Oil companies Shell and BP have exited the Sapref refinery, effectively ending their joint venture in South Africa.
The Sapref refinery has long been a cornerstone of South Africa’s refining capacity, which is why this move is a surprise to most. The companies had placed the refinery on care and maintenance in March 2022, citing challenging operating conditions and an uncertain outlook for the market.
Why Shell and BP Left
The Sapref refinery, located in Durban, was South Africa’s largest crude oil refinery with a capacity of 180,000 barrels per day, accounting for about 35% of the country’s total refining capacity.
The decision by Shell and BP to sell their stakes in Sapref shows broader industry trends where international oil companies are reevaluating their investments in markets with volatile economic conditions.
According to reports by Statista, the country’s economy has only seen an average growth of 1.1% over the past six years. This decline started under Jacob Zuma’s rule and has now passed on to Cyril Ramaphosa.
The closure of this facility has left a substantial gap in South Africa’s ability to produce refined products domestically, increasing its reliance on imports and raising concerns about fuel supply security.
Impact on the South African Economy
Beyond just a business decision, Shell and BP’s withdrawal from South Africa’s refining operations had wider economic casualties. There were job losses and a decline in local economic activity as a result of the refinery closure. Furthermore, the increased reliance on imported fuels increased industry and consumer costs, resulting in higher gas prices.
The South African government has been looking into ways to boost the nation’s refining industry, but getting new investment has proven difficult. It has been challenging due to the worldwide shift toward renewable energy and the high cost of modernizing ageing refineries to comply with environmental regulations.
During its functioning, the refinery had decades of cases of pollution incidents and accidents . From the connection of underground pipelines through various South Durban residential areas to petrol pipeline leaks into the environment.
A Broader Trend in the Energy Industry
The departure of Shell and BP from South Africa’s refining sector is not an isolated incident. Other international oil companies have also been scaling back their refining operations in the country.
For example, TotalEnergies sold its stake in the Natref refinery to its partner Sasol.
It also gave up on its intentions to drill off the coast of South Africa for gas and oil.
Additionally, BP has stopped selling jet fuel in South Africa.
Several factors drive this trend. Globally, oil companies are under pressure due to high costs. In markets like South Africa, where the refining sector has faced declining profitability and complex regulatory environments, it makes strategic sense for companies to exit and focus their resources elsewhere.
What’s Next for South Africa?
The Central Energy Fund, a state-owned company, has gotten approval to buy the refinery shares from Bp and Shell.
The company claims it would revive the refinery, using it to produce various petroleum products ranging from gasoline to jet fuel.
“The Commission is of the view that the proposed transaction is unlikely to substantially lessen or prevent competition in any market”.
“To address employment concerns arising, the Acquiring Firm shall transfer the SAPREF Refinery employees to the Acquiring Firm post-merger on no less favourable terms and conditions as the current employer.”, they assured South Africans.
However, the path forward is complicated. Any new investments in refining capacity will need to be weighed against global trends. For now, the country is likely to continue relying on imports to meet its energy needs, with potential price increases as a consequence.
