South Africa's Support for Synthetic Fuels Industry Extensive And Long-Term

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South Africa's Support for Synthetic Fuels Industry Extensive And Long-Term  

Posted: July 17, 2007 

On "Kentucky Tonight" on June 25, KRC's Director stated that “SASOL has been subsidized pretty heavily over the years by South Africa.” That statement was disputed by Jim Mayer, acting director of American Energy Security, an initiative of the Southern States Energy Board, who countered that the SASOL story is a major success - “the South Africa government helped a company get going called SASOL to develop a supply of alternative liquid fuels for their economy.…
Initially they got loan guarantees and the government established a price floor to allow them to have a footing to get going. Well they removed them fairly quickly and they paid back all their loans and they've been a major success story ever since….”

A February 9, 2007 Report of a Task Team appointed by the Minister of Finance in South Africa, "Possible reforms to the fiscal regime applicable to windfall profits in South Africa’s liquid fuel energy sector, with particular reference to the synthetic fuel industry", reflects that the government subsidies of the synthetic fuels industry have been far more extensive than simply loan guarantees and a price floor that were removed "fairly quickly," and that this subsidy has been both significant and long-term. Sasol was described by the Task Team as “[a] private sector company with strong competitive advantages secured through government subsidy and regulation.”

Below are highlights from the report:

The drive towards self-sufficiency was a key feature of the evolution of the industry in South Africa because of the country’s increasing isolation and sanctions during the second half of the 1900’s as the world responded to the apartheid government’s policies.

This gave rise to the development of a refining industry which developed through the provision of generous incentives to multinational oil companies to establish refineries in South Africa. More significantly, it also saw the establishment of a highly developed and unique synthetic fuels industry, initially owned by the government, built on the basis of what appears to be generous levels of government support for the technology, construction and continued operation of synthetic fuels manufacturing plants.

Id. at 56.

What form did these “generous levels of government support” for SASOL take?

In 1955, when the SASOL I plant was commissioned, “it received tariff protection” of around 20% of the fuel price, “as well as a refinery investment incentive.” The tariff protection was at 2 penny per gallon, and ½ penny per gallon refinery investment incentive.

Additionally, it received market protection in the form of an uplift agreement. “The oil companies were required to uplift Sasol’s entire production according to market share at import parity pricing.” p. 60. The Sasol upliftment agreement gave priority to synfuels. Id. p. 62.

The tariff protection system imposed a levy on petroleum products when oil prices were low and dispensed that levy to synfuels producers.

“From the 1950s the regulatory dispensation for petroleum products has rested upon three key pillars. They are:

* Market access control and competition (the RATPLAN and guaranteed off-take of synfuels)

* Retail price regulation

*Import control

Id. at 65.

“Since the 1950’s regulated pricing has been based on the price of importing fuel with a “generous” price build-up for storage and distribution. . . . The basis for calculating the import parity price … was revised (downwards) in the late 1990’s . . . because the previous IPP was considered too generous.”

Id. at 68.

Additionally, South Africa imposed import controls on petroleum.

The basis of the policy has been that imports are only permitted when local production is unavailable. This philosophy created a pecking order that meant that synfuels manufactured from indigenous materials had the first claim to the market. This policy was for many years unwritten and simply existed in practice. It was first recorded and formalized by the DME in 1995 the current version was approved in February 2004. It is currently under review again.”

Id., p. 69.

The crude refiners were forced to mothball around 30% of their capacity in 1982 when Sasol 2 and Sasol 3 came into operation.

Id. at 70.

Summarizing the direct government support for synthetic fuels manufacture,

Sasol One, which commenced production in 1954, was financed by the Industrial Development Corporation of South Africa and also received a refinery investment incentive. The first Sasol Supply Agreement protected Sasol and assured that all of its production would be bought by the oil companies at full import parity pricing, and that they would have a defined inland market in which oil companies were to accommodate Sasol pumps. The report called this a “very profitable market niche.”

For Sasol Two and Three, the government negotiated the extension of the Sasol Supply Agreement to accommodate the product produced by 2 and 3. 92% of the costs of constructing Sasol 2 and 3 were paid by the government, excluding payments of tariff protection. Those loans have now been repaid.

Indirect assistance to Sasol included a regulatory framework requiring accommodation of all products, import parity pricing, and transport infrastructure investments (including pipelines) to accommodate Sasol. Sasol, according to the report, still has guaranteed full offtake of production until they voluntarily relinquish it.

Id. at 72-74.

From 1989 – 1995, a tariff protection in the form of a price support floor for synfuels manufacture was instituted, providing a minimum selling price corresponding to around $23 per barrel, with repayment of 25% of gross income above $28.7/bbl.

In 1995, a new price support formula was adopted. Since 2000, the world oil prices have been such that tariff protection has not been triggered.

Even after the privatization of Sasol, according to the report, the Government is locked into ongoing tariff protection.

Id. at 74.

“Other oil companies in South Africa were obligated to buy all of Sasol’s synfuels for decades. Feedstock and product movement infrastructure still favours Sasol.”

In sum, Sasol’s success has been underwritten for over half a century by South Africa government financial and regulatory policies.

“[I]t is clear that very large amounts of the tax payer’s money have been used to support and maintain the synthetic fuels industry.” Id. at 77.

The impact on the consumer, according to the report, was that:

“Consumers have borne the costs of establishing and maintaining synfuels producers over some 70 years.”

“The regulated maintenance of import parity pricing through out the history of the industry has carried considerable benefit to the petroleum industry at the expense of motorists in the form of higher prices.”

“Significant over investment in pipeline infrastructure in the 1960s and 1970s was borne by taxpayers.”

“The cost of cross subsidization of transport between the crude and white product pipeline was carried by inland consumers.”

“The DWP pipeline was funded by setting product pipeline tariffs at rail tariffs and denying motorists the benefits of the more efficient form of transport.”

"Politically driven development of the oil industry security of supply through development of synfuels (and strategic) – built in many inefficiencies. The end cost was to the consumer and high fuel input costs to the economy particularly in the industrial heartland.”

Id. at 78.

The Task Team concluded that “[t]he synthetic fuels manufacturing industry would not have developed in the absence of incentives and tariff protection because of high capital and operating costs.”

In sum, government regulatory and financial support for the synthetic fuels industry in South Africa has been extensive and long-term, and continues in some forms even after privitization of the industry.

By Kentucky Resources Council on 07/17/2007 5:32 PM
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