Project Overview > FAQs

Q: What is the progress with feasibility and FEED studies. How close are PetroSA to putting in a formal request for financial support to National Treasury?

A: A full feasibility study has been completed which found that a 360 000 bpd crude oil refinery is technically feasible and commercially viable.

Q: How much money will the next phase (FEED) cost?

A: The FEED phase will cost about R2.5bn

Q: Are any other shareholders being sought for Project Mthombo? Or are any other strategic alliances being considered?

A:Negotiations are underway with a potential "anchor" partner. Discussion with several other potential partners are underway.

Q: What are all the key factors in the decision-making on the various options? Is government support the lynch pin? PetroSA has used political/shareholder channels but has not demonstrated why government should support this project.

A: Government originated the concern that SA's security of fuels supply is inadequate and, as contained in the Energy Security Master Plan, stated that the National Oil Company (NOC) will be responsible for 30% of crude sourcing. Mthombo addresses all these issues, however, if Government support for the project is not forthcoming, none of the locally represented International Oil Companies (IOC's) will have an interest in investing in the project. They will prefer to continue in import mode with minimal capital spend.

Q: If PetroSA commissions a refinery (Mthombo or other) where will it procure the skills to operate the refinery or will it form a strategic alliance before embarking on building a refinery? If so, at what stage are the negotiations (draft shareholders agreement stage)?

A:A fundamental requirement regarding the choice of partner(s) is to ensure that skills are available to the project. In addition, PetroSA plans to develop in-house skills through a massive training and development project together with entities such as the CDC and building on initiatives such as the Centre of Excellence technical training centre at Mossel Bay.

Q: Wholesale/retail clients: what retail groups would see its products into the South African market? What will be done with any excess production that cannot be absorbed in the South African market?

A: Basically, the placement of product from Mthombo will be the shortfall that SA needs to import due to lack of local refining capacity. It will be on a supply arrangement basis where all existing marketers source their shortfall from the new refinery. Surplus product will be exported into SADC and African markets for 8-12 years after commissioning whereafter that excess will be totally absorbed by the growing SA market requirements

Q: What does PetroSA think is the most probable future scenario vis-a-vis the provision of liquid fuels in South Africa i.e. importation or the construction of a large refinery complex that has the economies of scale, is globally competitive, and/or has export potential to neighbouring African states and elsewhere.

A: It is a fact that importing crude oil and refining it onshore is much more viable, from both cost-benefit and security of supply viewpoints versus the importation of finished product. Clearly, a world-class, economically attractive modern refinery ideally located, is first choice

Q: What are the key obstacles that government should address other than funding (e.g. policy, regulation, missing public infrastructure, co-ordination role

A:

• the assurance that the existing Basic Fuel Price (BFP) mechanism (or something similar) is maintained long-term
• ensuring that importation of finished product is not permitted once alternative local refining capacity (Mthombo) is available
• ensuring that the various SOEs and regional/local authorities that are key to the success of Mthombo are aligned and have co-ordinated plans and funding in place to enable the project to meet its target deadlines

Q: The refining industry is oversupplied globally, why does SA need a new refinery?

A:

• Firstly, due to the oversupply situation, many smaller refineries are being shut or are destined to be shut with only the larger, economic units likely to be in the supply game by 2015.
• Secondly, local refined production provides South Africa with an economic incentive (balance of payments) versus importation.
• Thirdly and in line with the Energy Security Master Plan, South Africa's security of supply scenario will be significantly improved with the construction of a new refinery at Coega

Q: What guarantee is there for long-term crude oil supply?

A: Availability of crude is not an issue as adequate resources have been proven. The crude market is commercially driven so availability is a matter of pricing. Further, as prices increase (relative to demand etc) more, currently unexploited resources will become available (deep sea, tar sands etc). Also, an increasing trend is for Atlantic crudes to move into Asia Coega is ideally situated on this trade route.

Q: Why is a new crude oil refinery necessary?

A: South Africa, resulting from strong economic growth fuelling the demand for products, has become a net product importer of diesel and require the import of petrol blending stocks to make the required quality products. Recent studies project growth rates of diesel at 6-8%, petrol at 2% and jet fuel at 6% per annum, therefore the country's deficit are set to grow rapidly without additional refining capacity.

The total product deficit is expected to be 8.5 billion litres per annum (approximately 150 000 barrels per day) by 2015, if no additional refining capacity is added. These levels of importation will have a negative impact on South Africa's foreign exchange balance and stretch the vulnerable existing national supply system to the point where significant product shortages would occur, in for example the case of an unplanned refinery outage.

Globally, conventional refinery liquid products continue to dominate liquid fuel supply, with transportation fuels retaining the lion's share of the demand. While the current economic crisis has dampened the short term demand for total liquid products and transportation fuels, provided economic stability can be restored, it is expected the growth in demand for transportation fuels will be rekindled.

Growing industrial demands, improvements in engine efficiencies and performance have changed car purchase and driving patterns resulting in the demand pattern in many regions moving from petrol-based to diesel. This has resulted in a shift in the relative values of these products within the market place with diesel now commanding a premium over petrol. Growing demand for environmental friendly products and the introduction of new clean fuels standards across the world makes argument for the building of a world-class refinery more compelling.

Q: Why is PetroSA building the refinery?

The existing SA crude refineries' average age is between 40 - 50 years with outdated technology that will require substantial financial investment to meet new Clean Fuels product specifications and emissions standards. There is no financial incentive to support such major investment, therefore no local refinery has announced plans to upgrade capacity - they would prefer to import instead of investing.

Another major reason for PetroSA to build the refinery is to satisfy the South African government's policy on security of supply. The government is concerned that the current dependence on the international oil companies to secure South Africa's liquid fuels energy needs is not desirable or sustainable. The Department of Minerals and Energy (DME) introduced an Energy Security Master Plan (ESMP) to address this growing concern. The ESMP calls for increased involvement and strategic leadership by the National Oil Company in the country's security of supply strategy and that is where Project Mthombo enters the national petroleum arena.

Q: Why build the refinery in the Coega Industrial Development Zone?

A: An extensive evaluation of a number of alternatives (Saldanha Bay, the Coega IDZ, Durban, Richards Bay, Newcastle and the Vaal Triangle) concluded that the most favourable location was the Coega IDZ. The criteria for the assessment were:

• Availability of suitable land
• Ease of crude supply
• Access to markets
• Access to services
• Opportunities for secondary industries
• Potential to impact sensitive environments
• Impact on land use
• Network diversity
• Complexity of approval process.

PetroSA initially identified five geographic locations that would meet the requirements in terms of access to crude supply, utilisation of existing infrastructure and accessibility to key markets. These were Saldanha Bay, Coega, Durban, Richards Bay and the Vaal Triangle. In addition to the original five locations, further possibilities that were identified as part of this study included Cape Town and the 'inland sausage', which later developed into the Newcastle geographic location. After intensive investigation and modelling, Coega was identified as the preferred location.

Q: Why a 'greenfields' project when 'brownfields' is less expensive?

A: The opportunity for a 'brownfields' expansion is restricted to basically the Durban area. This presents major environmental and logistical challenges and does not address the country's security of supply issues in that the capacity increase that is possible will not provide a long-term solution. So, on a cost per barrel basis, it is highly questionable whether a 'brownfields' project is indeed lower than a new project. Further, the country's reliance on the vulnerable Durban/Gauteng supply corridor will not be mitigated in such a scenario.

Q: Mthombo will 'force' some other refineries to close.

A: When Mthombo streams, surplus product will only be in the system for some 8-10 years. During this time there will be open competition between refineries which, in itself, is positive for the consumer. However, with the introduction of Clean Fuels 2, market opportunities and synergies that can be exploited between Mthombo and existing refineries will overshadow potential threats to others.

Q: Why should the State invest and not the Private Sector?

A: History in South Africa has shown that the International Oil Companies are most reluctant to invest in new refining facilities. These global companies prefer to invest in Upstream activities where financial returns are superior to volatile refining margins. For this reason and to ensure that SA obtains the most economic fuels supply, PetroSA is investing in Mthombo.

Q: Cash generation must be difficult due to the global economic downturn

A: Gasoline offtake is impacted by consumer discretionary spend (which supports the chosen Mthombo configuration). Commercial and Industrial throughput is affected more by GDP. All projections indicate that South Africa's downturn is relatively short-term and will correct within the next few years, certainly before Mthombo is commissioned in 2016.

Q: Isn't Mthombo's fuel quality too high for Africa?

A: Mthombo's quality of fuels will be totally in line with the proposed specifications that SAPIA are recommending. Further, with the opportunity for synergies between coastal refineries post Clean Fuels 2, the probability of older refineries exporting into Africa (instead of Mthombo) is highly likely.

Q: Won't Mthombo's pipeline to Gauteng negatively affect the New Multi-Product Pipeline's economics?

A: The new pipeline will be complementary to the New Multi Product Pipeline. While product moving out of Coega will replace the planned volume growth for the NMPP it will also enable major planned investment into the future phases of the NMPP to be deferred. Further, the reliance of product supply into the major heartland of the country on the vulnerable Durban/Gauteng corridor, will be mitigated.

Q: There are high costs associated with supplying power and water for Mthombo

A: The costs associated with supplying utilities for the Coega refinery (in view of the fact that Eskom reliability is flawed) through the proposed gasification of pet coke is economically more viable than the alternative of burning fuel. Further, power and water are two elements that are in serious short supply in the region and Mthombo will be able to contribute significantly in this regard.

Q: What is the impact of a 3600kbpd shutdown on the country?

A: The refinery is designed to handle 4 year turnarounds, with storage facilities to cater for this. It is worth mentioning that, being a new asset, unplanned shutdowns should be less than the existing old refineries which, nevertheless, are very stable. A further major mitigation for consideration is the role that Mthombo will likely fulfil in holding strategic reserve stocks which can be utilised in an unanticipated event.

Q: Is Mthombo too complex a project for Government to manage?

A: Mthombo is not complex, only large, consistent with modern lowest-cost-producer refineries and planned to meet the objectives of the ESMP. Our design has deliberately removed complexity and the technologies employed together with associated infrastructure requirements will be readily achieved under direction of PetroSA's Owner's Team. The only real call on Government is in the area of financial support and, to this end, we are seeking a position to meet Government's ability to fund.

Q: Mthombo produces too little gasoline

A: All market growth forecasts indicate that demand for diesel will overtake that of gasoline, hence the decision to maximise diesel production. This decision has reduced capital investment costs and Mthombo has the capability to supply reformate in a synergistic relationship with local refiners that are gasoline 'heavy'.

Q: How certain are you that the Basic Fuel Price (BFP) will remain in place for a reasonable time?

A: The South African market is highly regulated and this is unlikely to change in the foreseeable future. BFP is the cornerstone of the price control mechanism that exists in the retail supply chain and the risk of this being deregulated, with the consequent social upheaval through tens of thousands of job losses, is low. Government has stated that while a regulated market is in place, an 'import parity' system, meaning BFP or something similar, will remain.

Q: Outline the primary goals of the feasibility study?

A: The primary goal of the feasibility study is to deliver a cost estimate consistent with international standards for this project stage; to detail the operating costs for the selected configuration; to select technology licensors for the process units; to optimize the flow scheme and operating parameters to best meet the design premises: to determine the water and power requirements and to determine the effect of refinery emissions on the environment.

Q: What socio-economic impact will Project Mthombo have?

A: The proposed new refinery at Coega will not only be a major boost the regional economy of the Eastern Cape, one of the poorest regions within South Africa, but it will also save the country about R18,bn on its balance of payments.

The refinery is expected to generate up to 27 500 temporary jobs during the construction period of three to four years and, when operational, another 18 500 permanent jobs owing to direct and indirect effects in the South African economy. It will further unlock the growth potential of related industries such as car manufacturing and the petro-chemical industry.

It is also expected that the refinery will generate forward and backward linkages throughout the regional economy of the Eastern Cape through the purchase of goods and services from a diverse number of supporting business and equipment suppliers in the area of construction, transportation, management and financial services.

As a result, household incomes are expected to significantly increase. Additional incomes will also be generated as employees spend their salaries and wages on consumption of goods and services, property, and taxes throughout the local and regional economy. The lower income households are expected to benefit more during the construction phase of the project as the demand for low-skilled labour would be higher.

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