins

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6. Natref Investments

• The result is that more refined product
  transported from Natref to end destinations than
  before.

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7. Result of Transport situation

• The period through to 1979 can be considered a
  time when Natref was truly neutral from a
  transport perspective neither making nor losing
  money.
• The commissioning of Sasol 2 3, coupled with
  penalties imposed by SATS on rail backs from
  Natref seriously compromised Natrefs transport
  economic position to the extent that Sasol
  considered reducing production in 1986.
• The period between 1987 and 1991 resulted in
  numerous interactions with SATS at senior
  managerial level where both Total and Sasol
  expressed extreme dissatisfaction to the tariff
  structure. This culminated in the linked
  structure from 1991.

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8. Rail back Economics

• Rail backs towards the coast are costly in that
  the revenue earned for the white oil tariff to
  destination is often less than that for the total
  transport expense to supply product. For example
  (2003 / 2004 prices).

Coalbrook (Natref)
White oil transport Natref to Depot R25.85
Crude tariff to Natref R68.00 Equivalent white
oil at Natref yield R68 / 0.89 R76.40
Kroonstad
Durban to Kroonstad R99.02
Durban
Total cost of product passing via
Natref Equivalent cost of transport of crude
oil as white product plus Cost of transport
of white product from Natref to Kroonstad
R76.40 R25.85 R102.25 Recovery is Durban to
Kroonstad rate at R99.02 Net loss R3.23
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