Others could follow after Chevron’s exit

Now that Chevron has come clean about leaving South Africa – it has passionately denied any intention until now – speculation about the implications for the oil sector, and the economy, are blossoming, not least of which is a possible rush to the exit by the other oil companies: Shell, BP, Total and Engen.

Among the possibilities being mooted is that South Africa will lose the Chevron refinery in Cape Town, to be replaced by storage tanks to hold imported petrol, diesel and liquefied petroleum gas (LPG). In the case of LPG, this would make it critical that the Sunrise Energy gas import terminal at Saldanha Bay comes on stream in time to fill the LPG gap. So far, it has taken eight years to reach the point of issuing tender documents for its construction.

Read: Chevron looks to sell 75% of SA business

Until the terminal begins operations, the supply of LPG to the Western Cape will be tighter than it is already, and winter is not that far away. PetroSA cannot fill the gap on its own and the Chevron refinery LPG production cannot do so even now.

If the Chevron Milnerton refinery is scrapped, as some in the industry feel is inevitable, its storage tanks will be left standing; the vacant land would be handy for new storage tanks rather than being sold off, since the environmental clean-up costs would be high.

Largest market

What is attractive for prospective buyers is its Caltex service station network. Another lure is Chevron’s access to depot storage in Durban – it supplies Chevron customers in Gauteng and KwaZulu-Natal that combined are the largest market for petroleum products.

Market rumours suggest any Chevron buyer is unlikely to be another multinational oil company, because its sale signals that South Africa’s regulated oil market is no longer attractive. Others suggest, possibly optimistically, that Chevron’s decision may be part of a global re-positioning – and will most likely be described as such.

If all the major oil companies do head for the exit, it is not all bad. Major oil trading companies (see box) are likely to fill the breach. They are not risk averse, and many of them have African experience.

Oil traders are not small players; many are multinationals. They see sub-Saharan Africa as having the potential to suck up the increasing amounts of petrol and diesel pouring out of refineries in countries surrounding the Indian Ocean – all of them looking for buyers. Evidence of this are the new storage tanks in Mozambique, Tanzania and Kenya.

At least one trading company, Mercuria, which operates in 50 countries, has tried and failed to buy Chevron. One attempt is probably enough for it.

Joint venture

That still leaves a large number of potential Chevron buyers. (See box). One is Vitol. It claims to be the ninth-largest corporation in the world by revenue. It already operates in South Africa through a joint venture with Shell. Another is Trafigura; it is not small either. It has offices in 36 countries on six continents. It is already in South Africa importing products through Maputo in Mozambique.

Our Department of Energy (DOE) might like the size of such buyers for one of the country’s strategic assets, but it is doubtful that it fully understands the implications. For example, it has not so far provided leadership on key issues facing the industry, and in one case a major foreign investor withdrew from a potential investment in the sector citing “regulatory uncertainty”.

Any oil company exit from South Africa could at least partially be motivated by the department’s adversarial approach to oil and gas companies and the frustrating way it regulates the industry. Delaying justified price rises is one example, delaying mergers in the LPG industry is another.

But there is very little, if anything, the DOE can do about. With the oil price at rock bottom and a tanking rand, even with controlled profit margins in a regulated system, the rand/dollar exchange rate makes rand profits pathetic in the eyes of head offices in Paris, London, Houston and The Hague.

South African oil industry changes have been going on for a while. Cost cutting and job losses continue. PetroSA, at the moment, is slashing jobs for its own peculiar reasons, but shrinking staff numbers among the oil majors suggests not only a way of maintaining profits in tough times, but also a drive to clean up balance sheets with a view to attracting buyers.

Other indicators are the way oil companies have quietly wound up their pension schemes, outsourced their medical aid schemes and offered new staff provident funds without company liability. To many this seems to indicate a future oil industry scenario with only the SA Petroleum Refineries (Sapref) plant in Durban still standing tall, but with diminishing profits, and the others – Chevron, Engen and National Petroleum Refiners of SA (Natref) – either gone or remaining under new ownership.

Sapref is the largest and newest of all South African refineries, but it too might sell up rather than submit to pressures by the DOE to invest multiple millions in meeting new EU fuel specifications that would need state subsidies, or tax breaks the government is unwilling to grant, and anyway cannot afford.

None of this is to suggest that we are going to be short of motor fuels once the dust settles. What it does mean is that we may in future import a great deal more. With major oil companies doing the importing it has been relatively problem free. Fuel specifications have been maintained. There will have to be a close watch on this in future. Who will do it, is an open question.

The quality of fuel imports may or may not be up to the new green specifications demanded by motor manufacturers, posing some negative problems for newer engines, as has happened in other sub-Saharan countries where there were major problems with catalytic converters. The Engen refinery in Durban may follow the same route as Chevron, if it can find a buyer willing to take responsibility for a clean-up of the environment. The Natref refinery may continue, supplying Total a profit its French bosses will hardly notice.

The Chevron sale also brings up the empowerment issue. Most established oil companies have a 25 percent black shareholding. Will their owners be happy to be a partner with an oil trader, however big, rather than a multinational oil company?

Monolithic entities?

To those in the corridors of power this scenario cannot possibly happen. They appear to think that multinational oil companies are monolithic entities. BP Southern Africa, for example, can go bust without it being noticed in the annual report of BP. They assume making and selling petrol and diesel is a licence to print money. They think that oil companies would never leave the biggest economy in Africa (Nigeria’s is bigger now, and BP left it in 1979).

Anyway, how can you move an oil refinery, they seem to think. Surely threatening to sell Chevron and Engen is all bluff. But what if it is not a ploy? What if all the multinationals go, leaving South Africa dependent on imported fuels and lubricants of possibly dubious quality? What will it mean to rely on Sasol for a strategic reserve when it can only supply a third of what we need? Time, as always, will tell.

 

FACTBOX – Global commodity trading companies

Vitol Group

2010 revenue: $195bn.

Headquarters: Geneva, Switzerland; Rotterdam, The Netherlands.

Workforce: 2 700.

Interests: Physical oil trading. First to export oil from rebel-held Libya. Storage tanks, exploration and production in the Philippines, Congo, Ghana, Nigeria, Russia, Azerbaijan and Kazakhstan, and the Fujairah refinery in the United Arab Emirates. Vitol and Glencore were accused of paying kickbacks to Iraq in 2005. Vitol was fined $17.5m.

Glencore International

2010 revenue: Nearly $145bn.

Founded: 1974 by Marc Rich as Marc Rich & Company.

Headquarters: Baar, Switzerland.

Interests: Metals and minerals, energy and agricultural products.

Cargill

2010 global sales: $108bn.

Founded: 1865 with one grain storage silo in Iowa.

Headquarters: Minneapolis, Minnesota.

Workforce: 131 000.

Interests: Agribusiness, energy trading, meat and food ingredient applications, biofuels production, animal nutrition products, and industrial products such as steel and salt.

Koch Industries

2009 revenue: About $100bn.

Founded:1925.

Headquarters: Wichita, Kansas.

Interests: Oil refining, transportation, petrochemicals, forestry and paper, and ranching.

Trafigura

2010 turnover: $79.2bn.

Chairman and chief executive: Claude Dauphin.

Founded: 1993 from a split of a group of companies run by Marc Rich.

Headquarters: Geneva, Switzerland.

Workforce: 4 000. It is moving staff from London to Geneva.

Interests: Crude oil products, non-ferrous concentrates and refined metals trading and transport.

In 2009, Trafigura and lawyers representing about 30 000 Ivorians agreed on a pre-trial settlement to end a class action lawsuit alleging it of dumping toxic waste off Ivory coast in 2006.

Gunvor International

2010 turnover: $65bn.

Founded: 1997 by Swedish oil trader Tornqvist and Gennady Timchenko.

Headquarters: Amsterdam, The Netherlands; Geneva, Switzerland.

Interests: Oil trading, with emphasis on Russia. Has expanded into power and coal.

Archer Daniels Midland

2010 net sales: $62bn.

Founded: 1902.

Headquarters: Decatur, Illinois, listed on the NYSE.

Interests: Oil seeds, maize processing, agricultural services, storage and transportation, wheat milling, cocoa processing and food ingredients business.

Other: It is known for converting a beverage alcohol plant into its first ethanol fuel facility in 1978 during the Arab oil embargo.

Noble Group

2010 revenue: $56.7bn.

Net profit: $606m.

Founded: 1986.

Headquarters: Hong Kong, China.

Interests: From Brazilian sugar to Australian coal. Shareholders include China Investment.

Mercuria Energy Group

2008 turnover: $46bn.

Founded: 2004. Previously J&S, which specialised in Russian oil sales to Poland.

Interests: Crude oil and oil products in 2010, including fuel oil, middle distillates, naphtha and petrol. It also trades in natural gas, coal and biodiesel.

Bunge

2010 net sales: $45.7bn.

Founded: 1818.

Headquarters: White Plains, New York.

Interests: Oil seeds and grains, produces sugar and ethanol, mills wheat and maize to make ingredients used by food companies and sells fertiliser in North and South America.

R Phibro

Founded: 1901.

Headquarters: Westport, Connecticut.

Interests: Oil, gas, metals and agricultural trading.

* Keith Bryer is a retired communications consultant.

* The views expressed here do not necessarily reflect those of Independent Media.

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