Coega oil refinery plan: huge hurdles, big rewards
Mestosync Energy announced its intention in October to build an industrial complex in the special economic zone
Plans to kickstart a R15bn oil refining and petrochemicals hub in Coega in the Eastern Cape have been met with mixed interest, surprise and scepticism from industry experts.
The need for greater energy security has made increased oil-refining capacity a long-standing ambition of the government, but for more than a decade now, its mooted 300,000 barrel per day (bpd) Coega refinery, Mthombo, has failed to get off the ground.
Then, in October, black-owned company Mestosync Energy announced a plan to build a 400,000 bpd industrial complex in the Coega special economic zone.
The company has been issued a manufacturing licence in terms of the Petroleum Products Act and has said it will conclude financial negotiations by the end of November.
Bheki Gila, executive chair of Rand & Bullion, transaction advisers for the deal, said the refinery will end SA’s growing reliance on fuel imports.
“Whenever you take the energy security of a country and mortgage it to some other guy and you have no ability to sit around a table and negotiate — you have sold out to people,” said Gila, former CEO of the state’s Strategic Fuel Fund.
The proposed refinery will eradicate the need to import refined products, which will provide energy security and affect the current-account balance favourably, Gila said.
But to be viable it will have to assume a global posture from the very start, he said. This includes producing high-value petrochemical products, alongside regulated products such as petrol and jet fuel.
“I am yet to see a global refinery in the world that is profitable from making regulated products. But refineries that have a component of chemical beneficiation — they are always profitable,” Gila said.
It is expected that half the product will be sold in the SA market. On the domestic side, the base case assumes that existing refineries are refurbished to comply with new fuel standards — which would bring them back up to maximum capacity. Even so, the pursuit of a new refinery is justified, Gila said.
The other 200,000 barrels per day could be exported but would have to compete on the world market with product from refineries that are located in oil-producing countries and so do not have to import their feedstock. Gila said SA has a responsibility to compete or risk becoming the doormat of other nations.
A prominent criticism of building a refinery at Coega is that it is too far from Transnet’s pipeline, which moves fuel from Durban to Gauteng.
Shipping the product to Durban is out of the question, Gila said. Instead, a new pipeline from Coega to Gauteng could be built. Transnet’s long-term planning framework looked at a proposed pipeline for Mthombo. However, it found it would have implications for the Durban pipeline which would, for a time, be underutilised and so pipeline tariffs (which are paid by the consumer) would increase.
Chris Bredenhann, who heads up PwC’s Africa oil and gas advisory practice, said a refinery in KwaZulu-Natal makes more sense logistically. “At Coega, the challenges are not insurmountable, but it does add cost”, he said.
Gila said financial negotiations are nearing completion but noted that “funding will be acquired at once or in tranches in various phases, preferably from multiple sources”.
On the sidelines of the Africa Oil Week conference in Cape Town, energy minister Jeff Radebe side-stepped a question about his view on the Mestosync refinery.
Meanwhile, a $10bn investment pledged by Saudi Arabia could help the government in its ambition to raise domestic refining capacity — a matter that is “hot on the table”, he said.
Gila said if the government decided to pursue a refinery in Coega, it would be a welcome development and would present opportunities to leverage infrastructure support in an area where the need for it is great.