South Africa Briefing: Downstream Oil and Gas
South Africa’s mid- and downstream oil and gas industry is highly integrated and serves as a major employer and an economic driver for the country. Our Knowledge Series article gives an overview of the sector regulations and challenges.
By Cynthia Yav, Associate Attorney at Centurion Law Group’s Johannesburg headquarters
South Africa is recognised as Africa’s most sophisticated economy as well as a globally important emerging nation, and the country is equipped with a well-developed transport and manufacturing infrastructure that supports the downstream petroleum industry.
The oil and gas sector plays a key role in South Africa’s development and growth, with downstream activities employing around 250,000 people. At present the upstream sector is limited, with proven oil reserves of 15 million barrels, and about 60 percent of South Africa’s crude oil requirements are met by imports from OPEC Middle East and African producers. This is refined locally. South Africa has small conventional natural gas reserves but potentially large shale gas resources. This article seeks to provide a broad overview of the downstream oil and gas sector in South Africa, including its regulatory framework and sector challenges.
The downstream sector refers to the processing (refining), transporting, selling and distribution of refined petroleum products. This includes the refining of crude oil and the processing of natural gas, and the marketing and distribution of products. Natural gas distribution is one of the fundamental segments of the downstream sector, as it plays a vital role in heating and power generation.
South Africa’s downstream industry has a history of more than a century and its refineries and synthetic fuels plants are decades old. South Africa has the second largest refinery capacity in Africa, with four of its refineries located in Cape Town, Durban and Sasolburg, two located inland, and gas-to-liquids plants located at Sasolburg, Secunda and Mossel Bay. Further, South Africa’s sophisticated synthetic fuels industry, which produces gasoline and diesel fuels from the Mossel Bay gas-to-liquids plant and Secunda coal-to-liquids plant, accounts for nearly all of the country’s domestically produced fuel.
By virtue of its mature downstream industry, South Africa is well placed to serve as a hub for providing services and expertise in the oil and gas sector in Africa.
Major actors in the sector include Chevron, BP, Shell, Total, Engen and local company Sasol. The South African Petroleum Industry Association (SAPIA) is the industry body which represents the interests of downstream companies. These firms operate storage terminals and distribution facilities at all major ports.
The principal regulatory and oversight body responsible for oil and gas activities in South Africa is the Ministry of Mineral Resources, which acts as the custodian of South Africa’s petroleum resources on behalf of the government and is responsible for regulating and promoting mineral and petroleum development.
Downstream activities are regulated and administered by the Department of Energy (DoE) in accordance with the Petroleum Products Act of 1997, as amended by the Petroleum Products Amendment Act of 2003 and the Petroleum Products Amendment Act of 2005 (Petroleum Products Act), while the National Energy Regulator of South Africa (NERSA) is responsible for regulating the petroleum pipelines segment. The DoE and the International Trade Administration Commission of South Africa (ITAC) issue authorisations and permits, respectively, for the import and export of petroleum products.
The principal legislation governing transport of crude oil is the Petroleum Pipelines Act of 2003.
Regulation and Licensing
To manufacture, retail or conduct the business of a wholesaler of petroleum products or to hold or develop a site, the corresponding licences must be obtained. The Controller of Petroleum Products, represented by the DDG: Hydrocarbons and Energy Planning under the DoE, is the statutory authority mandated to issue manufacturing, wholesale, retail and site licences. In addition, the Controller is responsible for investigating offences and gathering information in relation to petroleum products. The government regulates wholesale margins and controls the retail price of petrol and diesel, and petroleum prices are regulated based on import parity price formulas. This means that the domestic price is influenced by supply and demand for petroleum products in international markets, combined with the rand/US dollar exchange rate.
Licensing for manufacturers, wholesalers and retailers of petroleum products is governed by the Petroleum Products Act, which covers a wide range of other downstream marketing activities. Wholesale and retail licences are valid for as long as a business is a going concern and do not need to be renewed. A retail licence will only be granted provided the site to which it relates is also licensed. Companies are required to obtain such operating licences in order to establish new service stations and distribute petroleum products, and these are normally granted subject to conditions, including but not limited to B-BBEE and environmental issues. The number of licences allocated is limited by the government, and manufacturers and wholesalers are prohibited from holding retail licences except for training purposes. Breach of local content requirements forming part of the licensing conditions would constitute a breach of the licence and could lead to the revocation of the licence.
The Petroleum Products Act provides that in the event of a contravention of the Act, the Controller of Petroleum Products must by written notice direct a person to cease such activity forthwith. The Controller of Petroleum Products may, in accordance with section 2(2)(A)(b), allow a person to continue with a prohibited activity contemplated in the Petroleum Products Act pending an application to carry on the prohibited activity and the issuing of a licence if the cessation of such an activity is likely to lead to a material interruption in the supply of petroleum products.
The downstream sector in South Africa is highly integrated throughout the value chain from production and refining of products to transportation, depots and storage facilities around the country and finally distribution to service stations and customers.
South Africa has a historic reliance on oil and gas imports, so a robust and efficient delivery system goes some way to reducing risk. One of the main challenges is security of supply, which in this case refers to the development of supply chain solutions for supply challenges, demand management issues and emergency response. The Competition Commission’s decision to grant SAPIA and its members an exemption from some of the prohibitions outlined in the Competition Act of 1998, as amended, will help improve domestic security of supply, reduce the threat of supply disruptions and facilitate multilateral logistics deliberations. It is SAPIA’s general view that in order to secure future security of supply, it is necessary for all relevant parties to plan together and jointly implement infrastructural improvements such as reconfiguration of refining facilities to enable production to meet emissions standards and improve South Africa’s global competitiveness.
Infrastructure has played a significant role in South Africa’s recent economic turnaround, and will need to play an even greater role if the country’s development targets are to be reached. Although the downstream industry is well served in its infrastructure needs, some facilities have not been upgraded for many years, lack maintenance and operational efficiency, and do not meet modern technological standards. Infrastructure in South Africa may be the most comprehensive and modern on the continent, but in a global market for petroleum products, South Africa has to ensure its facilities match the global competition.
The cycle of developing, producing, transporting, refining and delivering oil to end users entails significant environmental challenges, from harmful emissions from refineries, greenhouse gases, spills and ground/air/water contamination to fires and explosions at plants. In an effort to address some of these environmental issues, the Oil Industry Environment Committee was established. This was subsequently integrated with the SAPIA Engineering Committee to form the PIEEC, which co-ordinates the sector’s efforts in ensuring that no environmental harm arises from petroleum industry activities.
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