Industry calls for fuel levy to fund cleaner fuel

10th September 2004 By: Deborah Spicer

One of the biggest challenges facing the petroleum industry is the need to invest capital to meet the planned introduction of cleaner fuels in January 2006.

Engineering News spoke to South African Petroleum Industry Association (Sapia) director Colin McClelland about the challenge.

Because of the cost of complying with regulations, and in keeping with the practice in other countries, such as Germany and Australia, Sapia has approached Treasury and the Department of Minerals and Energy (DME) to consider a fuel levy.

“The purpose of such a levy would be to assist refineries recoup a portion of their multibillion-rand investments needed to modify their refinery processes, to meet the more environment-friendly petrol and diesel specifications that will become mandatory in 2006.” When Engineering News spoke to McClelland he was still waiting for a decision on the levy but seemed to think that the decision rested with Treasury, rather than the DME.

He says that the issue was mentioned in Finance Minister Trevor Manuel’s budget in 2002/3 but he did not cover it in the following budget speech.

Waiting for a decision means that there is no proposed quantum, or plan to implement the levy.

It is possible that South Africa may follow international examples and make use of a tax differential as an element in the pricing formula.

The differential internationally takes the form of a percentage of fuel tax being allocated to the cost of refinery upgrades.

This should be easier and more flexible to implement because of the price-control system.

Yet this is all speculation until a decision is made whether to implement a fuel levy or not.

Depending on whether a levy is implemented or not, and its size, refineries may be able to receive back some of the capital expenditure on producing cleaner fuels.

The end of leaded fuels has consequences for the motorist too, says McClelland.

“From 2006 leaded fuel will disappear and only unleaded or lead-replacement petrol will be available.” A lead-replacement petrol will be introduced into the market to cater for older cars that have soft valve seats.

Information will have to be widely and publicly disseminated so that vehicle owners can be aware of what they can and cannot use in their vehicles.

“This will be similar to the information that was available when unleaded petrol was introduced, but more in-depth.” Most of the public did not pay too much attention to the arrival of unleaded petrol and simply carried on using what they had been.

This will no longer be possible; a choice will have to be made, he says.

Some 65% of petrol sales are leaded petrol and McClelland expects that, while this figure will drop somewhat, by the time leaded disappears most users will still be using it.

For consumers who currently make use of unleaded petrols, there will also be a change in octanes to consider.

Currently, at the coast leaded fuel is supplied at 97 octane and unleaded at 95 octane.

This will change, in terms of current plans, to 91 and 95 octane – both in unleaded and lead-replacement fuel.

“There will be no 97 octane, so some vehicles will require timing changes.” Inland, after a period of phasing in, there will also only be 91 and 95 octane available.

McClelland estimates that most cars will run on 91 octane, and cars that have turbo enhancements may require a higher octane.

The cost of upgrading the refineries is expected to require a significant capital investment.

“Clean fuels will require an investment of approximately R10-billion in refineries.” While this sum has dropped from the earlier anticipated amount of between R10-billion and R15-billion due to the stronger rand, it is still a large sum of money.

Legislation requires that, by January 2006, no more leaded fuel is sold in South Africa.

“This will require the complete removal of lead compounds from petrol and the reduction of sulphur in diesel from the current maximum of 3 000 ppm to 500 ppm.” This will place the industry under severe pressure, says McClelland, as cleaner petrol costs more to produce but does not return a higher investment. Sulphur-free diesel, conversely, does demand a slightly higher price in the market although it does not compensate entirely for the extra expenditure on petrol.

“The only part of these costs that can be recovered from the consumer is the higher cost in international markets of 500 ppm sulphur diesel versus the 3 000 ppm grade, which currently amounts to between 6c and 10c a litre.” “All other capital and oper-ational costs will have to be absorbed by the oil companies if they intend to stay in the refining business in South Africa.” Oil companies must make important decisions about whether to import the product or to invest in improving the refining process.

“Important national economic consequences will flow from their decisions,” says McClelland. Regulations are also in the pipeline to further reduce emis-sions; Sapia and government are in talks over these.