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NATREF IN DURBAN

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NATREF IN DURBAN History Economic boom in SA post World War 2 resulted in petroleum demand reaching about 210 000 bbls per day in the early 1960 s. – PowerPoint PPT presentation

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Title: NATREF IN DURBAN


1
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).

3
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

4
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).

5
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.

6
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.

7
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.

8
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.

9
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.

10
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.

11
APPENDICES
12
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

13
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.

14
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

15
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.

16
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.

17
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.

18
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.

19
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.

20
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

21
6. Natref Investments
  • The result is that more refined product
    transported from Natref to end destinations than
    before.

22
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.

23
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
24
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