South Africa is the only country in southern African that produces bunker fuel oil (BFO), although questions remain over how it will implement the International Maritime Organization’s sulphur cap that comes into force in 2020.
As a member of the IMO, South Africa has a responsibility to ensure that the quality of bunkers sold in its ports complies with the IMO fuel specifications, or that ships calling for bunkers have scrubbers installed to reduce sulphur emissions, explained Dave Wright, an independent oil and gas consultant.
The country currently has three coastal refineries, operated by Engen, Sapref, and Chevron, producing about 20 million barrels of fuel oil per year. “Current [regional] sales volumes are about 8 million barrels/year, meaning they are already exporting 12 million barrels of fuel,” Wright told IHS Markit.
“Currently, the international maximum specification [for marine fuel] is 3.5% sulphur. The BFO produced in South Africa is less, about 2.5–2.6%.”
He doubts whether local producers will be able to reduce the sulphur content of their fuel to meet the 2020 deadline. “The time needed to implement the hardware conversions is about three to five years and no work has started at any of the refineries yet,” he said.
In addition, he said the cost of installing the new infrastructure required was about USD1 billion per refinery, although the actual price tag will vary from facility to facility, depending on current configurations.
This does not mean that the refineries cannot meet the 0.5% cap, as all three have the ability to produce low-sulphur fuel through blending, albeit at a higher price, Wright said.
To do this, it requires diesel to be mixed with 3.5% BFO at a ratio of 7:1. South Africa is already importing diesel as the current levels produced by the local refineries are not meeting demand.
“South Africa will be ready if it goes by the blending route. However, whether this is a sustainable solution for the coastal refiners in the long term is a difficult question to answer at this stage,” Wright said.
Given the composition of the new fuel, its pricing will be closer to the cost of diesel. “Typically, 3.5% BFO has a lower ex-refinery gate price than crude, whereas diesel sells at a price of 120% of the crude price,” Wright said.
Consequently, South African coastal refineries will need to export significantly greater volumes of 3.5% BFO to keep them running at the capacity needed to meet the country’s petrol, diesel, and kerosene needs.
Exporting large volumes of high-sulphur BFO at a reduced price will affect refining economics severely. In addition, the global price rise for diesel and low-sulphur BFO is likely to be volatile until the supply-and-demand position stabilises. Once this balance is restored, prices will moderate, Wright explained.
“Operators who have invested in hardware for their refineries now will achieve a reasonable payback on this capital expenditure. However, for those who invest later, it will be more difficult to make the expected returns on the capital invested as the prices normalise. Whether any of the local refineries will elect to install the hardware to reduce [sulphur content] at some stage is hard to say,” Wright said.