1. LOCATION OF THE REFINERY
Coega is centrally located between Cape Town and Durban coastal areas. The Coega location offers world-class facilities and support from the Coega Development Corporation and the opportunity to establish an alternative import / export hub in South Africa. PetroSA considered several alternative locations as part of a location screening study. Saldanha Bay, Richards Bay, Durban, Newcastle and Coega were examined. These locations were screened on environmental, technical, financial, commercial and strategic criteria, which informed the decision to locate the proposed refinery at Coega.
1.2. What are the key advantages of the Coega site?
Coega has several advantages over other locations. The most important are: The central coastal location offers logistics flexibility for the supply of automotive fuel to the east and west coasts. In several aspects the Coega refinery will follow the successful Singapore model: a world-class manufacturing site in a central location with a deep-water port and connecting small fragmented markets.
The liquid fuels market in the Eastern & Western Cape regions is rapidly growing and the regions are already importing fuels. A refinery in Coega can supply the growing demand more easily than a refinery elsewhere using the existing pipeline network. With the demand set to grow over the years, putting a strain on the existing pipeline infrastructure, the feasibility of building a complementary pipeline from Coega northwards is also being evaluated. This could add flexibility and complement supply options to the existing Durban/Gauteng corridor and enhance security of supply. World-class infrastructure is already in place in Coega. The refinery will leverage governmental investment in the Coega IDZ and avoid double investment at other sites. Coega offers excellent opportunities for growing an adjacent petrochemical industry. Major markets for plastics are already in place nearby in the motor car manufacturing industry. Coega is ideally located for exporting product either westwards or eastwards should the need arise.
2. PROJECT SPECIFIC QUESTIONS
2.1. Whose project is Project Mthombo, and will there be any partner companies involved?
The project is led by PetroSA, the national oil company. PetroSA is developing the project jointly with Sinopec as the anchor partner and Industrial Development Corporation (IDC) as the national funding partner. Sinopec is a Chinese national oil company that has extensive experience in building and managing refinery projects, specialises in industrial investment, the marketing and comprehensive utilization of oil and natural gas, oil refining, and transportation of petrochemicals.
2.2. What is the current status with Project Mthombo?
PetroSA, together with its joint study partner, Sinopec, have just completed the review of the project business case and a refinery capacity of 300 000 bbl/d has been approved by both partners. The two companies, together with IDC are preparing for the next phase of the project – which is the feasibility studies where the business case will be developed further. During feasibility the strategic partners will be firmed up; funding strategy confirmed; project timelines clarified; technology selected; project scope defined further; infrastructure studies conducted and more technical details will be provided concerning the project. After these studies the project will be able to progress sufficiently to take a decision to implement the FEED phase of the project.
2.3. What is Project Mthombo’s crude oil supply strategy?
Project Mthombo crude oil strategy considers long term trends to ensure that the refinery will remain competitive in markets may be fundamentally different from today's markets. The crude processing strategy is based on selecting design crudes that ensure the refinery supports a number of commercial and strategic objectives at reasonable capital and operating costs. Project Mthombo has therefore evaluated heavy crudes that are challenging to process which can be sourced from Venezuela, West Africa, Middle East crude and Brazil and Arab Heavy and Marlim crude oil blend has been chosen as the design crude.
2.4. What other supply alternatives has PetroSA considered?
Importing of final products that meet the Clean Fuels 2 requirements
One of the problems with this option is the security of supply risks associated with increasing import levels, e.g. risk of dependence on importers who have other commercial priorities; and the risks inherent in greater shipping movements. Also the negative impact of this option on the balance of payments and tax losses due to offshore refinery margins cannot be discounted. Continued imports of products in a country where unemployment is still relatively high can be equated to exporting jobs that would have otherwise been created through investment in a local refinery. With the implementation of Clean Fuels 2 (CF2) in 2017, sourcing large volumes of clean fuels could be a challenge as only a few refineries outside of Europe can make these specifications and Europe is the destination of choice for these volumes.
Coal-to-Liquid Plant (CTL)
PetroSA investigated two separate projects in parallel: an 80 000 coal-to-liquids plant in the Waterberg area, and a crude oil refinery based on imported heavy sour crude oil. Based on the assessment of the needs of the country, the commercial and social environment, PetroSA found the crude refinery in Coega to be a viable option. Although a CTL plant has an advantage of using indigenous resources and proven technology, it presented serious environmental challenges. Its small scale would not provide a long-term sustainable solution to the country’s growing demand and of the SADC region. The water requirements, project risks, high cost and other shortcomings rendered the project economically unattractive.
Partnering with Angolan NOCs to build a refinery in Angola or Nigeria
This option is not ideal for ensuring supply for our country as it has its own challenges, e.g. schedule risk which might be impacted by security or political environment. Similar to imports, building a refinery in another country does not promote creation of the much needed local jobs. However, with the SADC and Sub-Saharan region transportation fuel products shortfall expected by 2020 to exceed 400 000 bbl/d and 1 million barrels per day respectively, investment in the different regional centres is not necessarily mutually exclusive, because there is sufficient market to accommodate these possible developments.
2.5. If there is so much shale gas, why do we need Project Mthombo?
Shale gas has still a lot of uncertainties in view of time, volume and price. Shale gas still needs to undergo confirmation of gas reserves, proof of flow, assessment of sweet spots and priorities to develop and EIA. All these processes require time and financial investment. It will in any case come in a phased manner and will require logistical infrastructure integration in order to connect the gas to the market. Project Mthombo will allow such a flexible integration. In effect shale gas can strengthen the value proposition of Project Mthombo. Furthermore, the first gas is expected to be routed to the production of electricity as it would be an alternative market for shale gas. Shale gas will also replace the imports of LNG.
2.6. Building a huge refinery means excess volume to export and exports are not profitable. How is Project Mthombo going to remain viable while exporting excess products?
Project Mthombo is geographically located in the trade routes to be globally commercially competitive. In addition, PetroSA evaluated the viability of different configurations. In the 200 000 bbl/d case the products will be fully absorbed in the local market after which the country will need to import again. In the 300 000 bbl/d case, in the first few years of Project Mthombo operation, surplus diesel volumes will be exported at commercially competitive terms in the SADC markets, and will later be absorbed in the local market as demand grows over time. Our market studies have indicated that the South African shortfall on total oil products is expected to grow to more than 200 000 bbl/d by 2020, and more than 300 000 bbl/d by 2030.
2.7. How does the Presidential Infrastructure Coordinating Commission fit in to the project?
The Presidential Infrastructure Coordinating Commission (PICC) is a body established by the Cabinet to integrate and coordinate the long term infrastructure development program outlined in the Infrastructure Plan. The plan, adopted by the Government, will transform the economic landscape of South Africa, create a significant numbers of new jobs and strengthen the delivery of basic services to the people of South Africa. The PICC have assessed the infrastructure gaps and have established seventeen Strategic Integrated Projects (SIPs) clusters to support the infrastructure development. Project Mthombo falls in the SIP 3 cluster.
3. PETROSA RELATED QUESTIONS
3.1. What are the strengths of this project?
The project strengths vary from a financial perspective, technical perspective, operationally and environmentally. Not only is the project economically viable and able to attract investors because of its high returns and low operational costs per barrel, but it environmentally friendly and flexible to meet current and future fuel specs. The flexibility also extends to its ability to process a wide range of feedstock and its diesel/petrol production. This refinery will utilise existing technology thus has low technical risk. Additionally, the refinery products will be supported by the growth in local fuels demand and it will generate additional revenue from sales of electricity.
3.2. When will the Final Investment Decision be made?
The Final Investment Decision (FID) can only be made after the project has been fully defined and all the requisite approvals have been obtained.
3.3. How will PetroSA cope with competition for resources from other PetroSA mega projects (e.g. LNG / Project Ikhwezi, etc) and other local mega projects (e.g. Eskom)?
PetroSA recognises that there are constraints within PetroSA and the sequencing of the projects will take resources into account. The company has developed a centre of excellence in Mossel Bay, which has produced numerous artisans over a number of years. The centre can be expanded to cater for the expected labour requirements. Financing based on commercial drivers will be obtained from local and international sources as the project develops. PetroSA will be talking to other national stakeholders to co-ordinate all the projects and will investigate the possible establishment of facilities in South Africa for the manufacture of goods for the Oil and other large mechanised industries. PetroSA will be considering strategic partnerships with entities that are able to provide additional and complimentary resources and with equipment suppliers with a view of developing the local industry with a strong emphasis on the participation of BBBEE and SMME.
3.4. How will the local authorities cope with migration?
PetroSA will liaise with the local and support the Government spatial development plans to ensure that migration is co-ordinated with local development. PetroSA will actively engage with the local authorities to establish a register for labour and skills.
4. ECONOMIC VIABILITY RELATED QUESTIONS
4.1. How do we avoid creating another “White Elephant”, where the state is creating a mega project with minimal impact on sustainable job creation?
As part of the Strategic Integrated Projects identified by PICC under SIP-3 as critical infrastructure projects in the Eastern Cape, the Coega refinery will be a major engine for economic development in the province. Not only does the project have available market for its products, but it is technically feasible, commercially viable and strategically vital. The project’s multiplier effect on the economy and sustainable job creation will be significant. It is expected to create between 12 000 and 21 000 direct & indirect jobs during construction & between 2 000 & 5 000 when operational and it will contribute a huge saving on the country’s Balance of Payments (BoP). Our impact analysis has shown that between the period 2021 to 2030 the savings on the balance of payments attributed to the refinery will be about R300m per annum in 2012 terms and for the period 2031 to 2035, the net BoP savings is estimated to about R1.1 bn per annum.
4.2. How do you plan to transport the products cost effectively, reliably and with consistent quality to the main market in Gauteng?
The project can ship the products from the Port of Ngqura to Durban and from there via the existing pipeline to Gauteng. We are also evaluating the feasibility of building another complementary pipeline connecting Coega and Gauteng via Bloemfontein.
4.3. Why invest in a crude refinery without own crude oil sources?
Heavy, sour crude oil can more easily be obtained from various sources on the international market due to its low quality and pricing viz-a-viz lighter sweet crude. With the geographic location of Coega, it is conveniently located at the heart of various heavy crude sources.
4.4. What impact will the project have on South Africa’s fuels import bill?
Importing crude oil instead of refined product means that the value of the refining margins are retained in SA instead of going overseas. Project Mthombo will result in a saving of billions of Rands on the country’s Balance of Payments.
5. INDUSTRY RELATED QUESTIONS
5.1. Is there future in oil refining?
There is a continuous increase in primary energy demand, and although energy sources are diversifying to include other alternatives, crude oil is still the dominant energy source in the transport market. Crude refining remains the most effective means to convert abundant international crude oil reserves to petroleum products. Despite the decline in product demand in mature markets such as the US and Europe, consumption in emerging markets is still on the increase. The Sub Saharan African region is and will continue to be a growing market; it imports most of its product demand. South Africa is already importing transportation fuels - this shortfall is predicted to exceed 200 000 bbl/d by 2020. An additional crude refinery in South Africa will contribute significantly to the security of fuel supply to South Africa by diversifying the fuel supply portfolio.
The big international oil companies are focussing more on upstream oil exploration and production to maximise their balance sheets and are limiting investment in downstream projects. PetroSA, as the National Oil Company, needs to drive investment required to support security of supply.
5.2. What is the compelling reason to support Mthombo?
South Africa needs to have security of supply and only a crude oil refinery of this magnitude and lifespan is able to supply the petroleum needs of the country for the next 20 to 30 years. South Africa, resulting from strong economic growth fuelling the demand for products, has become a net product importer of diesel and requires import of petrol blending stocks to make the required quality products. Market studies have indicated that the country’s deficit is set to grow rapidly without additional refining capacity. Owning and operating a major crude oil refinery provides a platform for the Government to drive compliance with international standards on clean fuels. This could also address both environmental reasons for cleaner fuels as well as technological advances in the automobile industry and engine developments.
5.3. What impact will this project have on the oil industry?
Demand for fuel exceeds the current production capacity in South Africa. This project will target the incremental demand and should not have a negative impact on the current refinery operations. On the other hand this refinery will reduce the need for the industry to provide substantial commercial strategic stock cover together with the necessary infrastructure, to prevent future supply crisis. Moreover it will contribute positively to the industry by providing a long term reliable solution to address growing deficit in the region and drastically decrease vulnerability of the domestic downstream sector. This refinery will also address the introduction of Clean Fuels to South Africa, an area where the country is lagging far behind globally.
5.4. What is the impact of Lobito on Mthombo?
Indirectly Lobito will compete with Mthombo if built as a large scale export refinery. However, demand growth in the SADC region could accommodate both refineries. Furthermore, it is unlikely that Lobito refinery will materialise. Infrastructure, funding and skills requirements, as well as political instability pose a serious risk for the project thus making it difficult to attract investors.
6. MARKETING OF MTHOMBO PRODUCTS
6.1. Where and how will the products be marketed?
The entire production will be marketed in South Africa over time, however, for the first few years the surplus volumes of diesel may be exported to other SADC countries at commercial rates. Coega is geographically well situated on east and west trade routes to be globally commercially competitive. PetroSA will market the product through the local oil industry and partnerships
6.2. How will products be supplied to Gauteng?
The new multi product pipeline will be utilized to deliver the products to the markets on the Reef. A second, complementary pipeline from Coega to Gauteng is also under strategic consideration
6.3. Is PetroSA going into the retail market?
It is possible that, in the longer term, PetroSA will enter the retail market, but this will depend on the viability of taking such a step.
7. POLITICAL / REGULATORY QUESTIONS
7.1. What can the project contribute to National Growth Path and the National Development Plan?
In line with the country’s 2030 vision tabled in the NDP Project Mthombo will deliver massive benefits for the country. The project will have a major multiplier effect in all five identified areas on a local, regional and national level. The project is expected to create between 12 000 and 21 000 direct & indirect jobs during construction & between 2 000 & 5 000 when operational. There will be opportunities for Broad-based Black Economic Empowerment companies in the delivering of goods and services to the new refinery and the development of secondary industries around the refinery. The benefits also include the positive impact on balance of payments the project has over imports and the substantial dividends to the government that the project will yield which could be used to finance government initiatives (e.g. education, infrastructure etc). The project will unlock the region’s growth potential e.g. car industry; petrochemicals and as a globally competitive refinery it is expected to attract Foreign Direct Investment. The project has export potential to address the shortfall in the SADC region. It will also contribute to poverty alleviation, building technology and skills capacity.
7.2. Is the choice of Coega politically driven?
No, but a crude oil refinery in the Eastern Cape will be in line with Government strategy for developing the Eastern Cape which is currently the least developed (economically) region of SA. It falls under the Strategic Integrated Projects (SIP 3) identified by the PICC which are planned for KZN, Northern Cape and Eastern Cape.
7.3. What is your Broad-based Black Economic Empowerment strategy in the project?
PetroSA regards the South African government’s Broad-based Black Economic Empowerment (BBBEE) policy as a necessary socio-economic process to redress the imbalances of the past and to facilitate the participation of black people in the economy. PetroSA intends to maximise the participation of BEE companies in the project. Project Mthombo will create sustainable BBBEE opportunities across the value chain, including equity in trading and wholesale opportunities; competitive supplier development; skills development; employment equity; and corporate social investment.
7.4. Why is government driving this and not private enterprise?
Challenges in the supply of automotive fuels as a result of the lack of investment in infrastructure and refining capacity by the Oil Industry has clearly shown that Government cannot rely on the private enterprises to address the country’s security of supply issue. Government, through its national oil company, has a keen interest in security of supply of automotive fuels. It is in this spirit that PetroSA is driving this initiative. Government does encourage investments by private enterprise, which will be able to participate in the project at a later stage. PetroSA is open to discussions with all industry players. Strategic partners will be chosen on their ability to enhance the success of a project of such a large scale as this one.
7.5. How will the project be governed to avoid massive over-expenditure that has to be funded by taxpayers?
PetroSA will endeavour to ensure that the project follows international best practices that all front-end project steps are properly defined and that the project is professionally executed. The partnering strategy will help mitigate project risks through risk sharing with equity partners and utilising the experience, expertise, and resources of these partners. A detailed construction contracting strategy will be developed with the assistance of relevant external advisors. This will ensure that appropriate levels of risk are passed to experienced, credit-worthy contractors under EPC contracts etc, and that interfaces between contractors and suppliers are properly managed. A world class Project Management Contractor will be employed to manage the construction process. A comprehensive insurance programme will also be put in place to protect the project from the effects of insurable events such as natural disasters, and accidental damage etc. After completion of construction the project will be ‘non-recourse’ to its shareholders. Lenders will require that appropriate arrangements are put in place in relation to the operation and maintenance of the project. These arrangements will need to be in accordance with the world’s best practice.
7.6. What is the fit with the government’s Energy Master Plan?
As noted in the Energy Master Plan, security of supply can be better served through crude imports rather than product imports. As part of energy security promotion of local production is therefore considered prudent. Further the Master Plan indicates that South Africa should diversify the source of crude oil to the country. This refinery will be designed to process crude oil sourced from countries other than the Middle East.
8. ENVIRONMENTAL FACTORS
8.1. Will an Environmental Impact Assessment be done?
PetroSA is committed to following the mandatory legal process. PetroSA will commission an Environmental Impact Assessment (EIA) once sufficient technical information is available for PetroSA to conduct a meaningful assessment process. During the EIA members of the public and other stakeholders will be given the opportunity to voice their concerns as part of the prescribed public consultation process.
PetroSA is committed to engaging with people affected by our proposed projects and taking their views into account in the decision-making. The project will be financed with debt and equity. The lenders will bring rigorous environmental standards and a high level of scrutiny regarding Environmental & Social Issues. Therefore, in order to satisfy lender requirements the project will need to demonstrate compliance with international standards.
8.2. Will the emissions from the refinery have a negative impact on climate change?
No. The proposed refinery is a ‘new generation’ refinery aimed at meeting international best practice and all the South African legal guidelines, which means that the refinery should have minimal impact on climate change. The product quality is going to be consistent with global fuel Standards for meeting the future Euro V vehicle emissions requirements. The refinery will use advance technologies from feedstock processing to product finishing ensuring that the environment is protected and emissions are reduced.
8.3. How does the proposed refinery fit with RSA’s position on the environment?
PetroSA is committed to and supports the implementation of environmental best practices. The new refinery will be designed to international best practice standards, bearing the Kyoto principles in mind, and to meet all international standards for project financing, including the Equator Principles.